Jonathan Pong: Yes.
Eric Wolfe: Okay. All right. Thank you.
Operator: The next question comes from Wes Golladaywith Baird. Please go ahead.
Wes Golladay: Hey, everyone. I’m just curious what are the clients saying right now? I assume, you’re still the cheapest form of capital for them. Are they just looking to pause and to see where rates settle?
Sumit Roy: Yes, this is an ongoing debate. The clients tend to think about the world 12 months ago and we are trying to get them to understand the world has changed dramatically. It is that stickiness that causes the cap rate movements to drag and that’s no different today. What we are seeing, however is that, when there is pressure on the client i.e. there’s a maturity that they have to deal with on the debt side or they have a pipeline that is helping drive their growth and they have to build out assets or operate assets. That’s where we see a willingness to transact and accommodate the new cost of capital environment. But it depends on the client it depends on the sophistication of the client it depends on the need and the urgency that the client is experiencing at that point in time where these conversations are either fairly straightforward and easy or there’s a bit of a delta between what they’re expecting and hoping versus what we can deliver.
Wes Golladay: Okay. Thanks for the time.
Sumit Roy: Sure.
Operator: The next question comes from Ron Kamdem with Morgan Stanley. Please go ahead.
Ron Kamdem: Hey, the first couple of quick ones. Just back on tenant health, I’m looking at the supplement in this I see rent coverage is 2.8. Just wondering, does the Cineworld transaction sort of — is that going to hit that number next quarter? Number one. And then if you could just broadly talk about just what are you seeing in terms of tenant health in sort of sectors or areas where you’re starting to see some softness or any areas that are outperforming? Thanks.
Sumit Roy: Ron, so the Cineworld will not have an impact on the four-wall coverage, because we don’t get store-specific on a quarter-by-quarter basis. That number that we share with you our own assets where we do have a fair amount of visibility with regards to four-wall coverage. So when we have assets that have a point in time disclosure, we generally don’t try to include that, so no, it won’t have an impact. With regards to what we are seeing that 2.8 to 2.9 has been a fairly consistent number over the last call it three quarters. And it was a bit surprising all of last year because the cost of capital has started moving and we were expecting there to be a little bit more noise and what we ended up learning through the processes even the reserves that we had created we had to sort of unwind to reflect that the clients were doing better than what we had expected.
And that theme has sort of played out. There are certainly some bankruptcies in the casual dining side, on the franchisee side that they are such a small portion of our overall portfolio. I am talking single digit basis points that they don’t have much of an impact on the overall portfolio, where by and large given the essential retail that we’ve targeted, those clients are doing well. Sorry?
Ron Kamdem: Sorry about that. Go ahead.
Sumit Roy: No, that was it, Ron.
Ron Kamdem: Okay. Great. So just, I guess moving on to my second question. Just want to go back to one of the comments you made about sitting here and potentially getting 4% to 5% AFFO growth per share. Just to be clear, does that include the $1.8 billion of debt coming due next year? I think at a four or in change rate being refinanced? Or how are you thinking about the interest cost headwind in that number?
Sumit Roy: Yes, it does. And I think it does. So that’s definitely going to be a headwind and the way we are thinking about it is forecasting out what the forward curve looks like today, what we think we’ll be able to refinance that $1.8 billion of debt and what’s the negative impact running through the income statement and therefore to the AFFO per share. All of that’s been taken into account. And the big caveat here is making sure that the Spirit transaction does close in January, February and that our portfolio as we’ve shown to you in the third quarter continues to perform the way we expected to. And just those two pieces, I do think will allow us to get to that 4% to 5% without having to really raise $1 of equity I keep going back to that because that is a very important component of 2024.
Ron Kamdem: Great. Thanks, so much.
Sumit Roy: Absolutely.
Operator: The next question comes from Linda Tsai with Jefferies. Please go ahead.
Linda Tsai : Hi. What are your plans around assuming Spirit’s term loan? And how is lender reception been?
Jonathan Pong : Hey, Linda, we fully expect to assume Spirit’s term loan they’ve got $1.1 billion outstanding with a delayed draw to get to $1.3 billion. And so it’s obviously all swapped at a very attractive fixed rates for us. We have had some preliminary discussions with the lender group. The good news is that there’s quite a bit of overlap with our lenders and their lenders and we’ve been very flattered by the reception so far from our banking orders. And so everything is going according to plan there. We’ll be able to utilize those swaps that carry quite a bit of value and it fits nicely again into our maturity schedule. So everything is going fine there.
Linda Tsai : And then in terms of the Spirit acquisition, what’s the impact on Realty’s credit ratings and how do fixed income investors or review [ph] view this transaction?
Jonathan Pong : Yes. So Linda was a very favorable reaction and constructive feedback from the rating agencies both Moody’s and S&P they came out and reaffirmed the A3 ratings stable outlooks. And so again, we talk about how this is a very complementary portfolio and balance sheet. I would say, if you look at the before and after for some of the key credit metrics and our bond covenants, it’s essentially unmoved. And so from that standpoint it was at a very lease credit neutral and some could argue you would get positive given the additional scale that provides us. And so all good on the fixed income and rating agency side.
Linda Tsai : Just one last one. How do you think about portfolio discounts broadly like the EG group deal? Do you think they’ll persist in 2024 and beyond?
Sumit Roy : I do Linda. And in fact the larger the transaction, the better discount you’re going to get. We genuinely at least here at Realty Income. We believe that to be one of the core differentiators of realty income and anybody else in this space the ability to do these $1 billion transaction, $2 billion transactions and not have to worry about diversification. Obviously, you know of Jonathan and his team’s ability to access capital. I mean, that’s a big advantage for us. And even pre-Spirit we are probably the name that trades the most on an average daily basis and that too helps on the equity side of the equation. So I think setting aside the capital and people are more and more talking about our ability to access differentiated capital, they are approaching us with solutions that they’re looking for that has multiple millions of dollars associated with it and even potentially billions of dollars associated with it.
And so that’s how we want to be viewed. And as soon as you start to have those discussions on a one-on-one basis, you have the ability to move cap rates a little bit more. You have the ability to construct leases that are a lot more favorable. And we’ve seen that — we saw that on the transactions we just announced in the third quarter with ASDA and Morrison. We saw that on EG Group in the second quarter. We saw that on the gaming asset that we did in the fourth quarter of last year. These are all these $1 billion plus or close to $1 billion transactions. And that’s where I think we will continue to shine.
Linda Tsai : Thanks for the color.
Sumit Roy : Thank you.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Sumit Roy for any closing remarks.
Sumit Roy : Thank you all for joining us today. We look forward to seeing many of you at the NAREIT conference in Los Angeles next week. Have a great afternoon. Bye-bye.
Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
