Realty Income Corporation · NYSE:O
Realty Income — Q1 2019 Earnings Presentation
61 slides from Realty Income's earnings presentation, 2019
Slide 1: First Quarter 2019 Institutional Investor Presentation
FIRST QUARTER 2019 INSTITUTIONAL INVESTOR PRESENTATION
Slide 2: Contents
Contents Company Overview & 1Q19 Results 4 Recent Developments 6 Investment Thesis 11 Portfolio Diversification 20 Defensive Retail Portfolio 25 Asset Management & Real Estate Operations 30 Investment Strategy 33 Capital Structure & Scalability 40 Dependable Dividends 44 Summary 46 Appendix 47 - Sup
Slide 3: Safe Harbor For Forward-Looking Statements
Safe Harbor For Forward-Looking Statements Statements in this investor presentation that are not strictly historical are "forward-looking" statements. Forward-looking statements involve known and unknown risks, which may cause the company‘s actual future results to differ materially from expected re
Slide 4: Realty Income Company Overview
Realty Income Company Overview S&P 500 DIVERSIFIED, HIGH-QUALITY TRACK RECORD OF SAFETY REAL ESTATE COMPANY “NET LEASE” PORTFOLIO AND CONSISTENCY $29B A3 / A- 5,876 9.2 22 OF 23 enterprise value credit ratings by commercial real years weighted years of positive earnings Moody’s and S&P estate proper
Slide 5: Our Approach and 1Q19 Results
Our Approach and 1Q19 Results Acquire well-located commercial properties 1 ✓ ~$519 million in acquisitions Remain disciplined in our acquisition underwriting 2 ✓ Acquired ~4% of sourced volume Execute long-term net lease agreements 3 ✓ Recaptured 104.7% of expiring rent Actively manage portfolio to
Slide 6: Recent Developments
Recent Developments Realty Income will expand to international markets starting with strategic sale-leaseback with Sainsbury’s Realty Income Announces Estimated size of the commercial real estate market in International Expansion: ~ Europe is ~$11 trillion, with $30-$35 billion of annual single-tena
Slide 7: Europe Presents Compelling Market Opportunity
Europe Presents Compelling Market Opportunity Realty Income’s portable business model, cost of capital and scalability represent core competitive advantages ~ Ripe for sale-leaseback consolidation: We estimate $11 trillion of commercial real estate stock in the European market, only $3 trillion of w
Slide 8: UK is a Highly Liquid And Logical CRE Market For Our Initial Entry to Europe
UK is a Highly Liquid And Logical CRE Market For Our Initial Entry to Europe Historically, ~$65 billion of CRE has traded on an annual basis in the United Kingdom Estimated UK Commercial Real Estate Annual Investment Volume(1) USD in billions(2) Post-Brexit 94.6 Referendum Investment volumes Global
Slide 9: Sainsbury's Sale-Leaseback Highlights
Sainsbury’s Sale-Leaseback Highlights Accretive transaction establishes international growth platform with leading UK grocer £429 5.3% 5.8% >200 bps GBP 1st-year cash USD-equivalent Effective 1st-year million cap rate 1st-year cap spread to Transaction size(1) rate(2) leverage-neutral nominal WACC 1
Slide 10: Sainsbury's Sale-Leaseback: Investment Rationale
Sainsbury’s Sale-Leaseback: Investment Rationale Realty Income’s first international acquisition represents natural evolution and execution of strategy Realty Income’s sector-leading cost of capital, size and scale are competitive advantages portable to the UK ~ Limited retail real estate supply per
Slide 11: Investment Thesis
Investment Thesis (1) Consistent Earnings Growth (2) Predictable Business Model (3) Track Record of TSR Outperformance
Slide 12: Consistent Annual Earnings Growth Since NYSE Listing
Consistent Annual Earnings Growth Since NYSE Listing Positive earnings growth(1) in 22 out of 23 years as a public company Historical Earnings Growth Rates (Median) 17.0% Realty Income (1): 5.1% Current REITs (2): 3.2% 9.4% 8.1% 6.8% 6.6% 6.6% 6.4% 6.3% 6.0% 6.0% 5.1% 5.4% 5.1% 5.1% 4.9% 4.4% 4.2% 3
Slide 13: Consistency: Steady Portfolio, Solid Fundamentals
Consistency: Steady Portfolio, Solid Fundamentals Focus on quality underwriting and real estate supports predictable cash flow generation Consistent Occupancy Levels, Never Below 96% Tenets of Consistency: ˃ Careful underwriting at acquisition ˃ Solid retail store performance ˃ Strong underlying rea
Slide 14: Investment Spreads Maintain Even with Rising Interest Rates
Investment Spreads Maintain Even with Rising Interest Rates Rising interest rates do not pose a significant earnings headwind to the net lease business model 12% Acquisition Cap Rate 10% Avg US 10Y Yield 8% Acquisition cap rates highly correlated to changing interest rates… 6% 4% 2% R2 = 0.88 0% 199
Slide 15: Snapshot vs. S&P 500 REIT Peers
Snapshot vs. S&P 500 REIT Peers Superior stability: Favorable occupancy, dividend growth, credit rating and total return metrics Portfolio Occupancy Dividend Growth(1) 98.3% 96.6% 8% 93.7% 91.2% 4.6% 2.9% 0% Tenets of Consistency: Historical Median Lowest Year-End % of Years w/ Negative Dividend CAG
Slide 16: Track Record of Favorable Risk-Adjusted Returns to Shareholders
Track Record of Favorable Risk-Adjusted Returns to Shareholders Since 1994 NYSE listing, Realty Income shares have outperformed benchmark indices while exhibiting lower volatility Compound Average Annual Total Standard Deviation of Shareholder Return Since 1994 Annual Returns Since 1994 28.6% 16.9%
Slide 17: Attractive Risk/Reward vs. S&P Companies
Attractive Risk/Reward vs. S&P 500 Companies Higher returns and lower volatility than majority of S&P 500 companies since 1994 NYSE listing 35% Realty Income return Realtyper unitreturn Income of market per th 30% unit of market riskthe risk is in 98 in the percentile 98th percentile of S&P of all a
Slide 18: Attractive Risk/Reward vs. Blue Chip S&P Equities
Attractive Risk/Reward vs. Blue Chip S&P 500 Equities Historically, more return per unit of risk vs. the 10 largest S&P 500 constituents 25% Realty Income: Greater AAPL return per unit of market risk than each of top 10 largest S&P constituents(1) since 20% 1994 NYSE listing MSFT O Total Return CAGR
Slide 19: Attractive Risk/Reward vs. Blue Chip REITs
Attractive Risk/Reward vs. Blue Chip REITs Historically, more return per unit of risk vs. S&P 500 REITs Realty Income: Greater return per unit of market risk than S&P 20% 500 REITs(1) since 1994 NYSE listing ESS 18% O 16% AVB SPG PSA FRT Total Return CAGR 14% AIV VNO EQR WELL MAA 12% REG UDR MAC 10%
Slide 20: Portfolio Diversification
PORTFOLIO DIVERSIFICATION
Slide 21: Portfolio Diversification: Tenant
Portfolio Diversification: Tenant Diverse tenant roster, investment grade concentration reduces overall portfolio risk 6.1% 2.0% TOP 20 TENANTS REPRESENT 5.4% 1.9% 4.7% 1.8% 4.0% 1.8% 54% 3.6% 1.7% Of annualized rental revenue 3.4% 1.7% 3.2% 1.6% 2.7% 2.4% 1.5% 1.3% 11 12 Different Investment grade
Slide 22: Portfolio Diversification: Industry
Portfolio Diversification: Industry Exposure to 48 industries enhances predictability of cash flow (See Appendix for Industry Theses) Exposure to defensive industries: 96% of total portfolio rent is protected against retail e-commerce threats and economic downturns Non-Discretionary ❶ Convenience St
Slide 23: Portfolio Diversification: Property Type
Portfolio Diversification: Property Type Core exposure in retail and industrial single-tenant freestanding net lease properties RETAIL (82.4%) INDUSTRIAL (11.6%) Number of Properties: 5,702 Number of Properties: 117 Average Leasable Square Feet: 11,400 Average Leasable Square Feet: 229,000 Percentag
Slide 24: Portfolio Diversification: Geography
Portfolio Diversification: Geography Balanced presence in 49 states and Puerto Rico <1 <1 <1 <1 <1 <1 1.1 3.1 <1 4.6 <1 1.9 <1 <1 2.1 <1 <1 3.3 1.7 1.3 4.9 <1 <1 <1 6.0 2.7 <1 1.5 <1 1.7 3.1 8.7 1.6 2.6 1.4 3.0 3.6 Top 6 States 1.6 2.1 <1 <1 2.6 % of Rental Revenue 1.6 1.8 4.1 Texas 11.6% 1.6 Califo
Slide 25: Defensive Retail Portfolio
REALTY “INCOME The Monthly Dividend Company®
Slide 26: Top Tenants Highly Insulated from Changing Consumer Behavior
Top 20 Tenants Highly Insulated from Changing Consumer Behavior All top 20 tenants fall into at least one category (Service, Non-Discretionary, Low Price Point Retail or Non-Retail) Service / Experiential Non-Discretionary Non-Retail Low Price Point Walmart represented by Neighborhood Markets and Sa
Slide 27: Top Tenant Exposure: 2009 vs. Today
Top Tenant Exposure: 2009 vs. Today Less cyclicality and superior credit and diversification vs. prior downturn Bold tenants represent investment-grade rated credit TOP 15 TENANTS AS OF YE 2009 TOP 15 TENANTS AS OF 1Q 2019 Tenant Industry % of Rent Tenant Industry % of Rent Hometown Buffet Casual Di
Slide 28: Differentiated Business Model from Traditional Retail REITs
Differentiated Business Model from “Traditional” Retail REITs Lease structure and growth drivers support predictable revenue stream relative to other forms of retail real estate Unique “net lease” structure drives lower cash flow volatility Shopping Centers and Malls Initial Length of Lease 15+ Year
Slide 29: Realty Income Not Materially Impacted by Recent Retailer Bankruptcies
Realty Income Not Materially Impacted by Recent Retailer Bankruptcies 44 of 55 retailer bankruptcies since 2017 associated with companies lacking a non-discretionary, low price point, and / or service-oriented component to their business Realty Retail Industry # of BK Retailer Bankruptcy Income Expo
Slide 30: Asset Management & Real Estate Operations
ASSET MANAGEMENT & REAL ESTATE OPERATIONS
Slide 31: Active Real Estate Management: Re-leasing Experience
Active Real Estate Management: Re-leasing Experience Since 1996, Realty Income has achieved 100.3% recapture of prior rent on re-leasing activity Recapture vs. Prior Rent: (All Re-Leasing Activity) 1996 - 2005 95.9% 2006 - 2012 95.6% 2013 - Present 102.4% 2,975 Lease Expirations since 1996 2,586 389
Slide 32: Actively-Managed Real Estate Portfolio
Actively-Managed Real Estate Portfolio Proven track record of value creation, cash flow preservation and risk mitigation Asset Management & Healthy Leasing Results Real Estate Operations Blended rent recapture ✓ Largest department in the company 93.0% rate of 104.7% on expired leases ✓ Distinct mana
Slide 33: Investment Strategy
INVESTMENT STRATEGY
Slide 34: Investment Strategy: Key Considerations
Investment Strategy: Key Considerations Cost of capital advantage, size, track record represent competitive advantage COMPETITIVE ADVANTAGES VS. NET LEASE PEERS LOWEST COST OF CAPITAL SIZE AND TRACK RECORD 1 Supports investment selectivity 1 Ability to buy “wholesale” (at a discount) without creatin
Slide 35: Investment Strategy: Aim to Exceed Long-Term WACC
Investment Strategy: Aim to Exceed Long-Term WACC WACC viewpoint balances near-term earnings per share growth with long-term value accretion Long-term Weighted Average Cost of Capital “Nominal” 1st-Year Weighted Average Cost of Capital • Drives investment decision- • Long-term WACC is the hurdle • U
Slide 36: Investment Strategy: Benefits of Low Cost of Capital
Investment Strategy: Benefits of Low Cost of Capital Low cost of capital is the most important competitive advantage in the net lease industry 6% Higher Lower Reduces need to pursue lower- stock cost of quality, higher-yielding investments 5.3% 5.0% Annualized AFFO/sh Growth price capital to generat
Slide 37: Investment Strategy: Utilizing Low Cost of Capital Advantage
Investment Strategy: Utilizing Low Cost of Capital Advantage Low cost of capital allows Realty Income to acquire the highest quality assets in the net lease industry 8.0% “High Yield” Investment Characteristics (higher cap rates): Higher cost of capital forces companies to invest in riskier Acquisit
Slide 38: Investment Strategy: The Importance of Market Rents
Investment Strategy: The Importance of Market Rents Realty Income avoids lease structures with above-market rents, which can inflate initial cap rates Illustrative Sale-Leaseback Example Assumptions Annual EBITDAR (000s) $8,500 Replacement cost (psf) $200 Total square footage (000s) 175 Market rent
Slide 39: Investment Strategy: Disciplined Execution
Investment Strategy: Disciplined Execution Consistent, selective underwriting philosophy on strong sourced volume Key Metrics Since 2010 (Excluding $3.2 billion ARCT transaction): $12.8 billion $5.4 billion in non-investment grade 55% of volume leased to 84% in property-level acquisition volume of v
Slide 40: Capital Structure & Scalability
CAPITAL STRUCTURE & SCALABILITY
Slide 41: Conservative Capital Structure
Conservative Capital Structure Modest leverage, low cost of capital, ample liquidity provides financial flexibility Common Stock: $22.4 billion – 76% • Shares/Units outstanding – 304 million Debt: $7.0 billion – 24% Common Stock: 76% • Unsecured Notes/Bonds - $5.4 billion Debt: 24% • Unsecured Term
Slide 42: Well-Laddered Debt Maturity Schedule
Well-Laddered Debt Maturity Schedule Limited re-financing and variable interest rate risk throughout debt maturity schedule $1,800 3.9% Weighted average interest rate(1) Key Metrics $1,600 $1,400 • 88% fixed rate debt $1,200 • Weighted average rate 3.4% of 3.94% on debt(1) Debt Maturities ($mm) $1,0
Slide 43: Scalability as a Competitive Advantage
Scalability as a Competitive Advantage Leaders in the net lease industry in efficiency and ability to buy in bulk Larger Size Drives Superior Overhead Efficiency Larger Size Provides Growth Optionality G&A as % of Rental Revenue(1) in millions Transaction Size & Impact(2) to Rent Concentration Curre
Slide 44: Dependable Dividends
DEPENDABLE DIVIDENDS ?
Slide 45: Dependable Dividends That Grow Over Time
Dependable Dividends That Grow Over Time Steady dividend track record supported by inherently stable business model, disciplined execution Strong Dividend Track Record 86 consecutive quarterly increases $2.71 $2.65 101 total increases since 1994 NYSE listing $2.53 82% AFFO payout (based on midpoint
Slide 46: Summary
Summary ˃ Long term-focused business strategy ˃ Diversified and actively managed portfolio ˃ Proven and disciplined relationship-driven acquisition strategy ˃ Conservative capital structure able to withstand economic volatility ˃ Precedent of outperforming S&P 500 and REITs since 1994 listing ˃ Attr
Slide 47: Appendix
APPENDIX ? 47
Slide 48: Superior Performance During Great Recession
SUPERIOR PERFORMANCE DURING GREAT RECESSION
Slide 49: Superior Earnings Growth and TSR During Great Recession
Superior Earnings Growth and TSR During Great Recession 1 of 2 S&P 500 REITs with positive earnings growth, dividend growth, and TSR during Great Recession 2007-2009 Earnings CAGR(1) 2007-2009 Dividend Growth 2007-2009 Total Return 2.1% 14.7% 9.0% -2.3% -20.6% (2) -28.3% Realty Income S&P 500 REITs
Slide 50: NAV Premium Persisted Through Great Recession
NAV Premium Persisted Through Great Recession Cost of capital advantage (measured by premium to NAV) remained stable during recession Historical Premium / (Discount) to NAV Realty Income’s median NAV premium was 10% during the downturn (1 of only 6 S&P 500 REITs trading at a premium to NAV during th
Slide 51: Stable Leverage and Coverage Ratios During Downturn
Stable Leverage and Coverage Ratios During Downturn Lower credit metric volatility during Great Recession relative to other blue-chip REITs Leverage(1) Ratio Range (2007-2009) Realty Income 5.2x 0.7x 5.9x Tighter metric S&P 500 REIT Median (2) 5.7x 3.1x 8.8x ranges reflect: Min Leverage Spread Max L
Slide 52: Superior Relative Volatility Metrics vs. A-Rated REITs During Recession
Superior Relative Volatility Metrics vs. A-Rated REITs During Recession 2007 – 2009 relative rankings Rank Less Volatile 0.3% 0.3% 0.4% 0.6% 0.1x 0% 0.1% 1 0.7% 0.5% 0.6% 0.8% 0.3x 1.2% 0.2% 2 3.1% 1.1% 3.8% 1.3% 0.5x 1.5% 0.3% 3 3.7% 1.4% 4.3% 2.0% 1.5x 2.0% 0.3% 4 4.0% 1.7% 5.7% 2.2% 2.2x 2.2% 0.7
Slide 53: Top Industries Overview
REALTY JJINCOME The Monthly Dividend Company®
Slide 54: Convenience Stores (12.2% of Rent)
Convenience Stores (12.2% of Rent) Quality real estate locations with strong store-level performance Industry Considerations (1) Strong performance independent of gas sales: ~70% of inside sales are generated by customers not buying gas(1) (2) Larger-format stores provide stability: Larger format st
Slide 55: Drug Stores (9.8% of Rent)
Drug Stores (9.8% of Rent) Industry tailwinds, high barriers to entry, key real estate presence Δ in 30-day Prescriptions by Pharmacy Format (2012 – 2017)(1) 21% 21% 12% 3% (33%) Chain Mass Supermarkets Independent Mail Drugstores Merchants Pharmacies Pharmacies Industry Considerations Walgreens: 23
Slide 56: Drug Stores: Challenges Facing E-Commerce Disruptors
Drug Stores: Challenges Facing E-Commerce Disruptors Pharmaceutical supply chain carries significant barriers-to-entry Combined Market Share of Top 3 Incumbents(1) 90% 72% 50% + Heavily concentrated market share + Efficient supply chain & logistics + Captive pricing model Drug Stores Pharmacy Benefi
Slide 57: Health & Fitness (7.7% of Rent)
Health & Fitness (7.7% of Rent) E-commerce resilient supported by favorable demographic trends Industry Considerations (1) Favorable consumer trends and demographic tailwinds: Growing market as consumers increasingly value health / Baby Boomer age group has the highest attendance frequency (2) E-Com
Slide 58: Dollar Stores (7.4% of Rent)
Dollar Stores (7.4% of Rent) Counter-cyclical protection and E-commerce resilient Dollar General: 29 Consecutive Years of Positive Same-Store Sales Growth 9.5% Counter-cyclical sales growth trends supports portfolio during recessionary periods 7.3% 9.0% 6.0% 5.7% 4.9% 4.7% 4.0% 3.3% 3.2% 3.3% 2.8% 2
Slide 59: Quick-Service Restaurants (6.4% of Rent)
Quick-Service Restaurants (6.4% of Rent) High-quality real estate, reliable sales growth Industry Considerations (1) Consistent demand: Approximately 75 million Americans eat fast food every day(1) / positive trend of same-store sales growth supported by value-seeking consumers (2) Fungibility of re
Slide 60: Theaters (5.2% of Rent)
Theaters (5.2% of Rent) Stability throughout economic cycles / Experiential component supports e-commerce resiliency Industry Considerations (1) Historical U.S. box office receipts illustrate stability: 3.8% CAGR since 1981 / no year worse than -7.0% (2) High variable cost structure limits rent cove
Slide 61: Grocery (4.8% of Rent)
Grocery (4.8% of Rent) Exposure to top operators in a largely e-commerce resistant industry Grocery E-Commerce Market Share Remains Modest(2) 64% 35% 24% 20% 9% 3% Media Consumer Sporting Apparel Home Grocery Electronics Goods Goods Industry Considerations U.S. Grocery Market Share(2) (1) Stable, ne