Joshua Dennerlein : Okay. And then maybe changing the topic a little bit. How do you guys think about expanding or growing your exposure to lower credit quality tenants as a way to kind of widen the aperture and maintain growth?
Sumit Roy : Yes. 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. And I just want to remind the group that three years ago, when Cumberland Farms was available for sale, they were all of the natural operators that were very, very interested in this very well-run private company. And what was being bandied about as a potential sale leaseback, the pricing was in the low 5s, high 4 ZIP code. And 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 was demanding at that particular time.
Fast forward today, the four-wall coverages on these assets have only improved and improved, I would say, dramatically. So the assets remain exactly the same assets, and we were able to accomplish this transaction at 6.9%. Yes, if you look at EG Group, the credit that’s operating these assets, they are sub-investment grade. But if you look at the quality of the assets, it’s exactly the same. And we believe that EG Group is a very good operator of convenience store business. We can see that in the history that they have established in the UK, and we certainly see it in the performance of these assets. When you compare it to where they were performing three years ago and was warranting a price in the low 5s, high 4s to where we were able to accomplish.
So now you fast forward and you say, okay, you’re getting 150 basis points, 160 basis points of additional spread on this real estate, are you being paid for the credit risk inherent in the operator? And 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. And so for us, we’ve said this before that investment grade rating is a byproduct of the actual underwriting. It is not something that we seek out. It gets taken into consideration on 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 going to continue to pursue.
Operator: And our next question today comes from Michael Goldsmith of UBS.
Michael Goldsmith : Sumit you started the call by talking about continued momentum in the business. Can you just talk a little — REITs 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 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 has been pretty solid in the last several quarters.
Sumit Roy : Yes. 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. And so how do we think about our business and why do I use phrases like continued momentum. Even though this may be a lagging indicator, we are looking at transactions, these renewals every day. And when we are seeing the fact that we can still continue to generate 102%, 103% re-leasing spreads, yes, it’s lagging, but literally weeks, months. And it gives me continued hope that, look, for our product, where we play in the market, et cetera, there continues to be a fair amount of demand. And it manifests itself in some of the positive re-leasing 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 with those discussions. I think all of that gives us confidence that there continues to be momentum. The fact that we were able to raise $3.1 billion within a period of three months, in the fixed income market, the fact that we were able to close on $800 million of equity and have $1.5 million of unsettled equity available — $1 billion, sorry, of unsettled equity, again continues to give me confidence that even on our capital side, for us, we continue to sit in a very favorable position. So 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.
And 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 : My follow-up question is, it looks like you’ve opened up an office in Amsterdam. Can you talk a little bit about the advantage that you get from that? Should — does that mean that we should expect more international deals? Or does this allow you to source deals better throughout Europe? And are there any tax benefits from having an office there?
Sumit Roy : Yes. 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. And by international markets, I primarily mean the UK and Western Europe. This was largely driven by a substance 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. So that’s largely what’s driven a couple of hires that we’ve made. But most of the other hires will continue to be in the UK and potentially in some of these other countries as we begin to reach a core size in terms of our portfolio. So yes, 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: And our next question today comes from Harsh Hemnani with Green Street.
Harsh Hemnani: So we’ve heard from some of your peers that perhaps cap rates in the U.S. are closer to topping out. Is that something during the second quarter that you’re seeing too? And then the contrast that perhaps in the — 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? And the spirit of this question is not to say that as European cap rates going to expand over the 7.6, I understand that those idiosyncratic deals might not happen every quarter, but is the trend that you’re seeing in Europe upwards? And can that benefit your spread value to the peers?
Sumit Roy : Yes. Thank you for your question, Harsh. I wouldn’t go so far as to say that 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 10-year bonds are the price is literally one on top of the other. So they’re on those advantages today that we had a year ago. So I don’t expect that to be a disproportionate movement in one geography or the other. Could we see situations, however, unique situations that present themselves that is largely driven by used the word idiosyncratic issues? Yes. And that could garner additional cap rates. But as a market, on average, I don’t see there being that much more of an advantage in one market over the other in terms of cap rates.
And 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 vis-a-vis what we’ve experienced over the last, call it, 1.5 months, 2 months. But 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 as soon as we start to believe that the banking crisis is behind us, is another name that pops up. And as you know, a lot of these regional banks were the lifeblood of providing financing to developers and to other local real estate operators. And so is it possible that those situations could again manifest itself in for 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 the movements in cap rates have played out and it’s going to remain where it is today. But 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.
