Realty Income Corporation · NYSE:O
Realty Income — Q2 2020 Earnings Presentation
62 slides from Realty Income's earnings presentation, Aug 6, 2020
Slide 1: Institutional Investor Presentation
October 2020 INSTITUTIONAL INVESTOR PRESENTATION
Slide 2: Contents
Contents Investment Thesis 4 Company Overview 5 Summary of COVID-19 Impact 6 Superior Performance During Great Recession 10 Performance Track Record 15 Our Approach and 2Q20 Results 23 Portfolio Diversification 24 Defensive Retail Portfolio 29 Asset Management & Real Estate Operations 34 Investment
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: Investment Thesis
Investment Thesis Business model offers attractive total return with minimal cash flow volatility PROVEN TRACK RECORD OF RETURNS 15.3% Compound Average Annual Total Return Since ‘94 NYSE Listing 0.4 Beta vs. S&P 500 PREDICTABLE CASH FLOW Years with Positive Earnings Per Share 23 of 24 Growth(1) 94.0
Slide 5: Realty Income Company Overview
Realty Income Company Overview Business model has generated above-market returns with below-market volatility since 1994 S&P 500 DIVERSIFIED, HIGH-QUALITY TRACK RECORD OF SAFETY REAL ESTATE COMPANY “NET LEASE” PORTFOLIO AND CONSISTENCY $28B A3 / A- 6,541 9.0 23 OF 24 enterprise value credit ratings
Slide 6: Summary of COVID-19 Impact
Summary of COVID-19 Impact September represents continued improvement in rent collection trends during COVID-impacted period Contractual rent collected(1) 2Q July August September across: 2020 2020 2020 2020 Total portfolio 85.9% 91.6% 93.3% 93.8% Top 20 tenants 82.9% 89.8% 91.7% 91.9% Investment gr
Slide 7: Rent Collections from Top Industries
Rent Collections from Top 20 Industries Tenants operating in core industries selling ‘essential goods’ paid almost all rent due September 2020 Rent Collections(1) 12.3% % of September Contractual Rent Collected % of September Contractual Rent Not Collected 8.9% 8.4% 7.8% Received 93.8% of contractua
Slide 8: Cyclical Comparison – Entered Current Recession from a Position of Strength
Cyclical Comparison – Entered Current Recession from a Position of Strength Favorable balance sheet, scale and capital markets backdrop relative to Great Financial Crisis SCALE AND LIQUIDITY YE 2007 Q2 2020 Enterprise Value (in billions) $4.3 $28.1 Available Liquidity (in millions)(1) $593 $2,707 Fi
Slide 9: Ample Covenant Headroom
Ample Covenant Headroom Strong coverage metrics, minimal secured debt, healthier overall covenant cushion vs. 2007 Unsecured Notes Covenant Requirement FY 2007 Q2 2020 Total ≥ 150% Unencumbered 239% Assets 267% (Unencumbered Assets / Unsecured Debt) Debt Service ≥ 1.5x 4.2x Coverage 5.4x (Pro forma
Slide 10: Superior Performance During Great Recession
SUPERIOR PERFORMANCE DURING GREAT RECESSION
Slide 11: 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 12: 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 13: 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 14: 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 15: Performance Track Record
REALTY “INCOME The Monthly Dividend Company®
Slide 16: Consistent Annual Earnings Growth Since NYSE Listing
Consistent Annual Earnings Growth Since NYSE Listing Positive earnings growth(1) in 23 out of 24 years as a public company Historical Earnings Growth Rates (Median) 17.0% Realty Income (1): 5.1% Current REITs (2): 3.3% 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% 4
Slide 17: Low Earnings Volatility Supports Low Share Price Volatility
Low Earnings Volatility Supports Low Share Price Volatility Since 1994 NYSE listing, “O” annual TSR downside volatility is one of the lowest in the S&P 500 Annual Total Shareholder Return Among S&P 500 Companies: 25% Downside Volatility Since 1994(1) 20% Realty Income’s TSR Downside Volatility Since
Slide 18: Track Record of Favorable Returns to Shareholders
Track Record of Favorable Returns to Shareholders Since 1994 NYSE listing, Realty Income shares have outperformed benchmark indices Compound Average Annual Total Shareholder Return Since 1994 15.3% 10.5% 10.1% 10.0% 9.7% O Nasdaq Composite DJIA Equity REIT Index S&P 500 18
Slide 19: 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 Realty Income return per 35% Realty unit Income of market risk in return the per unit of market 98 percentile of all S&Pth th risk 500 is in the(1):95 companies
Slide 20: 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 and S&P 500 REITs 30% AAPL Average Annual Total Shareholder Return 25% 20% MSFT O UNH 15% HD JNJ 10% JPM INTC REITs WMT PG S&P 500 5% VZ Top 10 largest S&P 500 con
Slide 21: 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 22: 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) 98.4% 96.6% 8% 93.8% 91.2% 4.5% (2) 3.1% 0% Tenets of Consistency: Historical Median Lowest Year-End % of Years w/ Negative Dividend
Slide 23: Our Approach and 2Q20 Results
Our Approach and 2Q20 Results Acquire well-located commercial properties 1 ✓ ~$154 million in acquisitions Remain disciplined in our acquisition underwriting 2 ✓ Acquired ~1% of sourced volume Execute long-term net lease agreements 3 ✓ ~12 years weighted average lease term on new acquisitions Active
Slide 24: Portfolio Diversification
PORTFOLIO DIVERSIFICATION
Slide 25: Portfolio Diversification: Tenant
Portfolio Diversification: Tenant Diverse tenant roster, investment grade concentration reduces overall portfolio risk 6.0% 2.4% TOP 20 TENANTS REPRESENT 4.7% 1.9% 4.5% 1.8% 3.9% 1.6% 52.8% 3.4% 1.6% Of annualized rental revenue 3.4% 1.6% 2.9% 1.5% 2.7% 2.5% 1.4% 1.2% 11 12 Different Investment-grad
Slide 26: Portfolio Diversification: Industry
Portfolio Diversification: Industry Exposure to 50 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 27: Portfolio Diversification: Property Type
Portfolio Diversification: Property Type Core exposure in retail and industrial single-tenant freestanding net lease properties RETAIL (83.9%) INDUSTRIAL (10.9%) Number of Properties: 6,364 Number of Properties: 119 Average Leasable Square Feet: 12,000 Average Leasable Square Feet: 224,500 Percentag
Slide 28: Portfolio Diversification: Geography
Portfolio Diversification: Geography Balanced presence in 49 states, Puerto Rico and the United Kingdom <1 <1 <1 1.0 <1 <1 1.2 2.9 <1 4.2 <1 2.3 <1 <1 2.4 1.0 <1 2.3 2.0 1.1 4.4 <1 <1 <1 5.7 2.7 <1 1.7 <1 1.5 2.8 8.8 1.6 2.4 1.4 2.9 3.1 Top 6 States 2.1 2.3 <1 <1 2.2 % of Rental Revenue 1.5 2.0 3.7
Slide 29: Defensive Retail Portfolio
REALTY “INCOME The Monthly Dividend Company®
Slide 30: 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 (Non-Discretionary, Low Price Point, Service Retail or Non-Retail) Service / Experiential Non-Discretionary Non-Retail Low Price Point Walmart represented by Neighborhood Markets and Sa
Slide 31: 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 Q2 2020 Tenant Industry % of Rent Tenant Industry % of Rent Hometown Buffet Casual Di
Slide 32: 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 33: Realty Income Not Materially Impacted by Recent Retailer Bankruptcies
Realty Income Not Materially Impacted by Recent Retailer Bankruptcies 89 of 118 U.S. retailer bankruptcies since 2017 associated with companies lacking a non-discretionary, low price point, and / or service-oriented component to their business # of RI Retail Industry BK Retailer Bankruptcy Exposure
Slide 34: Asset Management & Real Estate Operations
ASSET MANAGEMENT & REAL ESTATE OPERATIONS
Slide 35: Active Real Estate Management: Re-leasing Experience
Active Real Estate Management: Re-leasing Experience Since 1996, Realty Income has achieved 100.4% 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 102.1% 3,362 Lease Expirations since 1996 2,887 475
Slide 36: 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 94.9% rate of 100.1% on expired leases ✓ Distinct mana
Slide 37: Realty Incurs Immaterial Recurring CapEx Obligations
Realty Incurs Immaterial Recurring CapEx Obligations Capital-light portfolio maintenance is a differentiating factor versus other CRE sectors 2012 – 2019 “Hidden” Cost of Supporting Portfolio Revenue: Recurring Capital Expenditures as % of NOI: Rarely captured in NAREIT-defined FFO multiples…. Realt
Slide 38: Investment Strategy
INVESTMENT STRATEGY ?
Slide 39: Investment Strategy: Key Considerations
Investment Strategy: Key Considerations Cost of capital advantage, size, track record represent competitive advantage COMPETITIVE ADVANTAGES VS. NET LEASE PEERS LOW COST OF CAPITAL SIZE AND TRACK RECORD 1 Supports investment selectivity 1 Ability to buy “wholesale” (at a discount) without creating t
Slide 40: 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- hurdle rate (no spread • Used to m
Slide 41: 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 42: 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 43: 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): $16.6 billion 51% 87% in property-level acquisition volume of volume leased to of volume associated with Investment grad
Slide 44: Capital Structure & Scalability
CAPITAL STRUCTURE & SCALABILITY
Slide 45: Conservative Capital Structure
Conservative Capital Structure Modest leverage, low cost of capital, ample liquidity provides financial flexibility Total Enterprise Value: $28.1 billion Common Stock, Unsecured Notes: $6.64 billion 72% (1) Revolving Credit Facility: $629 million Net Debt, 24% 28% Equity Unsecured Term Loans: $250 m
Slide 46: Laddered, Largely Fixed-Rate, Unsecured Debt Stack
Laddered, Largely Fixed-Rate, Unsecured Debt Stack Limited re-financing and variable interest rate risk throughout debt maturity schedule 7.4 Years 3.6% $1,798 Debt Profile Weighted Average Years Until Maturity Weighted Average Interest Rate(1) Unsecured 95% Unsecured Secured $1,399 $1,062 £(2) Fixe
Slide 47: 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 48: Dependable Dividends
DEPENDABLE DIVIDENDS ?
Slide 49: 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 91 consecutive quarterly increases $2.802 $2.73 $2.65 107 total increases since 1994 NYSE listing $2.53 81.5% AFFO payout (based on
Slide 50: Corporate Responsibility
REALTY’ )JINCOME The Monthly Dividend Company®
Slide 51: Corporate Responsibility
Corporate Responsibility Realty Income strives to lead the net lease industry in Environmental, Social, and Governance initiatives Overview Focus • We remain committed to sustainable • HQ energy efficiency, waste business practices in our day-to-day diversion, and water efficiency activities by enco
Slide 52: 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 53: Appendix
APPENDIX ? 53
Slide 54: Top Industries Overview
TOP INDUSTRIES OVERVIEW ENO PARKING
Slide 55: Convenience Stores (12.0% of Rent)
Convenience Stores (12.0% of Rent) Strong store-level performance is supported by the essential nature of the business Industry Considerations (I) Strong performance independent of gas sales: ~70% of gross profit generated from inside sales which is generally not impacted by gasoline demand(1); and
Slide 56: Drug Stores (9.1% of Rent)
Drug Stores (9.1% of Rent) Industry tailwinds, high barriers to entry, and key real estate presence support the evolution of a retail pharmacy Physical locations matter: Drug stores as COVID neighborhood testing hubs foreshadows malleability of physical space ~240K COVID-19 tests administered(1) ~1.
Slide 57: Dollar Stores (8.1% of Rent)
Dollar Stores (8.1% of Rent) Counter-cyclical protection due to a trade down effect and e-commerce resiliency Spending for Low Income Households Almost Fully-Recovered(1) 0% -1.9% 3/13: National -10.8% Emergency Declared -29.8% Top Income Quartile -36.2% Bottom Income Quartile Industry Consideration
Slide 58: Grocery (8.0% of Rent)
Grocery (8.0% of Rent) Exposure to top operators in an essential, e-commerce resistant industry Weekly Food Retail Sales: Y/Y Growth{2) 95% Retail food sales have remained robust through duration of pandemic 41% 37% 30% 32% 29% 28% 24% 22% 17% 19% 19% 17% 20% 17% 14% 8% Industry Considerations U.S.
Slide 59: Grocery: Overview of the U.K. Grocery Industry
Grocery: Overview of the U.K. Grocery Industry Traditional grocery retailers remain the core distribution channel and dominate online sales 2019 U.K. Grocery Sales by Channel(1) Traditional grocery retail formats 35% (supermarkets & hypermarkets) account for ~53% of sales 24% 18% 11% 8% 5% Supermark
Slide 60: Health & Fitness (7.1% of Rent)
Health & Fitness (7.1% of Rent) E-commerce resilient supported by favorable demographic trends Industry Considerations (I) Favorable consumer trends and demographic tailwinds: Growing market as consumers increasingly value health / Consumer surveys indicate that members are returning to gyms as they
Slide 61: Theaters (6.3% of Rent)
Theaters (6.3% of Rent) Stability throughout economic cycles / Experiential component supports e-commerce resiliency Illustrative Theater Rent Coverage Sensitivity Industry Considerations 2021 Film Slate is Strong (I) Theatrical releases are significant revenue generators for studios: Hollywood stud
Slide 62: Quick-Service Restaurants (4.8% of Rent)
Quick-Service Restaurants (4.8% of Rent) High-quality real estate, reliable sales growth Industry Considerations (I) Resilient business model: QSRs are less dependent on “dine- in” traffic as their revenue model is based on an “off-premise” and drive-thru (historically 65%+ of sales) offerings (II)