But those are going to be very specific to a very specific asset type, and I would put casinos in that bucket and perhaps some other asset types that lends itself to this. But as of right now, we don’t have other JVs that we’ve entered into.
Nate Crossett: Okay. So like what are the other asset types like, would data centers be on that list? I’m just curious.
Sumit Roy: Yes. Data centers is certainly an asset type that will require based on this influx of AI, et cetera. It’s an asset type that will have a massive requirement in terms of capital. I could see, if we choose to go into that area, that’s an area that JV-ing with an operator would make perfect sense.
Nate Crossett: Okay. Thank you.
Operator: The next question comes from Haendel St. Juste with Mizuho. Please go ahead.
Q – Haendel St. Juste: Hey, I guess it’s still good morning out there to you. So Sumit, I guess first question for you is on the composition of the transaction in the third quarter. The share of Europe was historically high. The high-grade share and cap rates, seemed low. Understanding there is a little bit of a lag at least on the cap rate. But I guess, I’m curious if you can help us square some of that and maybe perhaps offer any commentary or facts and figures that would help ease any concern regarding the quality of the assets you’re buying? And if we should expect Europe to continue playing a greater role near term? Thanks.
Sumit Roy: Sure. So you tell me, if buying Asda and Morrisons is diluting the quality of the asset pool at realty income handle. I think we’ve tried to answer this question before that, we do not target investment grade. What we are looking for are assets that we believe, are priced and have a profile of generating a return that is on a risk-adjusted basis, the right return profile. That is how we think about the world. And the fact that, we are able to enter into these negotiated transactions, with some of the best operators in UK. I think is something we are very comfortable doing. And the fact that they don’t have a an investment-grade rating is not an issue for us given how we were able to price it, the fact that these are top quartile assets that we were able to get and have inherent growth profiles that will continue to pay dividend in years to come.
So for us, it’s looking at the entire investment in totality. To determine how much risk are we really taking on? What is the operator? Where are they in terms of positioning? How are they positioned within that particular sector? What is the actual real estate that we are getting? What is the performance of the four wall? I think those are the things that we focus on. And the fact that they turn out to be investment grade or not, is almost a byproduct of that analysis rather than something that we target. And I think I’ve said this before but thank you for asking the question. I’ll keep repeating this. I believe we had about 20% of our investments this quarter that was investment grade. But again that could be in some quarters 40%, in some quarters it could even be less than that.
And we will, of course, continue to share that information with you but a portfolio that on a straight-line basis generates north of 8% yield, I think is something that we are very proud of Haendel.
Haendel St. Juste: Okay. Certainly appreciate that. And maybe one follow-up perhaps for Jon, a question on the reserves. I think there’s been about $11 million of reserve reversal year-to-date. Can you clarify what’s assumed in the 4Q guide, which includes the Cineworld restructuring and if we should expect any reversals in 2024? Thanks.
Jonathan Pong: No, nothing that you should expect for the fourth quarter, pretty much all of the reserve reversals that were significant have been taken as of the third quarter. You may have seen in our same-store rent growth slide in the supplement that we saw a bit of a bump in health and fitness and that was really related to one more regional client that we reserved or refers to reserve off of. As we look forward into 2024, nothing lumpy from that standpoint that would be on the radar as we think about just bad debt expense in general, modeling out the following year we always have some semblance of an unidentified reserve that we put in there just given our history. And we’re obviously very conservative on that front. And I think we’ve said this before, but we’ve historically realized about a 25 basis point credit loss in the portfolio at any given year.
Haendel St. Juste: Thank you.
Operator: The next question comes from Michael Goldsmith with UBS. Please go ahead.
Michael Goldsmith: Good afternoon. Thanks a lot for taking my question. Assuming you used the term hyper selective in terms of how you’re going to approach the next year, can you define what hyper selective means? And does that mean that you would only look at for opportunities greater than the 100 basis point of investment trends that you saw this quarter? Thanks.
Sumit Roy: That’s a great question, Michael. Look, I think if you look at where we are today and you look a year ahead in 2024, we believe that without having to rely on the equity capital markets, we’ll be able to deliver approximately 4% to 5% AFFO per share growth. And that is a pretty powerful statement to make and that obviously assumes that the Spirit transaction closes either in the first month, either in January or in February. And with just the free cash flow that we are going to generate pro forma, which is going to be right around $800 million, some of the headwinds that we are going to experience in the refinancing, absorbing all of that to be able to sit here today and say that we could deliver that growth without having to raise $1 of equity.
I think it’s a very good place to be. And so when I said about being hyper selective, what has happened more recently is that the cost of capital has moved so dramatically, so quickly that the cap rates haven’t had a chance to sort of adjust. And so we find ourselves in this – like I said in the second quarter, we had about 135 basis points of spread. And then in this quarter we have 105 basis points of spread. It’s a tough environment to be in when we are entering into transactions six months, seven months in advance of closing a transaction and the cap rate environment – I mean the cost of capital environment changes and when you are permanently financing it, it sort of eats into what you had originally underwritten. That is what I meant when I said, we want to be hyper selective because we want to help drive the cap rates out to help accommodate for these unforeseen movements in the cost of capital.
And so clearly the cap rates haven’t adjusted as much and that’s what I said that’s what I mean when I say we want to be hyper selective. We want to wait for the cap rates to adjust to make sure that we can get the spreads that we have historically achieved. That was really the color behind that comment.
