Realty Income Corporation · NYSE:O
Realty Income — Investor Presentation (2018)
44 slides from Realty Income's investor presentation, 2018
Slide 1: 4Q17 Institutional Investor Presentation
4Q17 INSTITUTIONAL INVESTOR PRESENTATION
Slide 2: Contents
Contents Company Overview & Historical Risk/Reward 3 Investment Thesis 8 Portfolio Diversification 13 Defensive Retail Portfolio 18 Asset and Portfolio Management 26 Investment Strategy 29 Capital Structure, Scalability, Dividends 38 Summary 43 All data as of December 31, 2017 unless otherwise speci
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: Company Overview
Company Overview S&P 500 Real Estate Investment Trust with Proven Track Record of Strong Total Returns Leading real estate company: Equity market cap of $16 billion and EV of $22 billion 50% of rent generated from investment grade tenants (1) Member of S&P 500 index Member of S&P High-Yield
Slide 5: Our Approach as The Monthly Dividend Company
Our Approach as “The Monthly Dividend Company®” Generate lease revenue to support the payment of growing monthly dividends Execute long-term net lease agreements Remain disciplined Actively manage the in our acquisition portfolio to maintain underwriting high occupancy Target well-located, Freestand
Slide 6: 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% Lower volatility correlated with Total Return CAGR Since 10/18/94 (NYSE Listing) higher returns over the long-term Realty Income return 30% per unit of mark
Slide 7: Attractive Risk/Reward vs. Blue Chip S&P Equities
Attractive Risk/Reward vs. Blue Chip S&P 500 Equities Proven long-term investment provides an attractive risk/reward Average Annual Compound 30% TSR per Unit of Market Risk Greater return per unit of market risk than O 42% Total Return CAGR Since 10/18/94 25% each of top 10 largest S&P constituents(
Slide 8: Attractive Risk/Reward vs. Blue Chip REITs
Attractive Risk/Reward vs. Blue Chip REITs Proven long-term investment vs. Blue Chip S&P 500 REITs Average Annual Compound 30% Greater return per unit of TSR per Unit of Market Risk market risk than each of the other 19 REITs in S&P 500 O 42% Total Return CAGR Since 10/18/94 25% with comparable trad
Slide 9: Investment Thesis: Earnings Growth, Outperformance, Consistency
INVESTMENT THESIS: Earnings Growth Outperformance Consistency 8
Slide 10: Stable Annual Earnings Growth Since NYSE Listing
Stable Annual Earnings Growth Since NYSE Listing Consistent AFFO/sh earnings growth, limited downside throughout cycles Annual AFFO/sh(1) growth since 1996 Earnings growth Consistency and stability of business model is reflected in earnings growth rates largely driven by 17.0% $3.2B ARCT transaction
Slide 11: 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 10Y Yield 8% Acquisition cap rates highly correlated to changing interest rates… 6% 4% R2 = 0.89 2% 0% … whic
Slide 12: Consistency: Steady Portfolio, Solid Fundamentals
Consistency: Steady Portfolio, Solid Fundamentals Consistent occupancy, same-store rent growth reflect limited operational volatility Consistent Occupancy Levels, Never Below 96% 99.1% 99.2% 99.5% 98.4% 97.7% 98.2% 97.7% 98.1% 97.9% 98.5% 98.7% 97.9% 97.0% 96.8% 96.6% 96.7% 97.2% 98.2% 98.4% 98.4% 9
Slide 13: Safety: Lowest Volatility, Highest Return Relative to Market Indices
Safety: Lowest Volatility, Highest Return Relative to Market Indices Since 1994 NYSE listing, Realty Income shares have outperformed benchmark indices while exhibiting lower volatility 16.3% Compound Average Annual Total Standard Deviation of Annual 29.6% Shareholder Return Since 1994 Returns Since
Slide 14: Portfolio Diversification
PORTFOLIO DIVERSIFICATION 13
Slide 15: Portfolio Diversification: Tenant
Portfolio Diversification: Tenant Diverse tenant roster, investment grade concentration reduces overall portfolio risk 6.5% Top 20 Tenants represent: 5.1% 4.0% 54% 3.9% 3.6% of annualized rental 3.6% revenue 3.0% 2.5% 2.2% 11 2.1% 2.0% different industries 1.9% Investment grade rated (1) 1.9% 1.8% (
Slide 16: Portfolio Diversification: Industry
Portfolio Diversification: Industry No industry represents more than 10.6% of rent Exposure to defensive industries: Top 10 industries represent strong diversification, significant exposure to non-discretionary, low price-point, service-oriented industries Industry Retail Characteristics Drug Stores
Slide 17: Portfolio Diversification: Geography
Portfolio Diversification: Geography Balanced presence in 49 states and Puerto Rico 1.0 <1 <1 <1 <1 <1 <1 3.3 1.2 <1 <1 2.3 2.2 5.0 <1 <1 <1 1.3 2.9 <1 <1 1.9 6.2 2.9 5.2 <1 <1 9.3 1.6 <1 1.6 2.8 2.8 1.5 1.4 2.8 1.6 <1 3.1 % of Rental Revenue 2.2 <1 2.2 Texas 9.4% 1.6 1.9 4.3 1.4 California 9.3% 9.4
Slide 18: Portfolio Diversification: Property Type
Portfolio Diversification: Property Type Roots in retail with growing exposure to mission-critical industrial properties RETAIL INDUSTRIAL OFFICE AGRICULTURE Percentage of Rental Revenue 80.7% 12.5% 4.6% 2.2% Number of Properties 4,999 116 42 15 Average Leasable Square Feet 12,060 224,340 73,921 12,
Slide 19: Defensive Retail Portfolio
DEFENSIVE RETAIL PORTFOLIO 18
Slide 20: Portfolio Highly Insulated From Retail E-Commerce and Economic Disruptors
Portfolio Highly Insulated From Retail E-Commerce and Economic Disruptors 96% of total portfolio rent is protected against retail e-commerce threats and economic downturns 19% Insulated from E-commerce pressures Fortune 1000 tenants 72% of rent from investment grade tenants Of Total Portfolio Rent =
Slide 21: Retail Tenants in Top 20 Highly Insulated from Changing Consumer Behavior
Retail Tenants in Top 20 are Highly Insulated from Changing Consumer Behavior 19 of top 20 tenants fall in at least one category (Service, Non-Discretionary, Low Price Point Retail or Non-Retail) Service / Experiential Non-Discretionary Non-Retail Service / Experiential Non-Discretionary Low Price P
Slide 22: Top Tenant Exposure: 2009 vs. Today
Top Tenant Exposure: 2009 vs. Today Top 15 tenants represent higher quality credit, less cyclical industries and greater diversification vs. 2009 Top 15 Tenants as of YE 2009 Top 15 Tenants as of YE 2017 Tenant Industry % of Rent Tenant Industry % of Rent Hometown Buffet Casual Dining 6.0% Walgreens
Slide 23: 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 Shopping Realty Income leases freestanding properties on a “triple-net” Centers and basis (tenant pays for taxes, insuranc
Slide 24: Realty Income Not Materially Impacted by Recent Retailer Bankruptcies
Realty Income Not Materially Impacted by Recent Retailer Bankruptcies Realty Income’s portfolio is designed to perform in virtually any economic environment Retailer Bankruptcies Since 2017 and Realty Income’s Industry Exposure 22 of 26 retailer bankruptcies since 2017 associated with companies lack
Slide 25: Historical Bankruptcy Experience Shapes Current Exposure
Historical Bankruptcy Experience Shapes Current Exposure Historical tenant bankruptcies have been in industries that Realty Income has minimal exposure to today % of All Realty Current Income Tenant Industry Drivers of Credit Issues Exposure Current Exposure Commentary Bankruptcies (% of Rent) Since
Slide 26: Five Key Considerations: Retail Portfolio Health
Five Key Considerations: Retail Portfolio Health Realty Income’s retail tenant roster consists of companies largely unaffected by recent credit issues 1) Retail tenant exposure differs from mall 2.8x 2.8x 2.8x 2.8x 2.7x 2.8x 2.6x 2.6x 2.6x 2.6x 2.6x 2.6x 2.7x 2.7x and shopping center tenant exposure
Slide 27: Asset and Portfolio Management
ASSET AND PORTFOLIO MANAGEMENT 26
Slide 28: Active Real Estate Management: Re-leasing Experience
Active Real Estate Management: Re-leasing Experience Since 1996, Realty Income has achieved 99.5% 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 102.0% 2,621 Lease Expirations since 1996 2,287 334
Slide 29: Active Management: Leasing and Dispositions
Active Management: Leasing and Dispositions Proven track record of value creation, cash flow preservation and risk mitigation Healthy Leasing Results Portfolio Management 100% recapture of expiring rents since 1996 Largest department in the company • Over 2,600 rollovers Includes renewals and re-l
Slide 30: Investment Strategy
REALTY (}INCOME INVESTMENT The Monthly D ividend Company® STRATEGY
Slide 31: Investment Strategy: Underwriting Approach
Investment Strategy: Underwriting Approach Real estate focused / Motivated to exceed long-term cost of capital Retail Non-Retail (principally Industrial) Strong unit-level cash flow Significant markets (generally MSAs coverage (specific to each industry) of ≥350,000 people) and/or mission critic
Slide 32: Investment Strategy: Key Considerations
Investment Strategy: Key Considerations Cost of capital advantage, size, track record: Supports investment selectivity, strong risk-adjusted spreads Competitive Advantages vs. Net Lease Peers Lowest cost of capital Size and track record • Supports investment selectivity • Ability to buy in “bulk” wi
Slide 33: Investment Strategy: Aim to Exceed Long-Term WACC
Investment Strategy: Aim to Exceed Long-Term WACC Cost of capital 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-making at the property l
Slide 34: Investment Strategy: Benefits of Low Cost of Capital
Investment Strategy: Benefits of Low Cost of Capital Low cost of capital (high equity multiple) is the most important competitive advantage in the net lease industry 6.0% Benefits of Low Cost of Capital 5.6% Annualized AFFO/sh Growth from Acquisitions Only 5.2% • More growth per dollar invested 5.0%
Slide 35: 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 and leases in the net lease industry 9.0% Acquisition Cap Rate to Achieve 200 bps Spreads Higher cost of capital forces “High Yield” Investment Characteristics
Slide 36: Investment Strategy: Focused on Market Rents
Investment Strategy: Focused on Market Rents Realty Income avoids lease structures with above-market rents, which can often 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 37: Investment Strategy: Focused on Maximizing Long-Term IRR
Investment Strategy: Focused on Maximizing Long-Term IRR Realty Income IRR analysis favors long-term cash flow consistency; higher initial cap rates ≠ higher IRR • Underwriting criteria geared towards long-term unlevered IRR exceeding long-term WACC • Net lease acquisition market is very efficient
Slide 38: 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): $4.2 billion 82% 58% $10.5 billion in non-investment grade retail acquisitions of volume associated with retail properti
Slide 39: Conservative Capital Structure, Scalable Business Model, Dependable Dividends
CONSERVATIVE CAPITAL STRUCTURE SCALABLE BUSINESS MODEL DEPENDABLE DIVIDENDS 38
Slide 40: Conservative Capital Structure
Conservative Capital Structure Modest leverage, low cost of capital, ample liquidity provides financial flexibility Common Stock: $16.2 billion – 72.6% • Shares/Units outstanding – 285 million Debt 27.4% Debt: $6.1 billion – 27.4% • Unsecured Ratings – A3 / BBB+ / BBB+ Common • Unsecured Notes/Bonds
Slide 41: Well-Laddered Debt Maturity Schedule
Well-Laddered Debt Maturity Schedule Limited re-financing and variable interest rate risk throughout debt maturity schedule Laddered Maturity Schedule with Primarily Unsecured Investment Grade Rated Debt Key Metrics $1,200 3.4% • 98% fixed rate debt Weighted average interest rate (1) $1,000 • Weight
Slide 42: Scalability of Costs Contributes to Higher Relative Valuation
Scalability of Costs Contributes to Higher Relative Valuation Relative NAV valuation comparisons should consider G&A efficiencies 93% EBITDA margins, never below 90% since 1998 Adjusted EBITDA per Employee ($000s) • Efficiency and scalability of business model leads net lease industry $7,301 • G&A e
Slide 43: 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 81 consecutive quarterly increases 95 total increases since 1994 NYSE listing $2.63 83% AFFO payout (based on midpoint of 2018 AFFO
Slide 44: Summary
Summary • Long term-focused business strategy • Diversified and actively managed portfolio • Proven and disciplined relationship-driven acquisition strategy • Conservative (A-rated) credit profile • Precedent of outperforming S&P 500 and REITs since 1994 listing • Attractive risk/reward vs. other RE