Harsh Hemnani: That’s helpful color. And then you’ve mentioned in the past couple of calls where vacant asset sales that your income have been going up. Past couple of quarters, all asset sales were vacant. And 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 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 of years and say versus recover?
Sumit Roy : That’s a tough question, Harsh. What we are experiencing is there is a price for any asset. And if you are willing to accept the price, I think you pretty much can sell an asset. All of what we have accomplished in the first quarter were vacant sales because that’s all we really needed to address. And it was about a 6% unlevered IRR, which is lower than what we have traditionally experienced, largely driven by one or two assets that we just wanted to get rid of because we felt like the long-term prospects or even the short-term prospects for that matter, didn’t justify us holding on to these assets. But if you look back, it’s traditionally been in that high single-digit unlevered IRR. So it gets into the double-digit levered return profile.
And that’s what we’ve traditionally experienced. And I think we should be able to go back to that. In terms of the profile of the buyers 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. Now in the past, we used to have, I would throw developers in the mix. And of course, developers keep sniffing around. But given that the debt markets are a little bit more challenging, there’s a little less perhaps demand from that ilk of potential buyers.
But I would say today, it’s largely owner operators that are driving the sales process.
Operator: And our next question today comes from Greg McGinniss with Scotiabank.
Greg McGinniss : So just touching 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 or whatever have happens to be and how you go about finding operators that maybe didn’t consider sale leasebacks in the past, but would be open to it now.
Sumit Roy : Yes, it’s a slew of avenues through which we source and I think it will be very consistent across the board. Obviously, we believe — we have a curated list of folks that we’ve been reaching out to speaking with one of which we’ve already talked about, EG Group, that we didn’t have expectations of sale leaseback in the near term, but it just so happened that, 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, Craig. But this is something that we do here in the U.S. We do this very consistently when we travel 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, 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 : Okay. And then I guess just talking about source deal volume a bit here, kind of a multi-parter. So first, when you’re talking about source deal volume, does that include the deals where 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? And third, how much of the deal volume in the past, do you think it was driven by cap rates trending down, which was enhancing exit IRRs that now is probably a thing of the past.
Sumit Roy : So Greg, to answer your first question, yes, even when the cap rate expectations are unreasonable. If somebody is 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 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. So rather than tainting their product, they’re just holding back. And I think 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 three numbers that we had the last three quarters. But it is slightly lower than the $25 billion, $26 billion that we were experiencing in the first two quarters of last year and quarters before that. So some of it is obviously getting played out in the sourcing numbers as well. It’s still a very healthy sourcing number. But 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 releasing refinancing scenario or what have you, that’s going to push them to say, okay, we are willing to accept the fact that we need a higher cap rate. We’ve had a few of those occasions where 5 months ago or four months ago, we had a grocery operator that came in and 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 five months ago. They’ve come back to us today saying, “Can you meet that? And we said, no, we can’t. Our cost of capital has moved, but we could do this. And they are willing to transact at that higher level today. So I know this is one anecdotal evidence of how it’s taking time, which is why there’s always a lag. But it is starting to play itself out. And I do expect sourcing numbers to start to go out. The longer this turmoil on the lending side continues, which obviously creates wonderful opportunities for us.
Operator: And our next question today comes from Eric Wolfe of Citibank.
Eric Wolfe : 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 were historically available to you?
Sumit Roy : Yes. I think, Eric, on multiple fronts, it opens up opportunities for us. Obviously, sale-leaseback as a comparative tool to raise capital, especially when compared against the debt products that’s available today, it’s very compelling. The cost of that capital raise is lower than what markets are able to satisfy. So I think from the traditional source, it’s going to create opportunities. It’s also going to create opportunities because you don’t have as many lenders today who would have traditionally participated in — on the secured side of the equation. And there are users of that capital stack that still need to either refinance their capital or just want to raise that in view of doing a sale leaseback. And because of fewer participants, I do think you can position yourself to play in that area because it’s very akin to your traditional underwriting with obviously a few more nuances around how you think about debt instruments as an investment.
But I think it’s going to open up opportunities on that front as well. And a lot of these 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 : That’s helpful. And then just a question on theaters. I know small percentage for you. But I’m just curious what you think needs to happen for there to be a more liquid market for assets. And maybe for Cineworld, specifically, once their balance sheet and leases presumably restructured, do you think there will be a market to sell those assets?
Sumit Roy : I think so, Eric. Look, this is consistent with what I’ve been saying specifically around in a world we remain in discussions. So I’m not going to 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. So I think all of that is 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. So in some ways, this is playing out of what is the highest and best use of some of these locations. And going through this process accelerates that ultimate outcome.
And so we are — look, we think we’re going to 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. And these opportunities that I’ve been referencing about 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. But we feel pretty good about the Cineworld situation.
