Yahoo Finance

Jonathan Pong

Thanks, Sumit. 2024 was another year of solid execution across all areas of our business. We remain confident that our unique platform and the investments we are making in the team -- we'll continue to generate consistently strong operating results.
From a balance sheet standpoint, we are well positioned to remain active capital allocators with ample liquidity and modest leverage as we finish the year with net debt to annualized pro forma adjusted EBITDA of 5.4 times. Our fixed charge coverage ratio of 4.7 times remains consistent with the 4.5% to 4.7% range delivered in 2023 and 2024. At quarter end, we held $3.7 billion of liquidity, including $445 million of cash, unsettled forward equity and unused capacity on our $4.25 billion revolving line of credit. Our exposure to February debt remains limited, representing only 4.2% of our outstanding debt principal at year-end.
The consistency of our cash flow and stability of our balance sheet remains the strength of our platform and contributes to our long track record of increases to the monthly dividend. We are proud to remain one of 66 companies in the S&P 500 Dividend Aristocrats Index for having increased our dividend for 30 consecutive years. Our most recent increase will take effect for the March monthly dividend payment, representing a 1.5% increase over the current monthly dividend and a 4.5% increase over the year ago period. This is our 129th dividend increase and our $656 million consecutive monthly dividend declared since our 1994 listing, and we remain grateful for the long-standing support of our income-oriented shareholders.
The scale and depth of our cash flow diversification and the income-oriented nature of our investments results in lower earnings volatility throughout economic cycles and makes our platform unique in both the broader real estate industry and the investment market at large. We'd be remiss without also acknowledging the talent, experience and commitment of almost 500 professionals globally who dedicate themselves to growing and protecting dividends. In our view, the combination of these features uniquely positions Realty Income to leverage this ecosystem to drive capital partnerships in the years to come.
As mentioned in our earnings press release, our Board authorized a common stock repurchase program for up to $2 billion in value. To be clear, we intend for any stock repurchase activity to be leverage neutral, as we intend to utilize proceeds from asset dispositions or free cash flow to fund any activity on the program. While we remain confident in our ability to source, underwrite and close on high-quality investment opportunities, at accretive spreads to our cost of capital. It seems appropriate for us to have this tool available to deploy capital in an agile manner should the opportunity present itself.
I'll now like to hand back to Sumit to complete our prepared remarks.

Sumit Roy

Thank you, Jonathan. In closing, our 2024 performance highlights our proven track record of results, supported by the stability of our portfolio, our talented and experienced team members and a strong balance sheet. We aspire to be the real estate partner to the world's leading companies and the relationships we have built over many years continue to add value to our company as demonstrated during the fourth quarter.
Looking forward, our pipeline remains active and the opportunities to partner with operators who are the best at what they do are encouraging, a testament to the value our company offers.
I would now like to open the call for questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) Farrell Granath, BoA.

Farrell Granath

I just want to ask about your cap rates and expectations going forward. And in your current line of sight, how are you seeing cap rates trend? And how does that apply to your cost of capital today?

Sumit Roy

Good question, Farrell. I would assume that based on the pipeline that we currently have, that the cap rates are going to be right around where we averaged in 2024.

Farrell Granath

Okay. And also in terms of capital recycling, I'm curious how you're thinking about that. I know at the end of '24, you were able to give a little guidance. How much of capital recycling would you see funding your acquisitions going forward? Or if you have any other color to share.

Sumit Roy

Yes. It's a little early in the year to give complete guidance and visibility on that front. But you can assume, for modeling purposes, it will be similar to what we achieved in 2024.

Operator

John Kilichowski, Wells Fargo.

John Kilichowski

Maybe if we could start on the share repurchase program. I'm curious, what's the threshold for you where those shares -- where your equity becomes a little more attractive than other options for your capital? And are any repurchases contemplated a guide?

Sumit Roy

So John, this is a function of what we are seeing in the market today. If you look at what's happened in the last four months, since the Fed started the reduction in rates. In October, we got to our 52-week high at $60 -- almost $65. Literally, within three months, we were down to $51. And with that backdrop, where the fundamentals of our business is not necessarily being represented in the capital markets, this is a tool that we feel like we should have.
Now I just want to be super clear that we will only use our free cash flow from operations and disposition proceeds to do buybacks on a leverage-neutral basis -- and it is an option that we believe we needed to have for the next three years, which is what our Board has sanctioned. In the event, we continue to see this level of volatility in the market. At the end of the day, we are investors. And if the best economic decision is to buy the stock back, given the volatility that we are experiencing, then that is one that we will choose to do. But the expectation and hope is that we don't have to lean on this tool, but it's one that we felt like we needed to have available to us.

John Kilichowski

Got it. And then maybe if I could just jump to the health of the overall portfolio here looking at the guide. The non-reimbursable expense is picking up a little bit from last year and your provision for bad debt at 75 bps. I want to say last year, you were closer to the 30 bps range. I'm curious if these numbers are more a function of conservatism on your part for starting the year or if you're seeing something in the market from your tenants that's making you want to be a little more cautious just as far as tenant credit is concerned.

Jonathan Pong

John, for your first question, the guidance that we do have is 1.4% to 1.7% for unreimbursed property expenses. That is closer to a new run rate, albeit we do have some assumption there for carry costs associated with taking properties. And so we obviously unknown associated with how quickly we can offload some of the vacancies.
Now as it relates to the bad debt expense, for 2024, we did finish close to 50 basis points in terms of bad debt expense as a percentage of revenue. So the $75 million is a bit of an uptick as Sumit mentioned in his prepared remarks, there aren't really any surprises. There's a handful of three tenants that comprise a majority of that. And these are primarily tenants that we underwrote as part of prior M&A transactions. So a little bit of conservatism. I think it's just to get these properties back in many of these cases, we expect to do quite well on the recapture. There could be some short-term disruption. But I think overall, nothing to be overly concerned about from our perspective.

Operator

Greg McGinniss, Scotiabank.

Greg McGinniss

The transaction market, from where you stand today, how are you thinking about kind of the split between US versus Europe versus debt investments for the year?

Sumit Roy

Yes. It's too early to tell, Greg. But clearly, what -- where we saw opportunities last year for the quarters was in Europe and the UK. That's where we did the majority of the transactions. That quickly changed when the cost of capital environment and the market's changed. There were more sellers willing to come to market. Our cost of capital had improved, and we were able to transact transactions at spreads that were acceptable to us for the risk we were inheriting. We ended the year at about 50:50 split between international and the US.
I will tell you that sitting here today, that split is probably where we'll end up for the year in 2025. But I do want to caveat it by saying it is a little early. And given where we were literally two months ago, it again goes back to the kind of platform that we have, the pipeline that we were able to generate and how quickly we were able to generate that pipeline is a testament to what we keep talking about in terms of a very differentiated business model vis-a-vis anybody else out there. And that's what gives us the confidence to have come out with a $4 billion guidance on the acquisition front.
It's a combination of the pipeline that we already have, the visibility that we already have. Thus, I was able to answer the question around cap rates and where we think we are going to end up for the year 2025. And credit investments will certainly be a part and parcel of this makeup, but it won't be disproportionate to what we have achieved in 2024. It will be in a similar ZIP code. But that's the visibility that we have today.

Greg McGinniss

Okay. And could you just give us some info in terms of your progress on further investments into Continental Europe, which countries you've kind of moved into as you've built out the team in one in Amsterdam and what kind of excites you about the opportunities there right now?

Sumit Roy

Yes. That's a great question, Greg. It is this continued establishment of a very mature platform. That is our goal today. And that is part of the reason why our G&A load remains right around where it has been for the last year, 1.5 years, is because we are continuing to build out the team in both the UK as well as in Amsterdam.
And that is what's going to allow us to continue to scale once the team, the permanent team is in place. So in terms of new geographies, there are no new geographies that we have entered into that hasn't been fully disclosed. I think Poland was the last one that we had identified as a market that we wanted to go into. But a lot of what -- where we invested in the fourth quarter were the same market that we already entrenched in. The UK was the majority and Spain was the second country that we had a few investments in the fourth quarter.
But it's the same countries that we've already established our footprint in the CAT loan obviously allowed us to expand the geographies that we were in, it included Germany and Portugal. But outside of that, France, Italy, Spain, UK, Ireland, and Poland. Those are the countries that we are focused.

Operator

Ryan Caviola, Green Street.

Ryan Caviola

With announcements during the fourth quarter that other REITs are expanding into the private fund space does this alter your view on competition in that arena and recognizing that those REITs are in different property sectors, how do you gauge private capital appetite for net lease assets versus other real estate assets?

Sumit Roy

Ryan, in some ways, this is a reaffirmation of the strategy that we announced. Look, we pride ourselves in being a very transparent company. We try to talk to our investor base prior to doing anything. And that's what we chose to do during the last quarter announcement was to signal to the market that this is a natural extension of the business, which is to tap into the private sources.
We believe that we have a place in the core+ arena within this space. It's a perfect entry point for private investors to get into and really leverage a platform that we bring of circa 500 people that has been maturing over the last 55 years along with tools that we've developed. I believe that we have a place. And look, we've just launched our marketing process the data room is open.
We are super excited about this particular area of the business. And the fact that other operators, very successful operators who are choosing to come into this space is really an affirmation of the strategy that we have laid out. So we feel good. We'll get our share of capital. We'll keep you abreast like we always do, of how we are progressing -- but we feel like this is such a massive place in terms of just the quantum of capital available that for us to not move into that area, would not allow us to continue to execute some of what we've talked about, which is diversifying our sources of equity capital. And so far, so good.

Operator

Ronald Kamdem, Morgan Stanley.

Ronald Kamdem

Just two quick ones for me. Just going back to the pipeline. Just wondering if there's any sort of larger sort of deals in there? Or is it all pretty granular? And maybe if you can comment on sort of the data centers and the gaming verticals and what the activity is looking like there?

Sumit Roy

Great question, Ronald. So look, in the pipeline that we currently have, we don't have a very large transaction, and we define very large transactions of 500 and above. These are run of the mill right down the fairway type opportunities, and we are very happy to have built a pretty robust pipeline.
In terms of the asset types, you mentioned gaming and you mentioned data centers. I'll take gaming first. Look, gaming is, by its very nature, very episodic. We do have a couple of conversations ongoing. There's obviously a lot of interest in your own backyard ran, as you know, we'll see how all of that plays out. But we think that, that has a very long fuse attached to it in terms of getting things over the finish line.
The data center space is a very interesting space. It's one that we are very excited about, but at the same time, we are incredibly deliberate about who we want to partner with what are the leases that we want to be exposed to? Which markets are we willing to sign up for? And most importantly, who are the operators developers that we want to create a long-term relationship with. We've all seen news of Microsoft and some other very large hyperscalers coming out and saying we're going to walk away from certain developments, et cetera.
Those are the types of things that just continue to make us very diligent in terms of who we want to ultimately work with. And the discussions that we are having and the ones that we are deciding to forward are the ones that we feel very confident about in terms of their competency, in terms of their track record and not borrowed track records, but their actual track record as an institute and their ability to deliver product, those have become very important in our underwriting process.
And at the end of it all, it's the physical real estate, where is it located? How -- who is it being developed for? What is the kind of leases? Because no true lease in the data center space are the same. And obviously, we've learned that through multiple discussions that we've had. So we believe that cloud services, AI will continue to drive a lot of the demand for data centers, but we have to be hyper selective in terms of which ones do we want to invest in and with whom. So that's my thinking on the data center space.

Ronald Kamdem

Really helpful. And then my second one is just on the sort of the bad debt guidance of 75 basis points. Was there a write-down in the quarter on straight-line rent is just as an aside, but -- the question is really, is this year just sort of a unique outsized year? Or is it -- and should we be expecting that to sort of normalize as you roll the calendar? Or is it sort of a longer -- a bit of a longer tail as sort of the portfolio that you acquired continues to roll through?

Jonathan Pong

Ron, on your first question, you're right. For the fourth quarter, there was a straight-line rent write-down. It was primarily associated with the three tenants. So it was about $8 million or so impact. And so that is one reason why the straight line was a little bit lower than our run rate in Q4.
As it relates to the go-forward trajectory of that debt expense, I think as we get closer towards the midpoint and end of the year, we'll obviously narrow the range a bit right now it's late February. And given that a lot of these potential reserves are concentrated in three tenants that represent about $0.03 per share potential reserve. We are just having a wide range of outcomes for those. But certainly, as we get more information, I think we would expect to hopefully bring that down and narrow our conservatism on that.

Operator

Smedes Rose, Citi.

Madeleine Fargis

This is Maddie Fargis, on for Smedes. Just on the debt side, it looks like you have just under $2 billion of debt maturing in 2025. Can you talk a little bit about your plans to address these maturities? And then maybe looking ahead to your debt coming due over the next couple of years as well?

Jonathan Pong

Matti, we have intentionally staggered our maturities in any given year. That's been very much an intentional process. I think when you look at this year, the $1.9 billion or so coming due at 4.2%, give or take. Right now, if we were to go out our US dollar financing, this is all on a 10-year unsecured basis. You're probably looking at around 5.3% in sterling. It's probably 5.6%. And then in euros probably 3.8%.
So a lot of it is going to depend on the currency in which we refi, but you assume it's dollar pricing and dollar debt, maybe 100 basis points or so headwind and assuming half year convention because maturity date is around the midpoint of the year on average. Perhaps that's $0.01 of dilution for 2025.
I think as we go forward, we've been through many cycles. We've seen a lot of different interest rate environments. We've seen it be a headwind in recent years. We've seen it absolutely be a tailwind in a decade before that and I think having that staggered maturity schedule and having the options, frankly, to tap into three different currencies gives us the flexibility, the optionality and the ability to be patient to wait for that right bite. And so that's how we're going to continue to manage our maturity risk. We also have, of course, a $4.25 billion revolver, and that allows us, again, to have ample sources so that we don't feel pressure to go out and do a deal on a certain day week quarter.

Madeleine Fargis

Great. And then just circling back on guidance quickly. Your guidance range for the income tax expense. It looks like it comes in higher than full year '24. Can you talk a little bit about what's maybe driving that increase, some puts and takes there?

Jonathan Pong

Sure. So we've had an active year on the European side, particularly in the UK. In the UK, we do -- we are subject to a statutory tax rate that we've minimized down into around 10%, 11% of NOI at this point. And as we build up that European platform and buy properties in the UK, you are going to start seeing that run rate and income taxes creep up. So we did $66 million in income taxes globally for 2024. And that's really translating kind of that 80% to 90% run rate.
And if you look at the Q4 income tax number, that essentially shows what that new quarterly run rate will be. I would emphasize that for every transaction that we bring to investment committee, we are always capturing the impact of income taxes in our underwriting. Both on a short-term basis as well as from a long-term underwritten IRR basis.

Operator

Brad Heffern, RBC Capital Markets.

Brad Heffern

Sumit, you mentioned in the prepared comments the sale leaseback was 7-Eleven in the quarter. I'm assuming that was a relatively low cap rates. So I'm just curious if you could talk about the trade-off there between quality and initial spread and does those assets potentially fit in better with the private capital vehicle?

Sumit Roy

There's a lot in what you just asked, Brad. So I'll try to go through each one. I'm not going to specifically talk about 7-Eleven's cap rate. But as you know, the entire US transaction that we did, which was about north of $1 billion was at a 6.4% cap rate. And clearly, that dominated what we did that quarter.
And the other point I'm going to make is we feel very confident that we were able to get this particular portfolio at least 100 basis points discount to where these assets trade. If you look at just even in 2024 and you look at the number of assets that 7-Eleven assets that have a 14-year, 15-year would. And by the way, you'll get about 45 transaction hits there. You will see what the average cap rate is. It's in the very low pie. And obviously, they range from the high 4s to probably the mid-5s. That's the range of where these assets trade.
And so look, this is our sixth sale leaseback with 7-Eleven. They chose to work with us. And it's, again, a testament to what we stand for. So we are very happy about this particular portfolio.
You asked a second question or you implied something about would this have been better suited for the fund business. The answer is yes. I don't know about better suited, but it would certainly be just a fine transaction given the overall return profile that this particular transaction has for the fund business. But we are very comfortable with it being on balance sheet. The point I would make is a slightly different one. We sourced about $43 billion worth of transactions in 2024. We did about $3.9 billion in investments in this year.
And our belief is that had we the fund business up and running, we could have done 2x that. Because there were certain transactions we chose to walk away from, which check almost all the boxes except for the initial spread that we need to be able to do things on balance sheet. That is where why we say that the fund business is complementary. It supplements what we are able to do on the public side and can truly take advantage of a platform that we've built. -- which is why we are so excited about being able to raise capital on the private side and have that act as a complement to what we have achieved on the public side.

Brad Heffern

Yes. And then maybe for Jonathan. On the office move out, you talked about in the prepared comments, First of all, is that the entire $0.04 that you mentioned? Or was that just a portion of it? And then more broadly, I know it's a small part of the portfolio. But is this the biggest potential surprise in the office portfolio? Or is there the potential for more headwinds on that front?

Jonathan Pong

So I wouldn't say it's the $0.04. It was really concentrated in one asset, but there are a handful, and that impact was more in the $0.05 range for 2025. As it relates to everything else, Keep in mind, a lot of the office that we have brought in has come from M&A. We do not see at this injunction anything that rises to that level of materiality we have been tracking in this portfolio in this one particular asset for some time. So it didn't come as a surprise. The timing of that happened late in the year. And so the annualized impact that does show up.

Operator

Michael Goldsmith, UBS.

This is [Catherine Grade], on for Michael. My first, just a couple of specifics on changes to the portfolio this quarter. You already touched on your thoughts about data centers and in the gaming vertical, but I saw your industrial exposure also increased a bit in the quarter. So just wondering if you can provide any color on opportunities that you're seeing in that space going forward and sort of what the appetite is for investigating further the industrial vertical?

Sumit Roy

Yes. Industrial continues to be a focus for the team, and we will continue to look for opportunities to invest in industrial assets. The truth of the matter is that they trade at levels that we can't always participate in. So the exposure that we are increasing on the industrial side is largely coming from development, expansions and projects that we have underway with partners who are developing assets for us that we are leasing out.
And so that's the way we are trying to continue to play on the industrial side. But it should come as no surprise when you do see us being able to participate and buy industrial assets. That is certainly a focus of ours and our asset management team can attest that, that's where a lot of the mark-to-market on the rents are coming in and they're coming in way above what our current rents are, and we create a lot of value doing that. So -- that will continue to be part and parcel of our business strategy going forward.

Got it. That's very helpful. And then my second question, given that we could have been in this period of elevated bankruptcies in the US, I'm just wondering if there are any consumer or retail trends that you're particularly paying attention to as you monitor your portfolio as you sort of navigate this period of elevated tenant credit issues. So just wondering your thoughts about that.

Sumit Roy

Yes. That's a great question. Obviously, there are a lot of things going on. The macro backdrop is not very conducive for especially retailers who have a stretched balance sheet, et cetera. And so we're keeping a very close eye on that. To further exacerbate that situation, we have an uncertainty around what are the tariffs going to look like? How is that going to impact certain businesses and obviously, depending on the type of retail business you have, tariffs can be a big impact or not so big impact.
On the area of media where you have a lot of consumer goods like televisions and stereos et cetera, 60% of that tends to come from China. And so if there is a tariff, those retailers that are exposed to that, if they are unable to pass through the higher cost, they better have a good balance sheet. Otherwise, it's going to be difficult for them to absorb that. And so that's the general trend, and I'm just picking on a very -- consumer electronics is a very specific example, but you can extrapolate that across all these other sectors. Apparel is a big one. China actually exports 34% of the apparel to the world. Thankfully, in the US, it's only 22%, 23%. So it's not going to be quite as acute, but those that are disproportionately exposed to that peak are ones that we are keeping a closer eye on.
And those are much more of a thematic element. It's not specific to our portfolio that we are focusing on. But the downstream impact of all of this uncertainty is certainly leads us to be a lot more cautious. That's the reason for our conservatism, if you will, on being overly aggressive in a year that is clouded with uncertainty.

Operator

Jay Kornreich, Wedbush.

Jay Kornreich

Just starting with -- going back to the private capital fund as you've had several additional months to assess how it would take form after initially announcing it. Are there any updates you can provide us to the initial size you foresee for it and when you anticipate beginning to deploy capital?

Sumit Roy

Jay, too early to tell. We literally opened the data room last week. We've had a few initial meetings, so far so good have, like I said, as we progress, we'll keep you up to speed on how things are progressing, but too early to tell in terms of target size.

Jay Kornreich

Okay. Understood. And then just one more as we think about funding for this year, is you have $92 million of unsettled forward equity, $445 million of cash. So just with the guidance showing $4 billion of acquisitions, intended for. Just would be curious to hear you thoughts on how you plan to fund the acquisition pipeline and if you would raise equity at current trading levels.

Jonathan Pong

Yes, Jay, I think when you look at the combination of cash and the unsettled forward and you also keep in mind that we do have around $850 million of annual free cash flow. You do have equity-like sources of capital that covers us for close to the first $2 billion of buying power. We also have a disposition program where, as you saw last year, 50 million a significant increase in our run rate, but that also becomes a tool for us to recycle capital.
And so when you're left with that residual funding need, if you will, we made certain assumptions into our forecast and our model in terms of what that weighted average cost of capital is. And the reason why we came out with a $4 billion number isn't just a random number. It's a number that we feel confident in being able to achieve at certain cap rate through yields that allow us to do deals on an accretive basis year 1. So I think that's one way of saying that we indexed into a current cost of capital, maybe even a little more conservative than even that. And you know that on the top line, we are targeting deals and seeing a pipeline of deals where we know we can get a sensible spread.

Operator

[Robbie Vavya], Mizuho.

Can you offer some color on tenant credit, which tenants or categories are currently on your watch list? What are the embedded reserves? And does the 75 bps reserve that you mentioned earlier include only known store closures of bankruptcy at this point? Or any -- does it include any speculative bankruptcies or store countries?

Sumit Roy

Okay. So I'll take your last question first since we've already talked about rent losses this year. The 75 bps that we've mentioned definitely has general reserves, areas that we just don't know what could go wrong, given some of the commentary I've made around the volatility in the macro environment as well as uncertainty around where some of the policies are going to go.
I would say that there is a fair amount of general in there. And there's a fair amount of conservatism even on the identified names that Jonathan went through in terms of what we actually think the impact will be with those names. So that's the commentary on the bad debt expense.
In terms of our credit watch list, our credit watch list is right around 4.8% today. And that is slightly higher than the third quarter, again, reflective of what we've already talked about in terms of the uncertainty, et cetera, et cetera. And we are keeping a close eye on that particular watch list. And we will continue to modify it as we go forward, but that is our current understanding of where credit events could happen.
And again, just because something is on the watch list doesn't necessarily mean that there is going to be a credit event. In fact, one of the names came off our credit watch list last year in the fourth quarter, and there were a few that were added just based on what we think could happen on the tariff front and which businesses could get impacted. So that's how this the credit watch list has been created.

Operator

Upal Rana, KeyBanc Capital Markets.

Upal Rana

Just on the fourth quarter, you saw the cap rates compressed by 30 basis points. Just curious what drove the compression there? And what does that tell us about the competition in the transaction market today?

Sumit Roy

Yes. Upal, I think, look, the comments I made around coming out of the third quarter into the fourth quarter, the Fed starting to reduce rates, there was an expectation of continued reduction. There was an expectation on where some of the interest rates were going to settle out. That obviously pushed the cost of capital higher and I think all of that allowed potential sellers to come to market. There was a meeting of the reservation price, those transactions got done. So that certainly had a downward pressure on the overall cap rate. But we are talking about 20 basis points from [7-3, 7-4, to 7-1] at the end of the day.
But I think the second point you made about competition, there is more and more competition coming on the private side. And these are incredibly large asset managers who are starting to understand the benefits of net lease investing. And for me, that's just again, an automation of a business model that has this profile of delivering steady growth, very predictable stability over very long periods of time. And so we welcome the institutionalization of this space, and we feel very confident in our ability to continue to leverage a platform that's been curated over 55 years to lean on relationships that we built on.
80% of everything we do is repeat business with repeat clients. That's pretty powerful. And so the fact that all of these clients are coming in, these potential investors are coming into the space is a good thing, but we feel like we are very well positioned to take advantage of our fair share.

Upal Rana

Okay. Great. That was helpful. And then I appreciate the items that you highlighted that's impacting AFFO per share in '25. But curious what needs to happen for you to achieve the high end of your guidance there?

Jonathan Pong

Well, I think it really comes down to where we end up landing on the reserve side, given that we are expecting 75 basis points of unrented, you can do the math on what that represents every $9 million is a $0.01, right, based off of our share count. So I think it really comes down to that. It also comes down obviously to where the 10-year yield is. We know how correlated our stock is to the 10-year one of the most correlated in the S&P, but obviously getting a little bit of relief fund on that front should help our spreads.
I think just frankly, stability in the rate market for our potential clients and sellers to see that there is a stabilized market. We know where the rates are going. We feel like there is some stability in our cost of capital, the volume will come back at levels that hopefully finds an equilibrium that allows us to outperform the $4 billion. So I would say it's really just those two factors and also our ability to rid ourselves of vacant properties that do have significant carry costs because that is one of the drivers of our guidance of 1.4% to 1.7% on reimbursed property expense margins.

Sumit Roy

But I think the point that you made about a more stable backdrop, that's a key point for us. Our ability to generate transactions and to source transactions, Upal, is bar none. And if we just have a stable backdrop, and I don't care if the tenure is at a 5% zip code or at a 4.5% or 4.25%, we just want stability.
And once that happens, I think our ability to generate a robust pipeline, we just showed it to you in the last quarter of what we can do a backdrop that is a bit more stable. And I think that's what we are hoping for. The rest of it will all play itself out. But in terms of driving growth, that is one of the biggest drivers.

Operator

Jason Wayne, Barclays.

Jason Wayne

Development spending was down and development yields were up year-over-year in '24. Just wondering what drove that how much development is included in guidance this year? And what the underwriting assumptions are for new developments?

Sumit Roy

The reason why investment yields on development keeps going up. It's really a function of the vintage of when these developments were being originated. And as the older vintage developments are getting delivered, that cap rate, that yield on that development should go up. Because it's much more reflective of what the market is today versus what it was in 2023 or early 2023. And so I think that's just a function of resetting all of our development and some of the -- most of the development that's closing today were generated maybe a year ago where the markets were already telling you that there's going to be a fair amount of volatility. So that's the reason for the higher yields.
In terms of the pipeline and how much of this development constitutes that it's going to be similar to what we did in 2024, development. Again, these tend to be repeat businesses with clients that we have a very deep relationship with -- and they have chosen to do reverse build-to-suit or build-to-suit with us, primarily because in this environment, they want somebody with stability, et cetera, and that's up. And so I think the proportion should be similar to 2024 is how I would underwrite it, Jason. And hopefully, the yield question I've addressed it satisfactorily.

Operator

Alec Feygin, Baird.

Alec Feygin

To follow up on something that was talked about in the 3Q or maybe 2Q call. But have you guys gotten the space back from the C-store tenant? And if you have, what's the current assumption for what happens to that space that's embedded in guidance?

Sumit Roy

Yes. So absolutely, we've got our space back, and we are not going to speak to what continues to happen on the legal front, but we essentially have most of the space back, if not all of the space back. And we are in the midst of -- and we were already in parallel having discussions with other very established C-store operators, and we are in the midst of getting that over the finish line.

Operator

Tayo Okusanya, Deutsche Bank.

Tayo Okusanya

Yes. In regards to the tenant watch list have credit in general. Could you talk a little bit about how you're looking at that from the US versus Europe perspective? And then it is Europe positive any meaningful part of that in any way?

Sumit Roy

That's a great question, Tayo. Obviously, given the vintage in Europe, there is a lot less contribution from Europe on the watch list. Having said that, there were certain assets that we intentionally pursued knowing that some of these clients, and I'll give you two examples. Copper drive was one and Homebase was another that we wanted to get back -- and we already had parallel discussions with other clients that wanted that particular location. And so as an asset management, active asset management strategy we pursued assets that had those two particular clients as in those assets.
And the resolution has been pretty remarkable in terms of when we did get those back and our ability to recapture rents well north of the expiring rents or the in-place rent is the strategy behind why we did it. But those are intentional strategies. Outside of that, we -- it's very pristine and we don't have any names from Europe that happened to be on the watch list.

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

Well, thank you for joining us today, and we appreciate all the questions. We look forward to meeting you in the upcoming conferences. Have a great day. Thank you.

Operator

Thank you. The conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.