Sumit Roy: Yes. So a lot of these were retail parks. And let’s talk a little bit about retail parks because there’s a confusion when you say multi-tenanted, we think in terms of what — how we define multi-tenanted here in the US. This is not like multi-tenanted here in the US. A lot of these are I would say 80% of them are Tier 1 or Tier 2 as we define them, clients that we are pursuing on a freestanding basis. And they happen to be located in a contiguous part. And each one of these units basically has a flow-through from rent to NOI, very similar to what you would find on a freestanding basis. So the growth in these leases, they tend to be shorter, anywhere between five to 10 years. And the growth in these leases could be open market reviews or they could have some of the larger boxes could have more of the regular way growth that we’ve seen that are tied to inflation, et cetera.
But when we are underwriting these assets, we are looking at the composition of the tenants. We’re looking at the flow through. We’re looking at are these rents above or below market? We’re looking at what the long-term profile of the return is going to be. And then we are comparing it to what are we getting these assets at day one in terms of the initial yield. And these assets have really done very well. And some of the numbers, a lot of the renewals come strong, these retail parks that we bought because the freestanding assets haven’t gone through a renewal process yet. And the fact that they are very similar in nature to our overall portfolio of 104.3% that we were able to generate this quarter is a reflection of how we are underwriting each one of these retail parks.
But that’s where we are seeing the value. And the fact that we are now starting to consolidate and control swaps of retail parks across the UK is a massive advantage for us because the kind of conversations we can have with clients that we’ve obviously wanted to grow with is very different when we control major locations that they would like to continue to stay over the long duration. And I think that’s how we are able to generate the value that we are able to generate. And we are doing it at a time point in time where should be told retail parks are starting to change. If you look at the vacancy that you have, it’s circa 2%. If you look at the actual growth that we are being able to generate, it’s much higher than what was traditionally achieved.
And if you also look at the free rent concept that used to exist, we are being able to compress on that concept, just given the fact that we control so much more of retail parks. So this has been a great investment for us. And I just want to make sure that people realize that the flow-through is very similar to a stand-alone net lease business that we’ve traditionally been involved in. So I’m glad you asked the question, Anthony. Thank you.
Anthony Paolone: Thanks for all the color. And then just my follow-up is more on the credit side. You spent a bunch of time on that. But can you give us any updated thoughts on AMC, both as it relates to how you’re thinking about that credit as well as your specific assets with the box office being down a bunch this year?
Sumit Roy: Yeah. So look, we’ve gone through one of them already with Cineworld. AMC represents about 1% of our rent. We have, I believe, 39 assets. AMC continues to be able to raise capital in the equity markets. And 2024 is not going to be a great year for the box office. We recognize that. It may be equivalent to last year, maybe it will be even a little bit less than last year given some of the disruptions that occurred in 2023. But the expectation is that 2025 will supersede 2023 and the quality of movie releases will be much higher in 2025 than in 2024. Is it possible that AMC goes through a BK process? Yes, it’s absolutely possible. But I can tell you, our experience on Cineworld gives us a lot of confidence that the assets that we have and the resolutions that we’ve been able to achieve and the restructuring of the rent that was achieved is still going to create an outcome that is very acceptable to us.
Tony, just to put things in perspective, our history, and we’ve had several bankruptcies in our history, our recapture rate has been north of 80%. And I believe if we were to do the full analysis, once we go full cycle on the Cineworld, it’s going to be in that ZIP code. And it’s not actually even better than that. given some of the resolutions that we are finding on the vacant asset sales that we had touched on last year on Cineworld. So, I believe AMC is going to be a similar story, but it is not trade comp that they’re going to go through a BK process, we believe they have enough liquidity to certainly withstand this year and potentially most of next year as well. But if they were to go through a BK process, it’s not necessarily a bad thing.
I think it will allow them to restructure the debt, which I think continues to be a massive burden and they will emerge stronger for it. And we believe that, again, just like in the Cineworld situation, we have some of their better assets and we will do fairly well even if they were to go through the BK process. So, that’s our thoughts on AMC.
Operator: Our next question comes from Haendel St. Juste of Mizuho. Please go ahead.
Haendel St. Juste: Hey, good morning out there. Sumit, you mentioned thoughtful and disciplined growth selective a few times about your prepared remarks, clearly suggesting that the activity will remain subdued as you push the more yield and quality, but you did leave the door open in capacity in the gas a little bit more compelling opportunities to emerge in the back half of the year. So, I guess I’m curious maybe some more thoughts on that and how you think about balancing the pace of investment versus your longer term earnings growth target if you’d be willing to push a bit more in the second half, even if that would make — right opportunities came along? Thanks.
Sumit Roy: Hi Haendel, I’m sorry, it was very difficult to hear you. But I think what you’re asking for is, do we expect to accelerate the investments in the latter half of the year given what we are seeing today? And if I didn’t quite get that, I apologize. But the answer is, look, we are not trying to look for a particular quantum of acquisitions or investments, we are allowing for the market to dictate how much we’ll be able to achieve in a year, which is very uncertain. If you’re asking for an opinion, I do believe that especially here in the U.S., the second half of the year, when there is a little bit more clarity in terms of where interest rates are going, et cetera, there will be more opportunities. And Haendel, if you look at what we’ve been able to achieve over the last few years, we tend to get more than our share of the volume, especially of the product that we are interested in pursuing.
And so is it possible that the U.S. acquisition numbers for the remainder of the year is going to be higher than what we achieved in the first quarter, the answer is yes. We certainly do. Do we expect the European momentum to continue? The answer is, yes. Do we expect both these markets to accelerate? The answer is, yes. And I just want to caveat it that this is our opinion, and time will tell. But we feel fairly optimistic about the second half of the year.
Haendel St. Juste : Thank you for that. And just a follow-up on Europe since we’re talking about it here. I think you have close to $10 billion or so, plus or minus asset value there. So I guess I’m curious if there’s any change or update on the thinking of a potential spin-off of that platform? Is it large or mature enough? And maybe when do you think that it could be ready to stand on its in? Thank you.
Sumit Roy: That was a loaded question, Haendel, but thank you for asking. The number is, I believe, closer to $11 billion. Yes, if we were to spin that business out, it would be one of the largest REITs in the U.K. But that is absolutely not our intention today. We are very happy with having Europe as part of our overall platform precisely for the reasons that we talked about on this call regarding the first quarter. It allows us the opportunity to play in markets where we have the best risk-adjusted return profiles of investments. And therefore, all of that benefit accrues to our shareholders here in the U.S. And so that’s how I’m going to leave it. Again, was this a grand design that we would grow up to $10 billion? No. It’s again a function of the platform that we brought in, our cost of capital, our team and their ability to execute unlike any other teams and our ability to form the relationships as quickly as we did and now we consider the de facto net lease company in all of Europe.
I mean, those are benefits that has taken us five years to establish. And now we feel like is the time for us to continue to harvest the benefits of establishing ourselves in Europe. So that’s how I would answer it.
Operator: The next question comes from Nick Joseph of Citi. Please go ahead.
Nick Joseph : Thanks. Given the opportunities that you’ve talked about in the better cap rates in Europe and kind of the thoughtfulness on the long-term weighted average cost of capital. How do additional data center and gaming investments look today on the U.S. side?
Sumit Roy: Thank you for your question, Nick. Yes, I would say about 6% of our investments in the first quarter went towards the digital JV that we have formed. As you may recall, Nick, that is an asset that is being currently developed in Northern Virginia, in Loudoun County. And it won’t be operational until the end of this year, the first phase, maybe — actually, it’s the first quarter of next year. And then there could be the second phase that gets kicked in. So as of right now, that is the only investment that we have on the data center side. There are other opportunities that we are looking at. We do have an investment that we will make, we will continue to make in Spain, that is also looking at a data center side that we believe is very well located, and there seems to be a lot of interest in that particular side.
That will be our additional spend on the data center side, but that hasn’t been substantial to date. But those are really the only two opportunities that we are looking at. We are obviously involved in multiple conversations with multiple operators to try to understand where the real opportunities are versus the optimism that continues to play out in this particular space. And we are hopeful that we can grow our high percent part of our portfolio in a meaningful way over the next few years. But as of right now, a lot of it is just in the initial stages of conversations with potential operators outside of the JV that we have with digital.
Nick Joseph: Thanks. And then just on the gaming side?
Sumit Roy: On the gaming side, things continue to look interesting. We’ve obviously made two investments. It represents slightly north of 3% of our rents and we are in conversations with other opportunities, including potential development opportunities in large cities. There’s a very long tail to some of these development opportunities. But we’ll see how some of these conversations translate into actual transactions. But I will say that there was an interesting conversation we were having earlier this year, which has been kind of put on hold for right now that would be a continued growth of our gaming business, but it hasn’t quite materialized yet. So we’ll see how that plays out.
Operator: The next question comes from Wes Golladay of Baird. Please go ahead.
Wes Golladay: Hi, everyone. You highlighted all the levers you have to pull. And when you created last year was the credit investment platform. Can you give us an update on that?
Sumit Roy: Yeah, Wes, we continue to look for opportunities on the credit investment side. But please keep in mind that one of the things that’s dictating our investments in the credit side is to continue to strengthen relationships with either existing clients or to help facilitate sale leaseback with those existing clients. And if we want to be viewed as a real estate partner to some of the world’s leading operators, part of being that partner is to provide capital through the traditional channels that we have established or on a more secured basis to balance sheet lending. And that continues to be how we think about our credit investment. But one of the advantages of doing this Wes, as I’m sure you recognize is this continuous headwinds that we experienced, given the refinancings that we are having to incur at much higher rates.
This is a perfect natural hedge to that,, because here we are lending to clients that we have credit exposures to reflective of the current higher interest rate. And that’s really part of why we believe that this is such a good strategy for us in the interim, people talk about reinvestment risk. Well, guess what, if the environment is different and interest rates actually go down. We don’t have to roll our credit. Our cost of capital should be better. These headwinds that we are facing on our refinancings will dissipate. And we’ll be able to, therefore, invest it in more of our traditional sources, this capital that we get back at very good yields. And so really, I think of the credit partly as a defensive mechanism and is a natural hedge to the headwinds that we faced, but also very much in line with trying to become that real estate partner to the world’s leading operators, and these are operators with whom we want to continue to grow our relationship.
Wes Golladay: A quick follow-up on that one. So when you talk about the natural hedge, would you look to keep these more SOFR based loans?
Sumit Roy: Yeah. We do have software based loans. But by and large, what we try to do is not expose ourselves to the floating rate element. We try to lock it in, we get it but then no longer becomes a perfect hedge. But given where the environment is and given the expectation of interest rates, we are still very well protected. We have one loan, the ASDA loan that was — it was — it’s a floater and it’s off of the SONIA in the UK. But largely, every other loan that we’ve made has been a fixed component to it. And keep in mind that we also inherited some loans, one of which actually got paid off at 100% that we inherited from Spirit, and it was a $33 million seller financing that Spirit had provided to imagine, which, by the way, was an outcome that was superior to how we had underwritten it. So yeah, it’s — Jonathan, do you want to add something?
