Realty Income Corporation · NYSE:O
Realty Income — Investor Presentation (2018)
56 slides from Realty Income's investor presentation, 2018
Slide 1: Third Quarter 2018 Institutional Investor Presentation
THIRD QUARTER 2018 INSTITUTIONAL INVESTOR PRESENTATION
Slide 2: Contents
Contents Company Overview & 3Q18 Results 4 Investment Thesis 6 Portfolio Diversification 15 Defensive Retail Portfolio 20 Asset Management & Real Estate Operations 25 Investment Strategy 28 Capital Structure & Scalability 35 Dependable Dividends 39 Summary 41 Appendix 42 - Superior Performance Durin
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 $24B A3 / A- 5,694 9.3 21 OF 22 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 3Q18 Results
Our Approach and 3Q18 Results Acquire well-located commercial properties 1 ✓ $609 million in acquisitions Remain disciplined in our acquisition underwriting 2 ✓ Acquired ~7% of sourced volume Execute long-term net lease agreements 3 ✓ Recaptured 107.9% of expiring rent Actively manage portfolio to m
Slide 6: Investment Thesis
Investment Thesis (1) Consistent Earnings Growth (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% 2% R2 = 0.89 0% 199
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% 4.6% 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 29.0% 15.9%
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 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 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 30% 25% AAPL Realty Income: Greater return per unit of market risk than each of top 10 largest S&P Total Return CAGR 20% constituents(1) since MSFT UNH 1994 NYSE l
Slide 14: Attractive Risk/Reward vs. Blue Chip REITs
Attractive Risk/Reward vs. Blue Chip REITs Realty Income: Greater Historically, more return per unit of risk vs. S&P 500 REITs return per unit of market risk than S&P 500 REITs(1) since 18% ESS 1994 NYSE listing PSA O 16% AVB SPG 14% VNO FRT EQR Total Return CAGR AIV MAA WELL 12% MAC REG UDR 10% VTR
Slide 15: Portfolio Diversification
PORTFOLIO DIVERSIFICATION
Slide 16: Portfolio Diversification: Tenant
Portfolio Diversification: Tenant Diverse tenant roster, investment grade concentration reduces overall portfolio risk 6.4% 2.0% TOP 20 TENANTS REPRESENT 5.3% 1.9% 4.8% 1.9% 3.9% 1.8% 54% 3.7% 1.7% Of annualized rental revenue 3.4% 1.7% 3.3% 1.4% 2.8% 2.3% 1.4% 1.2% 11 12 Different Investment grade
Slide 17: 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 18: Portfolio Diversification: Property Type
Portfolio Diversification: Property Type Core exposure in retail and industrial single-tenant freestanding net lease properties RETAIL (81.4%) INDUSTRIAL (12.4%) Number of Properties: 5,520 Number of Properties: 117 Average Leasable Square Feet: 11,365 Average Leasable Square Feet: 228,150 Percentag
Slide 19: Portfolio Diversification: Geography
Portfolio Diversification: Geography Balanced presence in 49 states and Puerto Rico <1 <1 <1 <1 <1 <1 1.1 3.2 <1 4.8 <1 2.2 <1 <1 2.1 <1 <1 3.3 1.8 1.3 5.3 <1 <1 <1 6.0 2.8 <1 1.5 <1 1.6 3.0 8.8 1.5 2.6 1.4 2.7 3.3 Top 6 States 1.5 2.1 <1 <1 2.3 % of Rental Revenue 1.5 1.8 4.1 Texas 11.1% 1.6 Califo
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 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 22: 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 3Q 2018 Tenant Industry % of Rent Tenant Industry % of Rent Hometown Buffet Casual Di
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 Retailer Bankruptcies
Realty Income Not Materially Impacted by Recent Retailer Bankruptcies 34 of 43 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 Expos
Slide 25: Asset Management & Real Estate Operations
ASSET MANAGEMENT & REAL ESTATE OPERATIONS
Slide 26: Active Real Estate Management: Re-leasing Experience
Active Real Estate Management: Re-leasing Experience Since 1996, Realty Income has achieved 100.0% 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 102.6% 2,824 Lease Expirations since 1996 2,453 371
Slide 27: 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 93.4% rate of 105.6% on expired leases ✓ Distinct mana
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 SIZE AND TRACK RECORD 1 Supports investment selectivity 1 Ability to buy “wholesale” (at a discount) without creatin
Slide 30: 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 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 9% Higher Lower Reduces need to pursue lower- stock cost of quality, higher-yielding investments 7.6% 8% Annualized AFFO/sh Growth price capital to generate
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 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 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): $11.9 billion $4.6 billion in non-investment grade 57% of volume leased to 83% in property-level acquisition volume of v
Slide 35: Capital Structure & Scalability
CAPITAL STRUCTURE & SCALABILITY
Slide 36: Conservative Capital Structure
Conservative Capital Structure Modest leverage, low cost of capital, ample liquidity provides financial flexibility Common Stock: $16.8 billion – 71% • Shares/Units outstanding – 296 million Debt: $6.8 billion – 29% Common Stock: 71% • Unsecured Notes/Bonds - $5.4 billion Debt: 29% • Unsecured Term
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 Key Metrics 3.4% Weighted average interest rate(1) $1,000 • 87% fixed rate debt 3.1% 5.0% $800 4.6% • Weighted average rate of 3.9% on debt(1) 4.1% Debt Maturities ($mm)
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 84 consecutive quarterly increases 98 total increases since 1994 NYSE listing $2.65 $2.53 82% AFFO payout (based on midpoint of 2018
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: Superior Performance During Great Recession
SUPERIOR PERFORMANCE DURING GREAT RECESSION
Slide 44: 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 45: 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 46: 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
Slide 47: 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 48: Top Industries Overview
REALTY JJINCOME The Monthly Dividend Company®
Slide 49: Convenience Stores (12.1% of Rent)
Convenience Stores (12.1% 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 50: Drug Stores (9.9% of Rent)
Drug Stores (9.9% 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: 2
Slide 51: 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 88% 70% 50% + Heavily concentrated market share + Efficient supply chain & logistics + Captive pricing model Drug Stores Pharmacy Benefit M
Slide 52: Dollar Stores (7.4% of Rent)
Dollar Stores (7.4% 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 trends supports portfolio during recessionary periods 7.3% 9.0% 6.0% 5.7% 4.9% 4.7% 4.0% 2.8% 3.2% 3.3% 3.3% 2
Slide 53: Health & Fitness (7.3% of Rent)
Health & Fitness (7.3% 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 54: Quick-Service Restaurants (5.7% of Rent)
Quick-Service Restaurants (5.7% 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 55: Theaters (5.4% of Rent)
Theaters (5.4% 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 56: Industrial Transportation Services (5.0% of Rent)
Industrial Transportation Services (5.0% of Rent) Offers property diversification and exposure to E-commerce tailwinds Industry Considerations (1) Realty Income primarily exposed to blue chip operator: FedEx (4.9% of rent) controls 23% share of E-commerce parcel delivery market(1) / 33% share of U.S