Realty Income Corporation (O) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Realty Income fourth quarter and year end 2019 operating results conference call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Andrew Crum, Associate Director, Realty Income. Please go ahead.

Thank you all for joining us today for Realty Income's fourth quarter and year end 2019 operating results conference call. Discussing our results will be Sumit Roy, President and Chief Executive Officer. During this conference, we will make certain statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in any forward-looking statements. We will disclose in greater detail the factors that may cause such differences in the company's Form 10-K. We will be observing a two question limit during the Q&A portion of the call in order to give everyone the opportunity to participate. If you would like to ask additional questions you may reenter the queue. I will now turn the call over to our CEO, Sumit Roy.

Thanks, Andrew. Welcome everyone. We completed another year of strong operating performance delivering favorable risk adjusted returns for our shareholders. We are pleased to have provided our shareholders with more than 21.2% total shareholder return in 2019. During the year, we invested over $3.7 billion in real estate properties, an increase to AFFO per share by 4.1% to $3.32 per share. 2019 was a record year for property level acquisitions, and included approximately $798 million in international investments, including our first ever international sale leaseback of 12 properties located in the United Kingdom leased to Sainsbury's, a leading grocer. In 2019, we celebrated the 50th anniversary of our Company's founding and the 25th year since our public listing, and we were proud to be added to the S&P 500 Dividend Aristocrats Index earlier this month. But being an S&P 500 constituent that has raised its dividend every year for the last 25 consecutive years. We entered 2020 very well positioned across all areas of the business and are introducing 2020 AFFO per share guidance of $3.50 to $3.56, which represents annual growth rate of approximately 5.4% to 7.2%. Earlier this month, we announced that Paul Meurer, Chief Financial Officer and Treasurer is leaving the company. To ensure a smooth transition, Paul will serve as a Senior Advisor to the company through the end of the first quarter and the company has begun a search for a new Chief Financial Officer. I want to thank Paul for his valued partnership and tremendous contributions to the company over the many years. Our portfolio continues to be diversified by tenant, industry, geography, and to a certain extent property type which contributes to the stability of our cash flow. At quarter end, our properties were leased to 301 commercial tenants in 50 different industries located in 49 states, Puerto Rico and the UK. 83% of our rental revenue is from our traditional retail properties. The largest component outside of retail is industrial properties at nearly 12% of rental revenue. Walgreens remains our largest tenant at 6.1% of rental revenue. Convenience stores remains our largest industry at 11.6% of rental revenue. Within our overall retail portfolio, approximately 96% of our rent comes from tenants with a service non-discretionary and/or low price point component to their business. We believe these characteristics allow our tenants to compete more effectively with e-commerce and operate in a variety of economic environments. These factors have been particularly relevant in today's retail climate where the vast majority of the recent US retailer bankruptcies have been in industries that do not possess these characteristics. We continue to feel good about the credit quality in the portfolio, with approximately half of our annualized rental revenue generated from investment grade rated tenants. The weighted average rent coverage ratio for our retail properties, it's 2.8 times on a four-wall basis, while the median is 2.6 times. Our watch list at 1.9% of rent is relatively consistent with our levels of the last few years. Occupancy based on the number of properties was 98.6%, an increase of 30 basis points versus the prior quarter. We expect occupancy to be approximately 98% in 2020. During the quarter we released 28 properties recapturing 106% of the expiring rent. During 2019 we released 214 properties recapturing 103% of the expiring rent. Since our listing in 1994, we have released or sold over 3,100 properties with leases expiring recapturing over 100% of rent on those properties that were released. Our same-store rental revenue increased 2% during the quarter and 1.6% during 2019, which is above our full year projection of approximately 1%, primarily due to the recognition of percentage rent. We expect same-store rent growth to normalize in 2020 and our projected run rate for 2020 is approximately 1%. Approximately 86% of our leases have contractual rent increases. Moving on, I will provide additional detail on our financial results for the quarter and year, starting with the income statement. Our G&A expense as a percentage of revenue was 4.3% for the quarter and 4.7% for the year, which was consistent with our full year projection of below 5%. We continue to have the lowest G&A ratio in the net lease REIT sector and expect our G&A margin to be approximately 5% in 2020. Our non-reimbursable property expenses as a percentage of revenue was 1.4% for both the quarter and for the year, which was lower than our full year expectation in the 1.5% to 1.75% range. Briefly, turning to the balance sheet. We have continued to maintain our conservative capital structure and remain one of only a handful of REITs with at least AA ratings. During the fourth quarter, we raised $582 million of common equity primarily through our ATM program at approximately $75.52 per share. For the full year, we raised $2.2 billion of equity at approximately $72.40 per share, finishing the year with a net debt-to-EBITDA ratio of 5.5 times. And our fixed charge coverage ratio remains healthy at 5 times, which is the highest coverage ratio we have reported for any quarter in our company's history. In January, we completed the early repayment of our $250 million 5.75%, 2021 bond through a full par call. Looking forward, our overall debt maturity schedule remains in excellent shape as the weighted average maturity of our bonds is 8.3 years, and we have only $334 million of debt coming due in 2020, and our maturity schedule is well laddered thereafter. In summary, our balance sheet is in great shape and we continue to have low leverage, strong coverage metrics, ample liquidity and excellent access to well priced capital. In the fourth quarter of 2019, we invested approximately $1.7 billion in 556 properties located in 42 states and the United Kingdom at a weighted average initial cash cap rate of 6.8% and with a weighted average lease term of 11.2 years. Approximately $1.2 billion of this quarters acquisitions were related to the CIM portfolio acquisition we announced in September. On a total revenue basis approximately 47% of total acquisitions during the quarter were from investment grade rated tenants. 100% of the revenues were generated from retail tenants. These assets are leased to 78 different tenants in 26 industries last year. Some of the more significant industries represented are convenience stores, dollar stores and drug stores. We closed 12 discrete transactions in the fourth quarter and approximately 10% of fourth quarter investment volume was sale-leaseback transactions. Off the $1.7 billion invested during the quarter, $1.5 billion was invested domestically in 551 properties at a weighted average initial cash cap rate of 7% and with a weighted average lease term of 10.6 years. During the quarter, $221 million was invested internationally in five properties located in the UK at a weighted average initial cash cap rate of 5.2% and with a weighted average lease term of 17.1 years. During 2019, we invested over $3.7 billion in 789 properties located in 45 states and the United Kingdom at a weighted average initial cash cap rate of 6.4% and with a weighted average lease term of 13.5 years. On a revenue basis, 36% of total acquisitions are from investment grade rated tenants, 95% of the revenues are generated from retail and 5% are from industrial. These assets are leased to 112 different tenants in 31 industries. Of the 72 independent transactions closed in 2019, 11 transactions were above $50 million. Approximately 38% of 2019 investment volume was sale-leaseback transactions. Of the $3.7 billion invested in 2019, nearly $2.9 billion was invested domestically in 771 properties at a weighted average initial cash cap rate of 6.8% and with a weighted average lease term of 13 years. During 2019, approximately $798 million were invested internationally in 18 properties located in the UK at a weighted average initial cash cap rate of 5.2% and with a weighted average lease term of 15.6 years. Transaction flow remains healthy as we sourced approximately $11.7 billion in the fourth quarter. Of the $11.7 billion sourced during the quarter, $9.8 billion were domestic opportunities and $1.9 billion were international opportunities. Investment grade opportunities represented 17% of the volume sourced for the fourth quarter. Of the opportunities sourced during the fourth quarter, 58% were portfolios and 42% or approximately $5 billion were one-off assets. In 2019 we sourced approximately $57 billion in potential transaction opportunities which marks the highest annual volume sourced in our company's history. Of this $57 billion sourced in 2019, 42% were portfolios and 58% or approximately $33 billion were one-off assets. Of these opportunities, $45 billion were domestic opportunities and $12 billion were international opportunities. Of the $1.7 billion in total acquisitions closed in the fourth quarter 15% were one-off transactions. As to pricing, US investment grade properties are trading from around 5% to high 6% cap rate range and non-investment grade properties are trading from high 5% to low 8% cap rate range. Regarding cap rates in the United Kingdom for the type of assets we are targeting, investment grade or implied investment grade properties are trading from the low 4% to high 5% cap rate range and non-investment grade properties are trading from the 5% to the low 7% cap rate range. Our investment spreads relative to our weighted average cost of capital were healthy during the quarter, averaging approximately 325 basis points for domestic investments and 228 basis points for international investments, both of which were well above our historical average spreads. Our investment spreads for 2019 averaged 271 basis points for all of our investment activity, representing the widest annual spreads in our company's history. We define investment spreads as initial cash yield less a nominal first year weighted average cost of capital. Our investment pipeline, both domestic and international remains robust, and we believe we are the only publicly traded net lease company that has the size, scale, and cost of capital to pursue large corporate sale leaseback transactions on a negotiated basis. Based on the continued strength in our investment pipeline, as well as our excellent access to well priced capital, we are introducing 2020 acquisition guidance of $2.25 billion to $2.75 billion. Our disposition program remains active. During the quarter we sold 29 properties for net proceeds of $36.3 million at a net cash cap rate of 6.8% and we realized an unlevered IRR of 10.4%. This brings us to 92 properties sold in 2019 for $108 million at a net cash cap rate of 8.1%, and we realized an unlevered IRR of 8.3%. We continue to improve the quality of our portfolio through the sale of non-strategic assets, recycling the sale proceeds into properties that benefit our investment parameters. We are expecting between $200 million and $225 million of dispositions in 2020, a large portion of which already closed earlier this month. In January, we increased the dividend for the 105th time in our company's history. Our current annualized dividend represents an approximately 3% increase over the year ago period and equates to a payout ratio of 79% based on the midpoint of 2020 AFFO guidance. We have increased our dividend every year since the company's listing in 1994, growing the dividend at a compound average annual rate of approximately 4.6%. And we are proud to be one of only three REITs in the S&P 500 Dividend Aristocrats Index. To wrap it up, it was a successful and active year for us in 2019, and we look to continue the momentum in 2020. Our portfolio is performing well. Our global investment pipeline is robust and our cost of capital and ample liquidity positions us to capitalize on our growth initiatives. At this time, I'd like to open it up for questions. Operator?

[Operator Instructions] Our first question comes from the line of Nick Yulico with Scotiabank. Please go ahead. Your line is open.

Hey, this is Greg McGinniss on with Nick. Digging into the acquisition guidance a bit. We're curious if you could give us estimated split between the US and UK, whether the EU's an option for 2020 and what cap rate are investment spread is assumed in the underwriting? Thanks.

The make up is going to be approximately 20% international, 80% domestic. And the spreads are going to be -- our hope is well north of our average spreads of 150 basis points, 160 basis points.

Okay. So coming in a bit from what you guys accomplished and I'm assuming that's just more conservatism than anything else?

That's what we feel very comfortable sharing with the market. Obviously what happened last year is something that we expect to continue, but we feel very confident in being able to say that our range in the acquisition is going to be in the $2.25 billion to $2.75 billion. And we hope to do far better than our average spreads, which as I said was right around 150 basis points to 160 basis points. So yes, a certain level of conservatism.

Okay. And then, so we know the acquisition guidance does not include potential portfolio acquisitions, but could you give us maybe some sense for what you're seeing out in the market today on that front. Are there portfolios currently being marketed to you, when you looking at any right now one that size. I'm just trying to get a sense what are reasonable upside as to acquisition guidance?

Yes. So let's be a little bit clear on what we are defining as portfolios. The large portfolio transaction that we did last year was at $1.1 billion CIM transaction, $1.2 billion CIM transaction. That's the kind of transaction that hasn't been sort of built into our $2.25 billion to $2.75 billion number. Clearly we are in the market and are constantly doing portfolio sizes in the range of $100 million to $200 million, and those are very much part and parcel of what's included in our guidance. Look, we've shared with you what the sourcing numbers were for 2019. We haven't seen any let up in terms of what we are seeing. So far and so early in the year, we are very optimistic about the pipeline and we are very optimistic of meeting the guidelines that we have shared with the market. And at this point, there is nothing that we are seeing in the horizon that would lead us to believe that this is going to be a much slower year than what we saw last year.

Our next question comes from the line of Christy McElroy with Citi. Your line is open.

Hey, good morning Sumit. Thank you. Just with a pickup in some of the open-air retailers filing for bankruptcy and announcing closures in recent months, and also reports of others hiring restructuring advisors. Can you talk about any specific tenants that you have exposure to that fall into this category or any pocket of your exposure where you're concerned about fallout, if you look into the next year.

There are some tenants that we are obviously looking at very closely. The good news here is we are so well diversified Christy that these are tenants that have very minimal, well below 1% exposure to. For instance, PO1 is one of our tenants that we are looking at, it's been on our credit watch list for a while. We have 12 assets with them, it's right around 10 basis points of rent. We did a sale leaseback with them in 1998 and it's actually been a great transaction for us. So we are almost indifferent as to what happens with them on 9 of the 12 properties we already getting inbound calls from large national tenants, that gives us very high level of confidence that we would be able to reposition this asset. A couple of other names that we are keeping a close eye on Crystal's is another one that we acquired through a large portfolio again basis points of rent and based on the four-wall coverage we feel our portfolio is very well positioned. And once again, but that's a corporate level credit that is in the news and one that we are looking at very closely. But in aggregate, we have obviously taken all of this into account in forecasting out our AFFO per share guidance. And so you can tell from the guidance that we have laid out Christy that fingers crossed this year will again be a very, very good year for us.

And you talked about in your opening remarks, the spreads in market cap rates between investment grade and non-investment grade. Do you think those spreads are wide enough just given sort of that tenant followed environment where you're seeing, and I think I heard you say that about -- said that about 70% of the deals that you're sourcing are investment grade versus, I think it's 50% in place. So will there be a continued effort to sort of raise investment grade exposure?

Actually what we are seeing is something very interesting Christy. I would argue that some of the higher yielding assets have compressed with regards to cap rates, and are moving closer to investment grade cap rates are in the market. So it hasn't been a movement in the investment grade market that is as pronounced as it is in the higher yielding markets. So, one must take into consideration, on a risk adjusted basis, where are you better off investing. And I think we've shared this with you in the past, Christy, credit is very much part of the analysis that we undertake. But we are not pursuing a particular credit profile. We are looking at it in totality and trying to come up with for the risk that one is assuming are the returns appropriate. That's how we look at all of our investments. And -- but the point I want to make is high yielding assets that used to have a high 7%, even an 8% cap rate now trading at a 6% cap rate and investment grade assets that were potentially in the high 5s are in the low 5s. So it's a far more pronounced compression that we are seeing in the higher yielding side of the equation, and it does give us pause, when we look at it from a risk adjusted basis as to whether we should continue to pursue all of those transactions.

Our next question comes from the line of Shivani Sood with Deutsche Bank. Please go ahead, your line is open.

Hey. Thanks for taking the question. As following up on these earlier question about portfolios, curious if you're seeing increased competition for larger portfolio acquisitions or sale leasebacks from private players in recent months. And how has that changed, how you're sourcing and approaching the process to remain ahead of that?

Shivani for us it's business as usual. We are not changing any of our methods of sourcing or pursuing potential transactions that have a risk profile that is not justified by the cap rates, that's being ascribed or that's being asked. I mean, we have, we did 89% of our transactions in 2019 were relationship driven transactions. We are continuing to pursue those. We continue to reach out to clients of ours that have credit that we feel very comfortable with. These are assets that don't even get marketed, and we continue to build on the sale leaseback side of the equation. And absent CIM, 61% of what we did last year was sale leaseback. So I wouldn't say that in any way we have altered the way that we are pursuing acquisitions. What we have done on the international side of the equation is, obviously, we have continued to establish new relationships with again having done the homework around clients that we would like to pursue over the long-term. And that has to been a major push for Neil and for myself to continue to grow our international platform. And thankfully, we've made a fair amount of progress on that front.

Thanks for that color. Just switching topics, the recap rate for occupied boxes is really good in the quarter. Can you share some more color on what drove that?

Yes, sure. So there were basically two things that drove that. And then as you can see our 2020 guidance is right around 1% which is traditionally being what we have said. Not every lease that we have has an annual rent growth. Some have rent growth every three years, some have rent growth every five years, and it just so happened that a disproportionate number of leases had growth coming in 2019. For instance, if you look at the Dollar stores, 46% of all the assets that we own within that bucket had an increase in 2019, and most of those were either a three or a five year rental increase, and that accounted for about 34% of the disproportionate increase in the rent, the 1.6% that we were able to achieve. On the second note a smaller contribution to the increase was the timing of the percentage rent accruals and that too helped. But if you were to take those two out of the equation, we would be right around what we have guided the market to for 2020.

Our next question comes from the line of Rob Stevenson with Janney. Your line is open.

Good afternoon. How are you feeling these days about the office segment. I mean you've added one asset in the last year. Is that a source of dispositions going forward? Is that a source of acquisitions going forward? I mean what's the -- how do you think about that over the next three years?

Rob, so as far as I know, our exposure to office has continued to dwindle over the last few years. It used to be north of 6% at one stage, today it's in the 3% zip code. And it's a product type that we have accumulated largely through large portfolio transactions. We haven't proactively gone out and bought some single-tenant net leased office asset. Having said that, the commentary I'm sharing with you is very much a US based commentary, but I suspect that it is going to be very similar even in the international market. So our view regarding office has not changed. It's asset type that we are very cautious about and we tend to be very, very selective when we even take a particular opportunity and do a deep dive into underwriting the opportunities.

Okay. And then I guess the other question for me winds up being when you take a look at the balance sheet over the next couple of years, a lot of sort of heavy lifting has been done. I mean, where -- is there any sort of opportunities out there for you guys to pick up anything over the next couple of years with rates bottoming yet again?

To me that is such a tertiary mechanism or tool to utilize to help grow our earnings. And I'm glad that you observe that by and large, our efficiency around our balance sheet financing has largely been realized. There is another unsecured that has a high 4% coupon, I believe in 2023, but that's one that we -- depending on where the interest rate environment is, we might take a look at taking out, but that is such a tertiary consideration when I think about what are the drivers of AFFO per share growth. But yes, I'm very happy. Jonathan, are there any other points you would like to make?

Yes, Rob, I think when you look out over the next few years through 2023, we obviously ticked down the 2021 in January, but in '23 and '24, we do have $1.7 million of debt that's maturing, but 2022 early in the quarter, but 2023 our [indiscernible] and so knock on wood rates stay low. It's interesting that a 3.25% coupon today is fairly high. So what we are looking at liability management ideas we're always thinking about how the make whole math kind of translates into a breakeven rate, if we were to refinance certain piece of the capital stack and you can expect us to continue doing that on a go-forward basis.

And just preferred have any place in the capital stack going forward?

We could issue in the mid to high 4s today on the preferred side. It's always something that we'll look at. But when you look at the indicative cost for us of 30-year unsecured paper, that's in the low 3% range today. That gap doesn't make a lot of sense for us.

Our next question comes from the line of Brian Hawthorne with RBC Capital Markets. Please go ahead, your line is open.

Hi. How comfortable are you with your C-store exposure and how high would you be OK with it going?

We are very comfortable with the kind of tenants that we have exposure to that largely constitute our industry exposure. 7-Eleven, Couche-Tard, under the Circle K banner, those are names that we are very comfortable with. They are the best-in-class convenience store operators and we monitor their business. We have a very close relationship with them. And we are very comfortable there. What we are not comfortable with are, the smaller format kiosk type C-stores that heavily rely on fuel sale to drive profitability. And thankfully those are largely out of our portfolio. We do have some, but by and large, most of that 11% exposure is being driven by 7-Eleven and Circle K.

Okay. And then have your tenants talked about rising wages impacting their coverages at all? The coverage ratios?

We went through how many, it was like north of 200 leases, and the fact that I'm sure those conversations in every -- not there in every tenant conversations, but I'm sure in some cases, those conversations had to have alluded to higher labor costs. But by and large, we are happy to report that our tenants are doing fairly well, and the fact that we were able to recapture 103% net of expiring rents leads one to believe that at least the kinds of tenants that we have exposure to are not insulated but are able to absorb the higher labor costs.

Our next question comes from the line of Spenser Allaway with Green Street Advisor. Please go ahead, your line is open.

Thank you. In terms of the $12 billion of deals you guys sourced international this year, can you provide a little color on what particular property types or industries you are seeing most heavily marketed abroad?

It's largely grocers, it's C-stores, it's movie theaters, it's discount retail, those are the buckets that they would fall in, as well as some industrial.

Okay and then just going back to the previous question on the recent wave of bankruptcies and ongoing headwinds in the retail segment. Do you suspect that we could see capex eventually creep higher in the net lease segment just in terms of TIs or potential deferred caped on any vacant assets?

We saw the exact opposite. Our capex has largely been consistent over the last three years. And what has actually reduced was our property expenses. If you notice, we were forecasting to the market that it would be anywhere between 1.5% to 1.75%, and we ended up being at 1.4%. And the reason -- there were two reasons for that. One was that the property taxes that we were forecasting on our vacant assets was far more than what we actually realized, given that we were able to sell our vacant assets at very attractive or total returns. And obviously the top line grew well in advance of what we had forecasted. So those two factors resulted in the property expense margins coming in below 1.5%. We are not seeing our capex numbers changing based on the current climate. And I think it's largely due to the type of retail that we invest in. Its net lease, if it's working for the tenant, they are happy to invest the capex themselves, reposition the assets to continue to remain relevant and drive profitability out of the store. And that's why the net lease industry tends to be a very, very efficient industry. But again, it is absolutely a function of the clients that one chooses to create an exposure to. And if it's the wrong set of clients, I'd say Spencer that that could have a different effect, but on our portfolio we are not seeing it.

Your next question comes from the line of Todd Stender with Wells Fargo. Please go ahead, your line is open.

Thanks. Looking at the average lease term, it's now just over nine years. It's been hedging lower and you guys have certainly acknowledged that. Can you talk about the recent releasing activity. Maybe in the term that they're renewed for. Your acquisitions have on average been higher than that average, but the portfolio average keeps drifting lower. Maybe just talk about releasing if you don't mind?

Yes, sure. And this is something we've talked about in the past as well Todd. If you think about it, at least -- lease the original lease tends to have a 15 year, 20 year or even 25 year sale leaseback. And then you have options built into these leases and those options tend to be five-year options. And this is all disclosed in our supplemental. If you look at our history of releasing and we've done north of 3,000 leases. 88% and it's been higher more recently. 80% to 90% of the existing tenants exercise these options. And so when you reset the lease term, it's right around the five year timeframe. It's only when we are going out and retenanting it with a new tenant or finding a new tenant even with zero vacancies that we have the opportunity to go beyond the five to something like a 10, and those have average in the six to seven years zip code. And so if we were to do no acquisitions, I think the normalized run rate for a net lease company, a very, very mature net lease company which is doing zero acquisitions or very little as a percentage of their overall portfolio. The normalized weighted average lease term is going to be right around six to seven years. And that's where the asset management and real estate operations team comes into play. And we have anticipated this and set the team up accordingly. And I think the results speak for themselves. On a quarterly basis, we share with you what the releasing spread is, and we share with you what's the capital invested was -- with regards to tenant incentives etc, and more often than not they tend to be zero. And we've been capturing north of 100% of the expiring rents. 103% this year. It was similar number last year and in this last quarter was 106%. So I believe that we have a team that in fact could be viewed as somebody that could create value, when these leases start to roll and we are able to maintain the kind of releasing activity that we have, being able to achieve over the last three to four years, that could become a growth driver for us. But clearly, new acquisitions, one should expect if it's a sale leaseback, it should be in that 15 to 20 years zip code and if it's acquired lease, it's going to have double-digit numbers. But as we become a bigger company and unless our acquisition numbers don't keep up on a pro rata basis, the weighted average lease term is going to continue to sort of get lower and should normalize right around seven years.

To that extension option number. Okay, that's very helpful. Thank you, Sumit.

Sure. Of course.

Our next question comes from the line of John Massocca with Ladenburg Thalmann. Your line is open.

Good afternoon. So you mentioned -- you mentioned in your prepared remarks there was significant -- if I heard you correctly, that significant portion of expected 2020 disposition activity closed earlier this month. Can you provide some color on what drove that?

Sure. We are under an NDA, so I have to be very careful. But it was one of our clients who did a strategic review of their real estate operations and approached us to buy back some of the assets that they had leased to us or vice versa that we had leased to them. And it was a very attractive return. We had five years left on the portfolio. And we were able to transact with them and that closed, I believe, early part of last week, and it was to the tune of about $116 million. So if you subtract out the $116 million in dispositions, you're back up to a right around $108 million and that's around the levels of what we achieved in 2019.

Okay that makes sense. Then as we kind of think about dispositions outside of that transaction. How much I guess is potentially being driven by the CIM portfolio and maybe kind of fine-tuning that portfolio more to kind of what you guys want to hold long-term?

Yes. This is the question that we've answered before, when we had announced the CIM transaction. This was a $1.2 billion transaction. We had said that $1 billion worth of the assets that we purchased were ones that we would buy in the open market, if they were available one-off. There's about $200 million worth of assets that we are going to asset manage more aggressively, and by that we had also bucketed that $200 million into some of them are going to be made available for immediate marketing and that's about 25% call it plus, minus. And the rest we would collect the rent for as long as the tenants continues to pay rent. And because of the location, because of the rent per square feet, we feel very good about being able to reposition those assets with potentially new tenants. And so that was the way that we underwrote the $200 million worth that would require more attention, if you will. And that hasn't changed. That's precisely the way we are thinking about the CIM portfolio.

Okay. But then when you think about dispositions on kind of a net basis with that, let's say $50 million that maybe a little more immediately ready for repositioning within the CIM portfolio. It would seem to imply then I guess maybe less disposition activity versus what you guys accomplished this year or is that the wrong way of thinking about it and all this will be kind of blended together?

Yes. Because, are you guaranteeing me that you are going to be able to -- we'll be able to sell those $50 million this year in 2020? We don't -- we didn't underwrite, thinking that we were going to be able to sell 25% of that portfolio that $200 million portfolio in 2020. So it is certainly a blend John. We would love to be able to achieve that. And if we are, we might come back and say to you later on in the year that our disposition numbers may be north of what we have gone out with. But there is certainly a level of flexibility that we've built into those disposition numbers.

Our next question comes from the line of Vikram Malhotra from Morgan Stanley. Please go ahead, your line is open.

Thanks for taking the question. Just on, going back to sort of the tenant health issues referenced being really small, several on the restaurant side. There were several names that have cropped up. NBC, Crystal etc. I'm just wondering maybe taking a step back restaurants remain kind of part and parcel of the net lease business. But are you thinking about restaurant slightly differently going forward, maybe on a three, five year basis between public, private, franchisee, direct, corporate-owned, any specific segments. I think any color there would be useful. Just because we've seen a couple of tenant crop up.

Sure, Vikram. Thanks for your question. We have -- and I am not sharing anything new here. We have been very cautious about the casual dining concept. And more importantly, even if the concept is a good one, we have been very careful about exposing ourselves to small scale franchisees. And so, those factors continue to remain front and center any time we are looking at transactions. And largely what you see playing out in the restaurant space today is not unexpected, and so we are very well -- thankfully, we are very well positioned for the worst outcome in some of what you have just shared in terms of the names and others that we are monitoring. And in fact, our expected outcome on this very small exposure that we have is still going to be north of what we have underwritten in terms of our guidance is my belief. But our thinking has always been very cautious on the casual dining side. It has been more positive on the quick service restaurant side and even within the quick service restaurants there are other drivers such as [indiscernible] need to have a certain number of units, they need to have a certain number of scale that would give us comfort, even if the corporate concept is one that that we find very interesting. So those hurdles have not changed.

Okay, great. And sorry if I missed this. I dialed in late. But on the international side, I heard you reference a couple of categories you were exploring, but just curious kind of how the pipeline looks between the UK and then broadly Continental Europe?

Look, our focus is still very much the UK, that's the geography that we decided to go into first for obvious reasons. We feel very comfortable with that. But we are starting to see some very interesting concepts coming out of Western Europe as well. And we are doing our diligence. Niel's making several trips across the pond to explore those opportunities. So I'm not going to keep those off the table, but in terms of the make up, I think you should expect 20% of the volume plus, minus to come from the international market. And I'd love to be surprised and that's a challenge for Neil. But the vast bulk of our acquisitions will still be US domiciled.

Our next question comes from the line of Collin Mings from Raymond James. Please go ahead.

First one for me, again this is something that's been discussed on a few prior calls. Obviously a lot of competition out there for industrial assets. Nothing closed during the quarter. Can you maybe just update us on what you're seeing on that front and maybe just talk a little bit about the pipeline on that front going forward?

Yes. Collin, the way you started asking the question is precise. There is a lot of competition. There are many people chasing single-tenant industrial assets. And yes, we haven't been able to get any over the finish line in the last quarter. We've been close on a few occasions, but did not -- chose not to continue to pursue the aggressiveness on the cap rate side, but it is something, it's a product that we like. It is an exposure to a certain certain types of tenants that we would find as being very complementary to what we already have. It's just that we haven't been able to actively get a lot of transactions over the finish line yet.

Okay. And then, I did want to follow-up, actually now in a couple of questions on the deal flow on the international front. You've referenced a couple of times again targeting plus or minus 20% of your activity in 2020 will fall to your international bucket. So as you think about targeting call it rough numbers $500 million or so of opportunities. Just curious if you can maybe drill down a little bit more. You mentioned a few things in response to Spenser's question in terms of the different sectors or property types you're seeing a lot of the deal flow. Can you maybe just elaborate a little bit more on where you think you are going to be able to reach the closing table this year on some of those opportunities. And then just, again, as you think about the relationships you've built in the regions to elaborate a little bit more on that as well.

Yes. It's very difficult to tell precisely where within those different buckets are we going to end up. Let's just look at historically what we have been able to achieve. The large part of the 18 transactions that we -- 18 properties that we acquired, 17 were in the grocer -- were grocery stores and they were the big four grocers in the UK and one happen to be a theater. And so the bulk of the transactions that we are seeing is with the big four. But there are some other transactions that we are starting to see that are very interesting. And I'm not in a position to share with you names of tenants, etc with whom we've -- we are making a lot of progress. That is something, as you can understand for competitive reasons. We'd like to get it over the finish line and then be in a position to talk about it more freely. But our conversations is broader than the grocery industry is what I can share with you.

[Operator Instructions] Our next question comes from the line of Haendel St. Juste from Mizuho. Please go ahead.

Hey, good afternoon. I don't know if I missed it, I don't think I did, but did you mention any update on the search for a new CFO. And if you haven't, could you comment on where that search stand. And what's embedded in the 2020 guidance from both the separation cost and a potential hiring of a new CFO?

Yes. So look, we have hired a search firm. We have created a profile and we are out in the market looking for the right individual to join the team, that's where we are with regards to the CFO search. The good news is Paul is very much here with us, acting as a Senior Advisor, and will continue to be with us through the end of March. The fact that we have a very strong team with Jonathan Pong and Sean driving our Capital Markets and Finance Departments and Sean driving our Accounting, we feel very comfortable that we don't have to be in a hurry to replace that particular role. We have a very strong team. Our focus is going to be in terms of finding the right person with the right cultural fit and can help be a partner to us in helping drive the next evolution of this company. And we are not going to take an expeditious route to get there. I mean we want to get this right. With regards to your second question or part of your question is around severance, it's just south of $2 million that is going to impact both the G&A as well as our FFO numbers. And yes, I think those were your questions.

Thank you for that. And as a follow-up of sorts, what level of international build-out cost is reflected in the current G&A guide? Remind us again how many people you've committed currently already to your international platform and where you envision that by year-end?

Yes. So look, we already have a small office in London. We have one person who is driving the business there. We have outsourced a fair amount of the administrative work that is required, i.e., accounting, tax as well as legal, it is quite possible based on the analysis that we have done that in-sourcing some of these functions may make sense. If the growth in our portfolio continues or accelerates the in-sourcing is going to accelerate. So we are very comfortable with the controls that we have in place and the process that we have implemented and it's a structure that allows us to be incredibly flexible. What we have committed to is to higher one other person in the UK, but the number of people who eventually become part of Realty Income Limited will remain to be seen. And it's going to be partially driven by the size of the portfolio that we are able to create. And so having that flexibility, allows us to be much more nimble when it comes to the G&A load that is associated with the platform.

Got it, got it. Thank you for that. And then maybe one more if you entertain me for a second. Curious on -- I guess what your view is on if you feel credit, tenant credits being fairly valued in today's market and whether size is an advantage or maybe a disadvantage for maybe some of your smaller peers have been able to grow faster in an environment where growth seems to have been prioritized over the past year or so. Does that make you any more or less inclined to perhaps consider splitting the company may be into a higher credit and maybe lower credit bucket or perhaps some transaction to in effect make the company a bit smaller or any other strategic change on that front.

Look that's a whole lot of questions that you have sort of built into this one question. What I can tell you Haendel is, we went through a very deep dive, I'd say now about 16 months ago, 15 months ago, and we feel very comfortable that our size, scale, and cost of capital, first and foremost is very portable and is a massive advantage to us as we have started to show. We can do, very large scale sale leaseback and it does not create immediate tenant concentration issues for us. We can be the one-stop shop for existing tenants and have transactions come to us without it -- without then feeling the need to have to go and test the markets, and that's value to them, it's value to us. It allows us to pursue proprietary software that we are developing in-house, that is going to help us drive the lifecycle of Real Estate within our business. Those are things that comes because we have size and scale. And we believe that we have created enough adjacent verticals and/or are exploring enough verticals, where we will be able to provide a growth rate that is very comparable to all of our net lease peers. And the fact that we have the lower cost of capital, and the fact that we have scale, and the fact that we have size, those are all benefits that should ultimately accrue to us. So until that equation changes, I don't see us having to explore. You know what was it that you said spin-offs or high yielding or lower yielding asset base. I mean this is part of our underwriting and it's in fact, a strength of our underwriting, that allows us to pursue the full spectrum of credit tenants and opportunities and it's what helps us drive growth.

Our next question comes from the line of Christy McElroy from Citi. Please go ahead.

Hey, it's Michael Bilerman here with Christy. Sumit forget about a spin, but just thinking about disposition volumes, right, because on one hand, it would be highly dilutive relative to buying something with your cost of capital, being able to sell obviously on asset at much higher cap rate than where you're effectively funding your costs. So recognizing that there is some dilutive aspect to selling assets. I would have thought just given your comments about how the markets pricing non-investment grade, given your size and scale of your portfolio that you would be able to look for either industry tenant or geographical potential concerns where you may want to take a more aggressive approach at shrinking the base, so that the ad of things that you're doing all these verticals that you're in, and having international and having your cost of capital from the debt and equity perspective, provides that much more bottom line growth over time and so that you're not going to be faced with something that comes down the road 12 to 24 months. I would just imagine out of your portfolio there has got to be more than $50 million or $75 million of dispositions, I think you'd want to do, if you really took a hard look at the portfolio?

And we are constantly doing that, Michael. We are constantly looking at the portfolio. We are trying to figure out what is the best economic outcome. Despite the fact that the cap rates seem very aggressive, what do we feel we can sell a given asset at versus holding on to that asset, collecting the lease and selling it vacant at the end. That's an analysis that we are constantly doing. The advantage that we have is so many of our assets and I talked about the PO1 example, we did a sale leaseback on those 12 assets that we own in 1998. We can sell those assets for ground and come out with higher single digit unlevered IRRs. But the fact is their rent is current. We are going to collect the rent and when they -- if they decide that they want to hand over some of the assets back to us at that point, we could do the exact same thing that we can do it today, but we have a few more months of rent collected. So it really comes down to an economic argument. And I think what differentiates us is we are constantly doing that on the assets that we have identified as not long-term holds. And in some situations, we have decided the selling it today is absolutely the right economic outcome because the rent we're collecting perhaps is not enough to justify holding it till the rent starts coming in. And that's where that $100 million and in this year $200 million of disposition number comes in. I think if you add up everything we've done over the last six years, it's north of a $1 billion of assets that we have sold. And it's not to avoid the dilution. You're absolutely right. That is a third level, fourth level consideration, but it's not the driver of the decision making process. It is really the economic analysis that we undertake Michael.

Your company is two times just over the last five years and you go last 10 years it's 4 times, right. Just in terms of size of the asset base. I guess, and I know the benefits of size and scale in terms of your cost of capital helping driving additional growth and allows you to do things as you said without getting a tenant concentration issue. For others, they may not want to take off as much of a portfolio been certain vertical because of that. I just, I guess I'm surprised that there isn't -- and look maybe all the investments you've made have been great, and you don't have a lot of issues, I guess I'm just surprised that there isn't that more aggressiveness of recycling of portfolio, especially in this environment where credit is being I think mispriced?

Yes. Look, we continue to keep looking at it Michael. And who knows, maybe in a few years we'll come out and or not even a few years, maybe in 12 months will come out and say we may need to do more. But right now we feel fairly comfortable that I think we've -- based on the analysis that we've done. We are comfortable with the $200 million of dispositions.

Have your views changed on public to public M&A within the net lease space, and sort of where is your mindset today, especially given your comments about size and scale and being bigger and being able to inherit other problems and dispose or they're not as big of a problem for you as they are of the target?

We've always been open to M&A, Michael. It's -- the question that we have wrestled with and the reason why we haven't been able to move forward has always been, do we have a seller out there that's willing to essentially sell their -- sell themselves. And if that situation were to occur, we would absolutely engage in a conversation. The question is, you look around the net lease space today and you see all of the net lease companies are trading at very high multiples. All of them seem to have a process identified to continue to grow their business. Within that environment, do you see someone raising their hand and saying, look, we would like to engage. If that happens, we are not going to shy away from engaging in that conversation and pursuing M&A.

This concludes the question-and-answer portion of Realty Income's conference call. I will now turn the call over to Sumit Roy for concluding remarks.

Thank you all for joining us today, and we look forward to seeing everyone at the upcoming conference. Thank you, Kenzie.

Thank you, this concludes today's conference call, thank you for your participation. You may now disconnect.