Realty Income Corporation · NYSE:O
Realty Income — Q1 2018 Earnings Presentation
49 slides from Realty Income's earnings presentation, 2018
Slide 1: First Quarter 2018 Institutional Investor Presentation
FIRST QUARTER 2018 INSTITUTIONAL INVESTOR PRESENTATION
Slide 2: Contents
Contents Company Overview & 1Q18 Results 4 Investment Thesis 6 Portfolio Diversification 15 Defensive Retail Portfolio 20 Asset and Portfolio Management 25 Investment Strategy 28 Capital Structure and Scalability 35 Dependable Dividends 39 Summary 41 Appendix 42 All data as of March 31, 2018 unless
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 Company $21 billion enterprise value Member of S&P High-Yield Dividend Aristocrats® index One of 9 (1) U.S. REITs with at least one “A” rating (Moody’s: A3) 1 of only 2 REITs in both categories Diversified “Net Lease” Portfolio 5,326 commercial real estat
Slide 5: Our Approach and 1Q18 Results
Our Approach and 1Q18 Results (1) Acquire well-located commercial properties $510 million in acquisitions (2) Remain disciplined in our acquisition underwriting Acquired 5% of sourced volume (3) Execute long-term net lease agreements Recaptured 100.4% of expiring rent (4) Actively manage portf
Slide 6: Investment Thesis
Earnings Growth Investment Thesis Outperformance (1) Consistent Earnings Growth Consistency (2) Predictable Business Model (3) Track Record of TSR Outperformance
Slide 7: Consistent Annual Earnings Growth Since NYSE Listing
Consistent Annual Earnings Growth Since NYSE Listing Positive earnings growth(1) in 21 out of 22 years as a public company Historical Earnings Growth Rates (Median) 17.0% Realty Income (1): 5.2% Current REITs (2): 3.7% 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% 3.2% 3
Slide 8: 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 9: 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% R2 = 0.89 2% 1996 1
Slide 10: 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 98.2% 9% 96.6% 93.3% 90.4% 4.7% 3.3% 0% Tenets of Consistency: Historical Median Lowest Year-End % of Years w/ Negative Dividend CAGR G
Slide 11: 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 29.1% 15.7%
Slide 12: 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 Realty Income Income return per return per unit of unit of market risk in the market 30% risk isof in 98th percentile all the S&P 97 th 500percentile
Slide 13: 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% AAPL Realty Income: Greater return per unit of market risk than each of top 10 largest S&P constituents(1) since 20% 1994 NYSE listing MSFT Total Return CAGR O
Slide 14: 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 20% market risk than S&P 500 REITs(1) since ESS 1994 NYSE listing 18% PSA O 16% AVB SPG Total Return CAGR 14% VNO FRT MAC REGEQR MAA HCN 12% AIV GGP UDR 1
Slide 15: Portfolio Diversification
PORTFOLIO DIVERSIFICATION
Slide 16: Portfolio Diversification: Tenant
Portfolio Diversification: Tenant Diverse tenant roster, investment grade concentration reduces overall portfolio risk Top 20 tenants represent: 54% of annualized rental revenue 11 different industries 11 investment grade rated tenants 6.7% Investment grade rated (1) 5.0% 3.8% 3.8% 3.6% 3.5% 3.5% 3.
Slide 17: Portfolio Diversification: Industry
Portfolio Diversification: Industry Exposure to 47 industries enhances predictability of cash flow (See Appendix for Industry Theses) Exposure to defensive industries: 94% of total portfolio rent is protected against retail e-commerce threats and economic downturns Non-Discretionary ❶ Drug Stores: 1
Slide 18: Portfolio Diversification: Geography
Portfolio Diversification: Geography Balanced presence in 49 states and Puerto Rico <1 <1 <1 <1 <1 <1 1.2 3.3 <1 4.8 <1 2.3 <1 <1 2.2 <1 <1 2.7 1.9 1.4 5.2 <1 <1 <1 6.3 2.8 <1 1.6 <1 1.8 2.7 9.0 1.6 2.7 1.4 3.0 3.3 Top 6 States 1.5 2.2 <1 <1 2.6 % of Rental Revenue 1.5 1.9 4.3 Texas 9.4% 1.6 Califor
Slide 19: Portfolio Diversification: Property Type
Portfolio Diversification: Property Type Core exposure in retail and industrial single-tenant freestanding net lease properties RETAIL INDUSTRIAL OFFICE AGRICULTURE Percentage of Rental Revenue 80.9% 12.6% 4.4% 2.1% Number of Properties 5,153 116 42 15 Average Leasable Square Feet 11,844 224,340 73,
Slide 20: Defensive Retail Portfolio
REALTY “INCOME The Monthly Dividend Company®
Slide 21: Top Tenants Highly Insulated from Changing Consumer Behavior
Top 20 Tenants 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 Low Price Point Walmart represented by Neighborhood Markets and Sa
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 1Q 2018 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 Unique “net lease” structure drives lower cash flow volatility Shopping Centers and Malls Initial Length of Lease 15+ Year
Slide 24: Realty Income Not Materially Impacted by Recent Retailer Bankruptcies
Realty Income Not Materially Impacted by Recent Retailer Bankruptcies 28 of 34 retailer bankruptcies since 2017 associated with companies lacking a non-discretionary, low price point, and/ or service-oriented component to their business Realty Income Retail Industry Retailer Bankruptcy Exposure True
Slide 25: Asset and Portfolio Management
ASSET AND PORTFOLIO MANAGEMENT
Slide 26: Active Real Estate Management: Re-leasing Experience
Active Real Estate Management: Re-leasing Experience Since 1996, Realty Income has achieved 99.6% 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 101.9% 2,687 Lease Expirations since 1996 2,342 345
Slide 27: Active Management: Leasing and Dispositions
Active Management: Leasing and Dispositions Proven track record of value creation, cash flow preservation and risk mitigation Portfolio Management Healthy Leasing Results Largest department in the company Distinct management verticals Blended rent recapture 83.6% Retail rate of 100.4% on expir
Slide 28: Investment Strategy
INVESTMENT STRATEGY
Slide 29: 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 Supports investment selectivity Drives faster earnings growth (wider margins) Critical in industry reliant on extern
Slide 30: 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 31: 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 8% Higher Lower Reduces need to pursue lower- stock cost of quality, higher-yielding investments 7.1% 6.7% Annualized AFFO/sh Growth 7% price capital to gene
Slide 32: 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 33: 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 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
Slide 34: 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): $11 billion $4.3 billion in non-investment grade 59% of volume leased to 83% in property-level acquisition volume of vol
Slide 35: Capital Structure and Scalability
CAPITAL STRUCTURE AND SCALABILITY
Slide 36: Conservative Capital Structure
Conservative Capital Structure Modest leverage, low cost of capital, ample liquidity provides financial flexibility Common Stock: $14.7 billion – 69% • Shares/Units outstanding – 285 million Debt: $6.6 billion – 31% Common Stock: 69% • Unsecured Notes/Bonds - $5.4 billion(1) Debt: 31% • Unsecured Te
Slide 37: Well-Laddered Debt Maturity Schedule
Well-Laddered Debt Maturity Schedule Limited re-financing and variable interest rate risk throughout debt maturity schedule $1,200 3.4% Key Metrics (1) Weighted average interest rate(1) $1,000 • 91% fixed rate debt 5.0% $800 4.6% • Weighted average rate of 3.9% on debt Debt Maturities ($mm) 4.1% 2.8
Slide 38: 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 39: Dependable Dividends
DEPENDABLE DIVIDENDS ?
Slide 40: 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 82 consecutive quarterly increases 96 total increases since 1994 NYSE listing $2.63 83% AFFO payout (based on midpoint of 2018 AFFO
Slide 41: 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 42: Appendix
APPENDIX ? 42
Slide 43: Drug Stores (10.5% of Rent)
Drug Stores (10.5% of Rent) Industry tailwinds, high barriers to entry, key real estate presence Δ in 30-day Prescriptions by Pharmacy Format (2011 – 2016) (1) 28% 28% 20% 5% (21%) Chain Mass Supermarkets Independent Mail Drugstores Merchants Pharmacies Pharmacies Industry Considerations Walgreens:
Slide 44: Convenience Stores (9.1% of Rent)
Convenience Stores (9.1% 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 45: Health & Fitness (7.6% of Rent)
Health & Fitness (7.6% 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 46: Dollar Stores (7.5% of Rent)
Dollar Stores (7.5% of Rent) Counter-cyclical protection and E-commerce resilient Dollar General: 28 Consecutive Years of Positive Same-Store Sales Growth 9.5% Counter-cyclical sales growth 9.0% trends supports portfolio during recessionary periods 7.3% 6.0% 5.7% 4.9% 4.7% 4.0% 2.8% 3.2% 3.3% 3.3% 2
Slide 47: Theaters (5.8% of Rent)
Theaters (5.8% of Rent) Stability throughout economic cycles / Experiential component supports E-commerce resiliency Industry Considerations (1) Historical U.S. box office receipts illustrate stability: 3.7% CAGR since 1981 / no year worse than -7.0% (2) High variable cost structure limits rent cove
Slide 48: Quick-Service Restaurants (5.3% of Rent)
Quick-Service Restaurants (5.3% 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 49: Industrial Transportation Services (5.2% of Rent)
Industrial Transportation Services (5.2% of Rent) Offers property diversification and exposure to E-commerce tailwinds Industry Considerations (1) Realty Income primarily exposed to blue chip operator: FedEx (5.0% of rent) controls 23% share of E-commerce parcel delivery market(1) / 33% share of U.S