Realty Income Corporation · NYSE:O
Realty Income — Investor Presentation (2017)
46 slides from Realty Income's investor presentation, 2017
Slide 1: 2Q 2017 Institutional Investor Presentation
2Q 2017 INSTITUTIONAL INVESTOR PRESENTATION
Slide 2: Contents
Contents Company Overview & Historical Risk/Reward 3 Investment Thesis 8 Portfolio Diversification 14 Defensive Retail Portfolio 19 Asset and Portfolio Management 25 Investment Strategy 28 Capital Structure and Scalability 38 Dependable Dividends 42 Summary 45 All data as of June 30, 2017 unless oth
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 $15.1 billion and EV of $21.2 billion Largest net lease REIT by equity market cap and enterprise value Member of S&P 500 index Member of S&
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 O Total Return CAGR Since 10/18/94 42% 25% each of top 10 largest S&P constituent
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 17 REITs in S&P 500 OO 42% Total Return CAGR Since 10/18/94 25% with comparable tra
Slide 9: Investment Thesis: Earnings Growth Outperformance Consistency
INVESTMENT THESIS: Earnings Growth Outperformance Consistency 8
Slide 10: Consistent Earnings Growth Outperformance vs. REITs
Consistent Earnings Growth Outperformance vs. REITs Long-term investors have been rewarded with earnings growth outperformance vs. the broader REIT sector Realty Income FFO/sh CAGR(1) Outpaces REIT Median Throughout All Cycles 6.4% FFO/sh 2012 10.1% CAGR 6.4% 2011 7.8% since: 6.5% 2010 7.9% 3.1% 200
Slide 11: 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 12: Interest Rate Sensitivity: Earnings Growth Undeterred by Rising Rates
Interest Rate Sensitivity: Earnings Growth Undeterred by Rising Rates Realty Income earnings growth outperformed other REITs during last rising rate era 10-year US 10-year TreasurUS Treasury Yield y Yield Spread investing dynamics persist 7.0% throughout the cycle During the prior cycle period of st
Slide 13: 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 14: 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 16.4% Compound Average Annual Total Standard Deviation of Annual 29.6% Shareholder Return Since 1994 Returns Since
Slide 15: Portfolio Diversification
PORTFOLIO DIVERSIFICATION 14
Slide 16: Portfolio Diversification: Tenant
Portfolio Diversification: Tenant Diverse tenant roster, investment grade concentration reduces overall portfolio risk 6.7% Top 20 Tenants represent: 5.3% 4.1% 53% 4.0% 3.6% of annualized rental 2.8% revenue 2.6% 2.4% 2.3% 11 2.3% 1.9% different industries 1.9% Investment grade rated (1) 1.8% 1.8% (
Slide 17: Portfolio Diversification: Industry
Portfolio Diversification: Industry No industry represents more than 11% 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 N
Slide 18: Portfolio Diversification: Geography
Portfolio Diversification: Geography Balanced presence in 49 states and Puerto Rico 1.0 <1 <1 <1 <1 <1 <1 3.4 1.3 <1 <1 2.3 2.2 4.5 <1 <1 <1 1.5 2.9 <1 <1 1.6 6.1 3.1 5.2 <1 <1 9.3 1.6 <1 1.7 3.1 2.9 1.5 1.4 2.7 1.6 <1 3.1 % of Rental Revenue 2.2 <1 2.2 California 9.3% 1.6 1.9 4.3 1.4 Texas 9.3% 9.3
Slide 19: 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 79.7% 12.8% 5.2% 2.3% Number of Properties 4,856 113 44 15 Average Leasable Square Feet 11,773 217,592 77,345 12,
Slide 20: Defensive Retail Portfolio
DEFENSIVE RETAIL PORTFOLIO 19
Slide 21: 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 22: 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 2.6x 2.6x 2.6x 2.6x 2.6x 2.6x 2.6x 2.7x 2.7x and shopping center tenant exposure • >9
Slide 23: 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 2Q 2017 Tenant Industry % of Rent Tenant Industry % of Rent Hometown Buffet Casual Dining 6.0% Walgreens
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 2017 Retailer Bankruptcies and Realty Income’s Industry Exposure 14 of 15 retailer bankruptcies in 2017 associated with companies lacking a non
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: Asset and Portfolio Management
ASSET AND PORTFOLIO MANAGEMENT 25
Slide 27: Active Management: Significant Re-leasing Experience
Active Management: Significant Re-leasing Experience Since 1996, Realty Income has achieved 99.2% recapture of prior rent on re-leasing activity Strong Track Record of Leasing Results Recapture vs. Prior Rent: (Renewal Activity) (102.6% Since 1996) Since 1996: 1996 - 2005 100.3% • Re-leased 2,130 ou
Slide 28: 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 99% recapture of expiring rents since 1996 Largest department in the company • Over 2,400 rollovers • Includes renewals and re-
Slide 29: Investment Strategy
REALTY ppincome | INVESTMENT The Monthly Dividend Company® STRATEGY
Slide 30: 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 31: Investment Strategy: Key Considerations Competitive Advantages vs. Net Lease Peers
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 32: 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 33: 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 7.0% Benefits of Low Cost of Capital • More growth per dollar invested Annualized AFFO/sh Growth from Acquisitions 5.8% 6.0% • Low cos
Slide 34: 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 35: 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 36: 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 37: Investment Strategy: Results of Conservative Underwriting
Investment Strategy: Results of Conservative Underwriting Industry exposure reflects defensive, cycle-resilient business models 90+% of retail portfolio: Top non-retail tenants: Has service, non-discretionary and/or low price Comprised primarily of investment grade tenants point component such as Fe
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): $3.8 billion 81% 59% $9.6 billion in non-investment grade retail acquisitions of volume associated with retail propertie
Slide 39: Capital Structure and Scalability
CAPITAL STRUCTURE AND SCALABILITY 38
Slide 40: Conservative Capital Structure
Conservative Capital Structure Modest leverage, low cost of capital, ample liquidity provides financial flexibility Common Stock: $15 billion – 72% • Shares/Units outstanding – 274 million Debt 28% Debt: $6 billion – 28% • Unsecured Notes/Bonds - $4.7 billion Common • Unsecured Term Loans - $320 mil
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 $1,400 Weighted average interest rate (1) • 89% fixed rate debt 4.2% $1,200 4.1% • W
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 $7,087 • G&A
Slide 43: Dependable Dividends
REALTY (pINcome | DEPENDABLE The Monthly Dividend Company® D VI D EN DS
Slide 44: Consistent Dividends That Grow Over Time
Consistent Dividends That Grow Over Time Steady dividend track record supported by inherently stable business model, disciplined execution Strong Dividend Track Record 79 consecutive quarterly increases 92 total increases since 1994 NYSE listing $2.538 ~83.2% Annualized AFFO payout (midpoint of 2017
Slide 45: Dividend Track Record: Growth Through Variety of Economic Cycles
Dividend Track Record: Growth Through Variety of Economic Cycles Zero dividend cuts in 22 years as public company 21.2% $3.2B ARCT acquisition supports 20%+ dividend increase Realty Income increased dividend in 2009 as median REIT cut eclipsed 25% 8.5% 8.6% 6.8% 6.5% 6.1% 6.0% 5.1% 5.3% 4.7% 3.8% 3.
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