Realty Income - Q1 2023
May 4, 2023
Transcript
Operator (participant)
Good day. Welcome to the Realty Income first quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. We do ask that you limit yourselves to two questions. Then you can rejoin the queue if you have additional questions. Please also note today's event is being recorded. I would now like to turn the conference over to Andrea Behr, Associate Director, Corporate Communications. Please go ahead.
Andrea Behr (Associate Director of Corporate Communications)
Thank you all for joining us today for Realty Income's first quarter operating results conference call. Discussing our results will be Sumit Roy, President and Chief Executive Officer, Christie Kelly, Executive Vice President, Chief Financial Officer, and Treasurer, and Jonathan Ponton, Senior Vice President, Head of Corporate Finance. During this conference call, we will make statements that may be considered forward-looking statements under Federal Securities law. The company's actual future results may differ significantly from the matters discussed in any forward-looking statement. We will disclose in greater detail the factors that may cause such differences in the company's Form 10-Q. We will be observing a 2-question limit during the Q&A portion of the call in order to give everyone the opportunity to participate. If you would like to ask additional questions, you may re-enter the queue. I will now turn the call over to our CEO, Sumit Roy.
Sumit Roy (President and CEO)
Thank you, Andrea. Welcome, everyone. We are pleased to report solid 2023 first quarter results exhibiting continued momentum in our business. I would like to express my utmost gratitude to our one team, whose efforts enable us to continue delivering on our growth objectives. I would also like to thank our equity and fixed income investors for their continued vote of confidence. Our team's efforts and the benefits of our size and scale were reflected in our first quarter results, highlighted by approximately $1.7 billion of high-quality investments acquired at a cash cap rate of 7%. This represents a 90 basis point increase compared to the investment cash cap rate we achieved in the fourth quarter of last year and resulted in an investment spread of 163 basis points, which is above our historical averages.
As we have experienced in prior cycles, cap rates for our investments after an adjustment period have historically tended to be positively correlated with interest rates, which is a trend we have largely continued to experience this year after the recent rise in rates. Our ability to access well-priced capital has historically served as a competitive advantage and is a testament to our long history of maintaining a conservative balance sheet and a diversified real estate portfolio supported by clients who are leaders in their respective industries. Amidst an environment in which capital is expensive and or scarce for many of our clients, our value proposition is even more pronounced. This dynamic is reflected in the recent portfolio acquisitions we have announced, the active deal pipeline we see today, and the favorable pricing spread we see for large portfolio transactions vis-a-vis one-off single asset transactions.
Our differentiated platform extends beyond the external growth lens. Recently, we have taken steps to leverage the size of our portfolio and the history of our operating business through the continued development of advanced analytics. The objective of this initiative is to develop predictive and prescriptive insights that harness the collective proprietary data that we've accumulated over several decades of investing in, managing, and releasing single-tenant net lease properties. Our team's proprietary predictive analytic tool leverages this trove of information in our investment underwriting, portfolio management, asset management, and development efforts, enabling even more informed investment decisions made by our best-in-class 1 team members. As our business grows, so too will the predictive power of this tool, which we believe will generate significant value for our stakeholders as we refine the accuracy, test conclusions, and broaden scope across industries, property types, and geographies.
As part of our core investment thesis, our size and scale have created opportunities to serve as a capital provider for best-in-class partners looking for alternative means of financing, given elevated debt costs. In the first quarter, we agreed to acquire up to 415 high-quality convenience stores from EG Group for $1.5 billion. Over 80% of the total portfolio annualized contractual rent is expected to be generated from properties under the Cumberland Farms brand, and we expect to close on this transaction in the second quarter. As illustrated by this deal, we believe our ability to offer not only certainty of close, but also attractively priced capital as a one-stop solution for sale-leaseback transactions is particularly valuable to institutional sellers of real estate today. We believe this will continue to expand our competitive advantage.
Internationally, we continue to venture into new geographical verticals and grow the total addressable market opportunity. This quarter, we took advantage of favorable pricing internationally to acquire properties worth approximately $390 million at an initial cash lease yield of 7.6%. After our initial entry into international markets in 2019, we now derive 11.7% of total portfolio annualized contractual rent from those markets. This natural extension of our platform has been a pillar of growth for the last 4 years, is indicative of our ability to methodically establish and scale a new vertical. Given the continued momentum in our acquisitions pipeline and our progress to date, we are increasing our 2023 investment guidance to over $6 billion from our prior guidance of over $5 billion.
Consistent with our investment strategy, we remain disciplined with regard to our balance sheet. Subsequent to our April bond offering, which settled on April 14th, we held approximately $5.6 billion of liquidity, including unsettled forward equity totaling $1.5 billion. Our current financial position has afforded us the ability to lean into near-term investment opportunities. Moving to operations, our platform continues to generate durable cash flows which support our stable earnings profile. For the first quarter, we are pleased to report occupancy of 99%, matching last quarter for the highest rate at the end of a reporting period in over 20 years. We generated a 101.7% recapture rate across 176 renewed or new leases executed during the quarter.
These results are a reflection of our talented asset management team and our unwavering commitment to core capital allocation principles, which include a focus on industry-leading clients who often operate in a low price point, service-based or non-discretionary industries. Our purposeful diversification across industries, geographies, and clients, and our emphasis on high-quality real estate locations and rigorous credit underwriting. Our investment philosophy is nuanced and not simply predicated upon the pursuit of investment-grade clients, which ended the first quarter at 40.8% of our annualized contractual rent. Many of our strongest operators, such as Sainsbury's, have no public debt, and thus are not rated at all. However, the consistency of their operations and health of their balance sheet are favorable attributes that are consistent with those of an investment-grade rated company.
We estimate that approximately 5.3% of our annualized contractual rent comes from unrated operators without public debt. We remain committed to investments that offer us attractive risk-adjusted returns as evidenced throughout our history, and going forward where we believe, based upon our disciplined underwriting and analytics, we are achieving better returns per unit of incremental risk. I would like to briefly touch on Cineworld, which represents 1.3% of our annualized contractual rent. Despite the ongoing Chapter 11 bankruptcy, we have continued to receive 100% of contractual rent in the first quarter and through April. As of March 31, 2023, we had cumulative reserves of $33 million on our Cineworld properties. Outstanding receivables, net of reserves, and excluding straight-line receivables, were $14.1 million.
We remain in discussion with this client, and will update the market on the outcome of these discussions at the appropriate time. Before turning the call over to Christie, I would like to highlight that in March, we published our third annual sustainability report, which details our ongoing commitment to operating as a responsible corporate citizen for our stockholders, our team, the communities in which we operate, and the environment. I'm proud of our continued progress on ESG initiatives as we seek to fulfill our commitment to building sustainable relationships, and I strongly encourage all of today's listeners to navigate to the sustainability page of our website to review the report. With that, I'd like to turn it over to Christie.
Christie Kelly (EVP, CFO, and Treasurer)
Thank you, Sumit. We worked together with our clients and our one team to achieve a successful quarter on a number of fronts, delivering AFFO per share of $0.98 on behalf of all of our stakeholders. We would highlight that the comparable quarter in 2022 benefited from approximately $10.2 million of rental revenue reserve reversals, resulting in an AFFO per share growth headwind of approximately $0.015 per share in the first quarter of 2023. In addition, higher year-over-year short-term interest rates represented an approximate $0.02 growth headwind as our weighted average interest rate on revolver and commercial paper borrowings was approximately 300 basis points higher than it was in the comparative period in 2022 on a similar average borrowing base.
Excluding these two items, our year-over-year AFFO per share growth rate was approximately 3.5% this quarter. As we evaluate the core fundamentals of our business, we remain focused upon delivering for our stakeholders over the long term and are encouraged by opportunities ahead. To that end, we are increasing the low end of our AFFO per share guidance range by $0.01, resulting in a new range of $3.94-$4.03, which represents 1.7% annual growth at the midpoint of the updated range. It has been a busy and productive start to the year on the capital raising front. Despite continued market volatility, we have raised approximately $3.9 billion of capital this year, excluding $1.5 billion of unsettled forward equity.
In April, we closed a $1 billion bond offering, which was comprised of $400 million of 4.7% senior unsecured notes due in 2028 and $600 million of 4.9% senior unsecured notes due in 2033, resulted in a weighted average tenor of 8 years and semiannual yield to maturity of 5.05%. The issuance allowed us to satisfy our near-term debt issuance needs while reducing our exposure to variable rate revolver and commercial paper borrowings to almost zero after our transaction closed on April 14th. In March, we increased our dividend for the 120th time since our public listing in 1994 to an annual rate of $3.06 per share, representing 3.2% growth from the prior year period.
Providing a stable and growing dividend is core to our mission at Realty Income. We take great pride in being one of only 66 constituents in the S&P 500 Dividend Aristocrats Index for having raised our dividend every year for the last 25 consecutive years. I would like to thank our one team whose focus and diligence has paved the way for our continued growth as we build upon our track record of consistency. With that, I would like to turn it back over to Sumit.
Sumit Roy (President and CEO)
Thank you, Christie. In conclusion, during periods of market uncertainty or dislocation, we look to unearth value by leveraging the inherent advantages of our platform. These trends include our continued access to relatively attractively priced capital and our portfolio scale, which we seek to leverage to produce unique investment opportunities as a leading sale-leaseback capital provider. When combined with the collective talents of our best-in-class team members to source, underwrite, and close on creative acquisition opportunities with strong risk-adjusted returns, we believe we are very well-positioned to continue amplifying our competitive advantages on behalf of our clients and stakeholders. We thank all our stakeholders for their support, loyalty, and trust in our company. With that, we can open it up for questions.
Operator (participant)
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. We do ask that you limit yourself to two questions, and then you can rejoin the queue if you have additional questions. Today's first question comes from Nate Crossett with BNP Paribas. Please go ahead.
Nate Crossett (Real Estate Analyst)
Hey, good afternoon. Yeah, thanks for the comments. I was wondering if you could talk about just deal flow U.S. versus Europe. What was the amount of deals you looked at in the quarter? I think that's the number you usually give. On cap rates. Last year, the spread of like the cap rates in the U.S. and Europe was pretty low. I think it was almost the same. This quarter, Europe is 60 basis points wider. I just wanna know if there's anything to note there.
Sumit Roy (President and CEO)
Thank you for your questions, Nate. Good questions. Let's start with the sourcing numbers. For this quarter, we sourced about $16 billion worth of product, 25% of which was in the international markets. I would say that if you go back to when we've started going into the international markets, the composition of international versus U.S. has been roughly around 30%, 70% in that ZIP code, plus minus 5%. This is pretty much within that particular range. What you might have noticed, however, is the amount of closing more recently, both in the fourth quarter of last year and the first quarter of this year, the contribution from the international side has been a little bit lower than what you have traditionally seen.
I would say that the international business has contributed about 35% of volume in terms of what we end up closing versus closer to 20%-22% this particular quarter. The main reason for that is we saw a delay in adjustments on the cap rate side in the international markets vis-à-vis the U.S. markets. We started to see cap rate expansion in the U.S. towards the middle of third quarter, fourth quarter, and obviously through the first quarter of this year. We didn't quite have the same experience in the U.K. market and some of the other international markets till, I would say, towards the end of the fourth quarter.
What was largely making, you know, potential sellers reconsider the market was not so much driven by actual trades taking place, but more idiosyncratic to their particular needs around redemption issues or, you know, refinancings that were coming nearer term. That's largely what's driven these opportunistic transactions that we've gotten over the finish line in the fourth quarter of last year and the first quarter of this year. That's what's resulted in cap rates being substantially higher than what I would call the norm, or what we are seeing in the everyday market, in some of these, some of these international markets. That explains the 60 basis point higher cap rate that we were able to achieve.
I might add, this is excellent product, largely driven by, you know, idiosyncratic issues being experienced by buyers who wanted to get this off their books, to meet, you know, some of the things that I've just discussed. That's, that's the dynamic we've seen with that.
Nate Crossett (Real Estate Analyst)
Okay, that's helpful. Maybe just one quick one on development yields. Those are notably below the acquisition yields. Are those just old commitments before rates moved? Or maybe you can describe what's happening there.
Sumit Roy (President and CEO)
Yeah. Nate, you've hit the nail on the head. It's exactly that. As you know, development obligations have a much longer lead time. A lot of what you see in you know, you saw in the fourth quarter, third quarter of last year and the first quarter of this year, though it's starting to move up, it hasn't moved quite as quickly, largely because what you're seeing, you know, filtered through the investment numbers were transactions that we had struck, I would say 3 quarters ago, 4 quarters ago. You should expect to see the yield on development creep closer to what we are actually experiencing in the investment you know, traditional acquisitions market over the next couple of quarters. It's just a timing issue.
Operator (participant)
Thank you. Our next question today comes from Brad Heffern with RBC Capital Markets. Please go ahead.
Brad Heffern (Director)
Yeah, thank you. Christie, I was wondering if you could talk through some of the puts and takes on guidance and why only the 1 cent increase at the low end given the increase in the acquisition guidance and the expense categories moving in the right direction?
Christie Kelly (EVP, CFO, and Treasurer)
Absolutely, Brad. You know, I think first, you know, in terms of what Sumit had discussed and the increase of our acquisitions guidance to over $6 billion, you know, we remain conservative in that front. You know, really looking towards the second half of the year, while things remain strong. As Sumit has discussed, you know, we're really, you know, a wait and see here as things unfold. I think the other thing too, in terms of guidance that we've articulated, and I mentioned some of this in my prepared remarks, is really the headwinds that we're seeing from a debt perspective. Although we've been, you know, very focused on ensuring that we're de-risking our balance sheet, and you can see that in the transactions that we've executed through April.
You know, we're really looking at where that may unfold in terms of the second half of the year and don't believe that that will alleviate over and above the competitive cost of capital that we've been able to generate, you know, vis-à-vis last year. I think finally, in terms of the positive trends that you saw in terms of the tightening of the guidance with G&A, we remain particularly disciplined during this macroeconomic backdrop and are focused on managing our G&A. Further to that, it's the benefits of size and scale, and you can see that over the years in terms of the trends of G&A to revenues. Finally, from an unreimbursed property expense margin perspective and the tightening there, we're just following in on the positive trends that we've been able to execute upon.
Brad Heffern (Director)
Okay, thanks for that. Sumit.
Christie Kelly (EVP, CFO, and Treasurer)
Thanks, Brad.
Brad Heffern (Director)
Just thinking about this EG Group deal, are you seeing more of these, very large sale-leaseback opportunities versus what you would normally see? Has the competition for those deals also thinned out?
Sumit Roy (President and CEO)
No, no, Brad. I wouldn't go so far as to say it's thinned out. In fact, the momentum has continued, and we expect that momentum to remain strong. You know, I don't know how many billion-plus deals, but these large transactions will be, you know, what drives some of the near-term financing issues that a lot of companies are going to have to deal with. With what we are seeing play out in the banking sector with fewer banks, you know, out there to provide capital, the cost of that capital being what it is given the interest rate environment, I do believe that sale-leaseback will continue to be a very attractive alternative to raise capital to help address financing needs at these companies. Keep in mind, EG had never done a sale-leaseback.
They had that option for many, many years. You know, they chose to go down this path, largely to address some of the leverage concerns that they had on the balance sheet. We expect that trend to continue. That's the reason why that's the impetus behind why we felt we should increase our acquisition guidance by $1 billion.
Operator (participant)
Thank you. Our next question today comes from Joshua Dennerlein with Bank of America. Please go ahead.
Joshua Dennerlein (Director)
Hey, everyone. Thanks for the time. Just to follow up on the EG Group deal. Just curious how that deal came together and maybe your ability to partner up further with them.
Sumit Roy (President and CEO)
Thanks for the question, Josh. EG is obviously a very well-established name in the U.K. market. Neil and I had been calling on them for a while, along with TDR Capital, their capital providers for a while, you know, this is a relationship where we knew they didn't have a high level of interest in necessarily going down the path of sale-leaseback financing when we first started to have conversations with them. I think that that relationship ultimately played out to our benefit when we were awarded the deal, when they did choose to go down the path of sale-leaseback to help meet some of their capital needs shorter term. This was a competitive process. It was run by Eastdil. We, you know, we went through...
We were obviously in close contact with EG directly as well. There were three finalists and we felt like we were awarded the deal based on our reputation, surety of close, and the fact that we had spent time developing a relationship with them. That's what really got us the deal at the end and our ability to be creative and, you know, there were certain asks that they had and our ability to meet those certain asks also, I believe, accrued to our favor. I think all of those factors went towards, you know, us being awarded the transaction despite us not being the highest bidder.
Joshua Dennerlein (Director)
Okay. Maybe changing the subtopic a little bit. How do you guys think about expanding your or growing your exposure to lower credit quality tenants as a way to kinda widen the aperture and maintain growth?
Sumit Roy (President and CEO)
You know, Josh, that's a very good question. I'm actually going to go back to the EG Group conversation we just had. If you look at the actual portfolio, 80% of the portfolio is Cumberland Farms. I just want to remind the group that, you know, 3 years ago, when Cumberland Farms was available for sale, there were all of the natural operators that were very, very interested in this very well-run private company. What was being bandied about as a potential sale-leaseback, the pricing was in the low 5s, high 4s zip code.
It ended up being EG Group that won the transaction, and they obviously didn't want any sale-leaseback financing to effectuate the buyout, but that was the quality of the real estate that Cumberland Farms, you know, was demanding at that particular time. Fast-forward today, the four wall coverages on these assets have only improved, I would say, dramatically. The assets remain exactly the same assets, and we were able to accomplish this transaction at a 6.9%. Yes, if you look at EG Group, the credit that's operating these assets, they are sub-investment grade. If you look at the quality of the assets, it's exactly the same. We believe that EG Group is a very good operator of convenience store business.
We can see that in the history that they've established in the U.K., we certainly see it in the performance of these assets, when you compare it to where they were performing 3 years ago and was warranting a price in the low fives, high fours to where we were able to accomplish. Now you fast-forward and you say, "Okay, you're getting 150, 160 basis points of additional spread on this real estate. Are you being paid for the credit risk inherent in the operator?" That's where the concept of risk-adjusted returns comes into play for us, and it is so front and center in everything we do. The answer for us was a resounding yes, we are being compensated.
You know, for us, we've said this before, that investment grade rating is a by-product of the actual underwriting. It is not something that we seek out. It gets taken into consideration on, you know, the collectibility of the rent flow over the 20-year or 25-year leases that we underwrite to. But ultimately, we look at every transaction on a risk-adjusted basis, and if it makes sense, despite the fact that it may or may not have investment grade rating, is something that we are gonna continue to pursue.
Operator (participant)
Thank you. Our next question today comes from Michael Goldsmith at UBS. Please go ahead.
Michael Goldsmith (Analyst)
Good afternoon. Thanks a lot for taking my question. Sumit, you started the call by talking about continued momentum in the business. Can you just talk. Re-rates tend to be lagging indicators, so can you kind of talk about the visibility that you have into the business and this continued momentum? Just trying to better understand, you know, how long of a path that you have where you feel very good about the spreads and the backdrop, because it seems like it's been everything's been pretty solid the last several quarters.
Sumit Roy (President and CEO)
Yeah. That's a great question, Michael. Things are moving so fast. Every other day, there's a bank in the news. News is super fast. How do we think about our business, and why do I use phrases like continued momentum? Even though this may be a lagging indicator, you know, we are looking at transactions lease renewals every day. When we are seeing the fact that we can still continue to generate 102%, 103% releasing spreads, yes, it's lagging, but literally, you know, weeks, months. It gives me continued hope that, look, for our product. You know, where we play in the market, et cetera, there continues to be a fair amount of demand.
It manifests itself in some of the positive releasing spreads that we share with the market. The second piece, which is much more of a forward-looking statement, is what are the continued discussions that we are having that then helps drive our pipeline on the investment side? What are the kinds of discussions that we are having? What's the size of the discussions that we're having? What's the yield associated, you know, with those discussions? I think all of that gives us, you know, confidence that there continues to be momentum. The fact that we were able to raise $3.1 billion within a period of three months, you know, in the fixed income market.
The fact that we were able to close on $800 million of equity and have $1.5 billion, sorry, of unsettled equity, again, continues to give me, you know, confidence that even on our capital side, for us, you know, we continue to sit in a very favorable position. We have the opportunity, we have the ability to raise capital, we have the ability to make spreads north of what we have historically achieved. Now with the international markets starting to reflect a little bit more of a positive movement for us on the cap rate side, that's what gives me confidence to say that we have continued momentum in the business.
Michael Goldsmith (Analyst)
Thanks for that. My follow-up question is, it looks like you've opened up an office in Amsterdam. Can you talk a little bit about the advantages that you get from that? Does that mean that we should expect more international deals, or does this allow you to source deals better throughout Europe? Are there any tax benefits from having an office there? Thank you.
Sumit Roy (President and CEO)
Yeah. The reason why we needed to open an office in the Netherlands was largely driven by the structure that we have created to allow us the flexibility to continue to grow in the international markets. By international markets, I primarily mean the U.K. and Western Europe. This was largely driven by a substance, you know, question around having or needing to have employees based in Amsterdam to be able to satisfy this tax structure that we've been able to create to give us this flexibility. That's largely what's driven, you know, a couple of hires that we've made. Most of the other hires will continue to be in the U.K. and potentially in some of these other countries as we begin to reach a core size in terms of our portfolio.
Yeah. That's what really drove setting up an office in the Netherlands and hiring a few folks who can help us manage our international business.
Operator (participant)
Thank you. Our next question today comes from Harshavardhan Agadi with Green Street. Please go ahead.
Speaker 14
Thank you. We've heard from some of your peers that perhaps cap rates in the U.S. are closer to topping out. Is that something you're in the second quarter that you're seeing too? Then to contrast that perhaps in Europe, you mentioned cap rates only started moving there in the fourth quarter or the first quarter of 2023. Do you still see more runway there and perhaps that being a tailwind for you relative to peers? The spirit of this question is not to say that are European cap rates gonna expand over the 7/6. I understand that those idiosyncratic deals might not happen every quarter. Is the trend that you're seeing in Europe upwards, and can that benefit your spread relative to peers?
Sumit Roy (President and CEO)
Yeah. Thank you for your question, Harsh. I won't go so far as to say that, you know, we see cap rates moving even more in the international markets than they have here in the U.S. I mean, just look at where our, you know, 10-year bonds are. The price is literally one on top of the other. They're on those advantages today that we had a year ago. I don't expect there to be a disproportionate movement in one geography or the other. Could we see situations, however, you know, unique situations that present themselves that is largely driven by, you know, you use the word idiosyncratic issues? Yes, that could garner, you know, additional cap rates.
As a market, on average, I don't see there being, you know, that much more of an advantage in one market over the other in terms of cap rates. You're right. You said it correctly that the movement in cap rates was slower in Europe than it was here in the U.S., but I think they've largely caught up. Like some of our peers, it is fair to say that we have not seen continued expansion of cap rates, you know, vis-à-vis what we've experienced over the last, call it month and a half, 2 months. That's not to say that cap rates could not continue to move. There's just a lot of uncertainty in the market today with banks, you know.
As soon as we start to believe that the banking crisis is behind us, there's another name that pops up. You know, as you know, a lot of these regional banks were the lifeblood of, you know, providing financing to developers and to, you know, other local real estate operators. Is it possible that those situations could again manifest itself in, you know, forced sales, where we could be the beneficiary, which could then have an impact on cap rates? Yes, it's possible. That is why I hesitate to say that, you know, the movements in cap rates have played out, and it's going to remain where it is today.
I think just like our peers, there has been a settling out, if you will, of cap rates that we have experienced, but I'm not sure if I subscribe to the fact that this game has played out.
Speaker 14
Got it. That's helpful color. Then you've mentioned in the past couple calls where, you know, vacant asset sales that yield income have, you know, been going up, past couple quarters, all asset sales were vacant. You said this is kind of going to be the normal course of business, where if that's the best use for those assets, and we have better uses for the capital to go out and buy something accretive, that's, you know, going to be what you will do. Can you give us a sense for what the buyer pool for these assets look like? Has that changed at all, the demand for these assets over the past couple years and say, versus pre-COVID?
Sumit Roy (President and CEO)
That's a tough question, Harsh. What we are experiencing is there is a price for any asset, you know. If you are willing to accept a price, I think you pretty much can, you know, sell an asset. All of what we have, you know, accomplished in the first quarter were vacant sales, because that's all we really needed to address. You know, it was about a 6% unlevered IRR, which is lower than what we have traditionally experienced, largely driven by one or two, you know, assets that we just wanted to get rid of, because we felt like, you know, the long-term prospects or even the short-term prospects for that matter, didn't justify us holding onto these assets.
You know, if you look back, it's traditionally been in that high single-digit unlevered IRR, so it gets into the double-digit, you know, levered return profile. That's what we've, you know, traditionally experienced, and I think we should be able to go back to that. In terms of the profile of the buyers, you know, in this market, I would say most of the buyers that are interested in buying these assets are folks who want to operate out of these assets. They don't want to enter into a lease. They want to control the assets. These tend to be not institutional quality buyers, but local buyers that want to run a business out of that location and want to own the real estate to do so. That's the profile.
In the past, we used to have, you know, I would throw developers in the mix, of course, developers keep sniffing around. Given that the debt markets are a little bit more challenging, there's a little less perhaps, you know, demand from that ilk of potential buyers. I would say today it's largely owner-operators that are driving the sale process.
Operator (participant)
Thank you. Our next question today comes from Greg McGinniss, Scotiabank. Please go ahead.
Greg McGinniss (Director)
Hey, good afternoon.
Sumit Roy (President and CEO)
Hi, Greg.
Greg McGinniss (Director)
On sale-leaseback again. I have to imagine there's more operators newly considering sale-leaseback financing. Can you just talk about the types of tenants you're having first time conversations with, who you might be targeting? I don't know if that's cold calls or through brokers, whatever happens to be. How you go about finding operators that, you know, maybe didn't consider sale-leasebacks in the past, but would be open to it now.
Sumit Roy (President and CEO)
Yeah, it's a slew of, you know, avenues through which we source, and I think it'll be very consistent across the board. Obviously, we believe, we have a, you know, a curated list of folks that we've been reaching out to, speaking with, one of which we've already talked about, EG Group. You know, that we didn't have expectations of sale-leaseback in the near term, but it just so happened that, you know, that became very compelling to them as a capital source. There are similar names like that. I'm not going to obviously go into the details, as you can imagine, Greg. You know, this is something that we do here in the U.S.
We do this very consistently when we travel, you know, to the U.K. and to Western Europe. There are obviously well-identified folks who own a lot of real estate, who are not in the real estate business, and those are the folks that we've sort of identified and tried to reach out through. The other channels are the more traditional channels. You know, brokers, investment bankers, colleagues who may have worked in certain places, who have an in into those places. All of those are avenues that we exhaust to continue to source our transactions, and those continue to remain the avenues of sourcing.
Greg McGinniss (Director)
Okay. I guess just talking about source deal volume a bit here, kind of a multi-parter. First, when you're talking about source deal volume, does that include the deals where, you know, sellers just have unrealistic cap rate expectations? Secondly, do you have some idea, or some sense of the level of sellers that maybe are just waiting on the sidelines, waiting for financial markets to settle out a bit? Third, how much of the deal volume in the past, do you think was driven by cap rates trending down, which was enhancing exit IRRs that now is probably a thing of the past?
Sumit Roy (President and CEO)
Greg, to answer your first question, yes. Even when the cap rate expectations are unreasonable, if somebody's reaching out to us and we've sourced it as a deal but have no interest in following up, it does get included in our source volume. I would say that, you know, a lot of folks, a lot of potential sellers of real estate are sitting on the sidelines. They recognize that the buyer pool is definitely a lot more discerning when it comes to cap rates because they are having to work in the same environment where the cost of that capital is much higher today than it was six months ago. Rather than, you know, tainting their product, they're just holding back.
I think, you know, look, I can't prove this 100%, but if you look at our sourcing numbers, it's $16 billion, $17 billion, $18 billion. Those were the 3 numbers that we had the last 3 quarters. But it is slightly lower than, you know, the $25 billion-$26 billion that we were experiencing, you know, in the first 2 quarters of last year and quarters before that. So, you know, some of it is obviously getting played out in the sourcing numbers as well. It's still a very healthy sourcing number.
I think as people wait longer and longer and this turmoil continues, I think we are going to start to see some of these sellers come in and say, "Look, I have an event," either it be a releasing, a refinancing scenario or what have you, that's gonna push them to say, "Okay, we are willing to accept the fact that, you know, we'll need a higher cap rate." We've had a few of those occasions where, you know, 5 months ago or 4 months ago, we had a grocery operator that came in and, you know, they wanted a particular cap rate, and we said that was too rich for us, and we said, "Okay, this is where we think we could have done that deal." This was about 5 months ago.
They've come back to us today saying, "Can you meet that?" We said, "No, we can't. Our cost of capital has moved, but we could do this." They are willing to transact at that higher level today. I know this is one anecdotal evidence of how, you know, it's taking time, which is why there's always a lag. It is starting to play itself out. I do expect sourcing numbers to start to go out the longer this, you know, this turmoil on the lending side continues, which obviously creates wonderful opportunities for us.
Operator (participant)
Thank you. Our next question today comes from Eric Wolfe at Citibank. Please go ahead.
Eric Wolfe (Director)
Thanks. I wanted to follow up on what you just said a moment ago, and also your comments around the new banks sort of being in the headlines every other day. Just curious whether anything that's happening right now with regional banks has already started to open up new opportunities for you. I'm specifically thinking about industries that rely on their credit. I think you mentioned some local developers, but just anything that relies on regional bank credit where you might see some opportunities today that weren't historically available to you.
Sumit Roy (President and CEO)
Yeah, I think, Eric, on multiple fronts, it opens up opportunities for us. You know, obviously, sale-leaseback as a comparative tool to raise capital, especially when compared against, you know, the debt products that's available today, it's very compelling. The cost of that, you know, capital raise is lower than what markets are able to satisfy. I think from the traditional source, it's gonna create opportunities. It's also gonna create opportunities because you don't have as many lenders today who would have traditionally participated on the secured side of the equation. You know, there are users of that capital stack that still need to either refinance their capital or just want to raise that as in lieu of doing a sale-leaseback.
Because of fewer participants, I do think, you know, you can position yourself to play in that area because it's, you know, very akin to your traditional underwriting with obviously a few more nuances around, you know, how you think about debt instruments as an investment. I think it's going to open up opportunities on that front as well. A lot of these, you know, alternative capital asset managers and capital providers, et cetera, I think they are very well situated to take advantage of those situations, as are we.
Eric Wolfe (Director)
That's helpful. Just a question on theaters. I know it's small percentage for you, but I'm just curious what you think needs to happen for there to be a more liquid market for the assets and, you know, maybe for Cineworld specifically, once their balance sheet and leases get presumably restructured, do you think there'll be a market to sell those assets?
Sumit Roy (President and CEO)
I think so, Eric. Look, this is consistent with what I've been saying specifically around Cineworld. We remain in discussion, so I'm not gonna get into that. There was some news this morning, which I think is very positive for the Cineworld name, where they've actually put out a date when they're planning on emerging. They've been able to attract new capital. I think all of that is, you know, quite positive. But what I have shared on our specific portfolio is around inbounds. There are certain locations that are absolutely in high demand for alternative uses. In some ways, this is, you know, a playing out of what is the highest and best use of some of these locations. Going through this process accelerates that ultimate outcome.
We are, you know, look, we think we're gonna be just fine. It is, like you said, a very small portion of our overall portfolio. To be very honest, I'm very hopeful that by the time we have our next quarterly call, that this will all be behind us. These opportunities that I've been referencing about, you know, basically repositioning some of these assets to an alternative use can start to play out, and we can actually start speaking to you about what those opportunities are. We feel pretty good about, you know, the Cineworld situation.
Operator (participant)
Thank you. Our next question today comes from Haendel St. Juste with Mizuho. Please go ahead.
Ravi Vaidya (Analyst)
Hi, this is Ravi Vaidya on the line for Haendel St. Juste. Last quarter you commented that your watchlist is about 4% of total ABR. Just wondering what that is right now and what other categories outside of the theaters are you monitoring or, you know, have a, have a negative view on?
Sumit Roy (President and CEO)
Yeah. Good question. Our watchlist today is right around 4.4%. As you correctly pointed out, it is largely dominated by the theater industry. Some of the other areas that we are, you know, continuing to look at, and keep in mind that our watchlist is not always a credit issue, it is just our view on the real estate, the location of that real estate, and, you know, what the ultimate outcome is going to look like. It's a combination of credit, it's a combination of real estate underwriting, but ultimately, the watchlist is, is dictated by the long-term desirability of those locations and operators. Along with the theaters, I would say, you know, restaurants are in there. Some of the more, you know, discretionary, type concepts are there, like home furnishing.
There are, you know, very few daycare centers and some of the other, you know, businesses that are not very well capitalized that you'll find there. That's the mix of what you'll find on the watchlist.
Ravi Vaidya (Analyst)
Thank you. That's helpful. one more here. you know, one of your peers, sold movie theaters at a 7/8. Would you consider selling theaters in that range? Or Like, what are your conversations been like in terms of pricing and regarding the theaters, since, as you said, it was such a large component of the watchlist?
Sumit Roy (President and CEO)
Yeah. That's actually a very good pricing, and I suspect that the person that bought it is probably a developer. You know, and we've done our own analysis, and for us, we feel like, you know, the best way to create value would be to hold on to these assets, and then, especially the ones where we have a view that can be, you know, redeveloped, et cetera, and capture that view once we have full control of that asset. Truth be told, there is so much discussion that we're having with Cineworld at this point that I don't wanna get into the details, but that discussion needs to be behind us.
My understanding is that, you know, a lot of these assets that are now going to be put out there for sale, et cetera, have already had their rents renegotiated, everything's already been priced in, and those cap rates that are being shared are being shared off of those new adjusted rent numbers. You know, in our view, if we feel like, "Hey, let's just hold on to these assets," we'd much rather get these assets back and reposition it, perhaps with some additional capital, but create much more value for, you know, for our investors, then that's what we'd choose to do. We haven't engaged in trying to go out and try to find a market.
You know, we've had a lot of unsolicited calls, I can tell you that, but we really haven't engaged in trying to, you know, sell any of our theater assets. We want to resolve the Cineworld situation. I think with the news today, I think that date is certainly getting closer, before we start to figure out what the best economic outcome is.
Operator (participant)
Thank you. Our next question today comes from Ronald Kamdem with Morgan Stanley. Please go ahead.
Ronald Kamdem (Managing Director)
Hey, a couple quick ones. Just going back to the opening comments on the international portfolio at 11.7%. Just thinking about where could that number go. Obviously there's different tax jurisdictions and so forth, but in your mind, how can that number trend in the next couple years? Obviously opportunity-driven.
Sumit Roy (President and CEO)
Well, these last couple of quarters, they have still, you know, represented 20%, 25% of our transaction volume. Clearly that 11% over time should continue to drift up. It was drifting up at a much higher clip, you know, when we were doing a lot more transactions. I do expect for us to get back into, you know, into that, you know, more normalized 30%-35%, maybe even more, you know, if certain situations play out. I am, I'm hopeful to keep growing our pie. Look, we continue to look at new geographies, and especially at a time like this, new geographies that seemed a bit out of our reach are starting to become a little bit more within our reach and more compelling today.
As we keep adding new geographies, as we continue to enhance our relationships, et cetera, I see, you know, this number, 11%, continue to grow and be a bigger part of the overall portfolio.
Ronald Kamdem (Managing Director)
Great. Then if I could just touch on sort of 2 verticals, 1, consumer-centric medical, 2 gaming, which I don't think has been mentioned before, but just the quick update on what the opportunity set is looking like. Has it slowed down with the events of the past couple weeks and so forth? How are you guys thinking about those?
Sumit Roy (President and CEO)
gaming continues to be of tremendous interest to us, Ron. you know, it's just hard to replicate what we got with the Boston asset. you know, we have an amazing partner in Greg at Wynn, and we will continue to try to work on trying to find new transactions that I don't know if we'll ever be able to replicate the one in Boston, but, you know, of a similar type, of a similar dominance in particular markets. We are looking at transactions. We are looking at transactions every day. you know, the pricing expectations is perhaps something that we are still trying to work through.
If we can, if we can get to an understanding which works for parties involved, I think, and I hope we are able to grow that part of our business. It's not a fait accompli. I mean, it is... The bar for us is higher. The good news is there is product out there that meets that bar. We are very hopeful. With Consumer-centric, you know, that's a business we love. We've been in that business. We've just coined the phrase to sort of, you know, define an area of our portfolio that we've obviously been very interested in. With the dental transaction that we did in the fourth quarter of last year, you know, that helped accelerate that part of the business.
Look, and I don't wanna get into the thesis again. I think we've shared that already. For a variety of reasons, we like that business. I think in some ways this is a business that is getting defined, right, you know, right in front of our eyes, and we want to participate in the potential upside that I see on the real estate side. Again, partnering with the right operators, you know, forward-thinking operators who share a similar, you know, philosophy of delivery of healthcare, I think, will, I hope, result in a slew of transactions for us on the consumer-centric side. Both those areas remain of high interest to us, Ron.
Operator (participant)
Thank you. Our next question today comes from John Massocca with Ladenburg Thalmann. Please go ahead.
John Massocca (VP of Equity Research)
Good afternoon.
Sumit Roy (President and CEO)
Hi, John.
John Massocca (VP of Equity Research)
Couple close on the hour mark here, so I just have 1 question. you know, obviously there was a same-store decline in theaters, which was kind of explained, but there was also a same-store decline in your QSR portfolio. I was just kind of wondering what was driving that. Was that some of the credit issues certain franchise operators had earlier this year or something else that's kind of idiosyncratic?
Sumit Roy (President and CEO)
No, no. It's. Look, the overall same-store decline was largely a function of what, you know, Christie touched on to explain why our AFFO per share was flat. It was basically, if you look at the reversals we took in the first quarter of 2022 versus the reversals that we took in 2023 first quarter, there was a net $9 million, you know, reversal that was very positive in the first quarter of 2022 that we didn't have, you know, we had to compare against in this quarter. When you look at same-store calculation, obviously that's what drove, you know, that very benign same-store growth number. Absent that, if you were looking at just the core portfolio, our growth would have been 1.5%.
The specifics around QSR is more driven by, you know, a couple of concepts that are not doing very well. Boston Market continues to be in the news. It's a very small portion of our overall, you know, allocation. I think basis points at this point. That, you know, is what drags the same-store sales numbers same-store growth numbers for that particular industry. It's very specific to a couple of names. Overall, like I said, we would have grown at 1.5% had it not been for these reversals in the 1st quarter of last year.
John Massocca (VP of Equity Research)
Okay. Then what's the overall view on kind of the franchise restaurant space? They had a, you know, kind of rough turn of the year. Have things stabilized at all, given kind of the continued strength of the consumer? Just kinda when you talk to tenants, when you look at new deals, what's the outlook there for that specific tenant industry?
Sumit Roy (President and CEO)
Yeah. It's, it's what you would expect, John. You know, casual dining is depending on the concepts. You know, some concepts continue to post very good results. Like Outback, I saw the results not too long ago. They had positive same-store growth. I think, Chili's had a similar story. You look at other concepts, you know, they're not doing as well. Thankfully, you know, the two that I mentioned are our two largest exposures. We do have some smaller concepts. You know, it's the smaller concepts that if they don't have the balance sheet wherewithal, you know, to increase prices or pass through some of the costs, et cetera, they're going to struggle.
Again, it's not none of this is a big part of our portfolio and all of which, you know, there are areas that we are focused on. It's already part of our watch list. That's where I expect to see, you know, some level of disruption, but nothing new is expected, you know, based on what we see today.
Operator (participant)
Thank you. Our next question comes from Linda Tsai with Jefferies. Please go ahead.
Linda Tsai (Senior Analyst)
Hi, just a quick one. Just a broader question on the overall market. When you look at the amount of dry powder available on the sidelines to deploy towards net lease, in which industries are you seeing the most demand?
Sumit Roy (President and CEO)
That's an interesting one, Linda. You know, if we just look at it, and I'll look back, I think it's convenience stores and grocery. You know, those are the industries that we were able to do the most deals in, but that's a selection bias that we have. You know, those are the industries we like, I can't answer that across the board. What I will tell you is, yes, you're right, there's a lot of capital, but that cost of capital is not uniform. You know, that's one of our biggest advantages, that we have a cost of capital that continues to be incredibly competitive and lower than almost everyone.
you know, in some ways, we find ourselves in a very favorable position to take advantage of what we are seeing in the market. We are very focused on areas of interest, you know, to us.
Linda Tsai (Senior Analyst)
Thank you.
Sumit Roy (President and CEO)
Thank you, Linda.
Operator (participant)
Thank you. Ladies and gentlemen, this concludes our question and answer session. I'd like to turn it back over to the management team for any closing remarks.
Sumit Roy (President and CEO)
Thank you all for your attendance today. We look forward to meeting with many of you at the upcoming Nareit conference in June. Thank you.
Operator (participant)
Thank you. Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.