Realty Income Corporation · NYSE:O
Realty Income — Q1 2020 Earnings Presentation
64 slides from Realty Income's earnings presentation, May 5, 2020
Slide 1: Institutional Investor Presentation
July 2020 INSTITUTIONAL INVESTOR PRESENTATION
Slide 2: Contents
Contents Investment Thesis 4 Company Overview 6 Summary of COVID-19 Impact 7 Superior Performance During Great Recession 13 Performance Track Record 18 Our Approach and 1Q20 Results 26 Portfolio Diversification 27 Defensive Retail Portfolio 32 Asset Management & Real Estate Operations 37 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 14.6% 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) 94.2
Slide 5: Current Valuation Offers Attractive Entry Point
Current Valuation Offers Attractive Entry Point “Lower for longer” rate environment should support multiple expansion given historical relationship Historical AFFO Yield Spread(1) vs 10-Year US Treasury 750 bps European 650 bps sovereign debt Economic crisis slowdown in Current spread is Fiscal clif
Slide 6: 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 $25B A3 / A- 6,525 9.2 23 OF 24 enterprise value credit ratings
Slide 7: Summary of COVID-19 Impact
Summary of COVID-19 Impact ~86% of rent collected in June including almost all rent due from core industries and IG portfolio Through July 1, 2020: o Received 85.7% of contractual rent due for June across our total portfolio o Received 82.5% of contractual rent due for June from our Top 20 tenants o
Slide 8: Rent Collections from Top Industries
Rent Collections from Top 20 Industries Tenants operating in core industries selling ‘essential goods’ paid almost all rent due in Q2 2020 June Rent Collections 12.1% % of June Contractual Rent Collected % of June Contractual Rent Not Collected 8.7% 8.5% 7.9% 7.1% 6.0% 5.7% 99% 100% 100% 4.2% 3.1% 1
Slide 9: Top Four Industries Sell 'Essential' Goods
Realty Income’s Top Four Industries Sell ‘Essential’ Goods Real estate portfolio is anchored by strong tenants operating in stable industries which remain open to consumers o Convenience stores: #1 industry (11.9% of rent) o C-Stores remain open and continue to sell ‘essential goods’ (gas, grocery,
Slide 10: Select Industries Challenged Due to COVID-19
Select Industries Challenged Due to COVID-19 Realty Income partners with leading operators in the Theater, Health and Fitness, and Restaurant industries o Theaters: (6.3% of rent) o Industry exposure is primarily concentrated with leading operators o AMC Theaters represents 2.9% of rent o Regal Cine
Slide 11: Cyclical Comparison – Entering Current Period from a Position of Strength
Cyclical Comparison – Entering Current Period from a Position of Strength Favorable balance sheet, scale and capital markets backdrop relative to Great Financial Crisis SCALE AND LIQUIDITY YE 2007 Q1 2020 Enterprise Value (in billions) $4.3 $24.7 Available Liquidity (in millions)(1) $593 $4,042 Fixe
Slide 12: Ample Covenant Headroom
Ample Covenant Headroom Strong coverage metrics, minimal secured debt, healthier overall covenant cushion vs. 2007 Unsecured Notes Covenant Requirement FY 2007 Q1 2020 Total ≥ 150% Unencumbered 239% Assets 275% (Unencumbered Assets / Unsecured Debt) Debt Service ≥ 1.5x 4.2x Coverage 5.5x (Pro forma
Slide 13: Superior Performance During Great Recession
SUPERIOR PERFORMANCE DURING GREAT RECESSION
Slide 14: 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 15: 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 16: 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 17: Superior Relative Volatility Metrics vs. A-Rated REITs
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 18: Performance Track Record
REALTY “INCOME The Monthly Dividend Company®
Slide 19: 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 20: 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 21: 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 14.6% 9.5% 9.5% 9.5% 9.0% O Equity REIT Index DJIA Nasdaq S&P 500 21
Slide 22: 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 per unit of market Realty Income return perth risk is in the 95 unit of market risk in the 30% percentile of all S&P 98th percentile of
Slide 23: 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 25% AAPL Average Annual Total Shareholder Return 20% MSFT O UNH 15% JNJ 10% JPM INTC REITs WMT PG S&P 500 T VZ 5% Top 10 largest S&P 500 constitu
Slide 24: 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 25: 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 26: Our Approach and 1Q20 Results
Our Approach and 1Q20 Results Acquire well-located commercial properties 1 ✓ ~$486 million in acquisitions Remain disciplined in our acquisition underwriting 2 ✓ Acquired < 3% of sourced volume Execute long-term net lease agreements 3 ✓ ~14 years weighted average lease term on new acquisitions Activ
Slide 27: Portfolio Diversification
PORTFOLIO DIVERSIFICATION
Slide 28: 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% 4.4% 1.8% 4.0% 1.6% 53.1% 3.4% 1.6% Of annualized rental revenue 3.4% 1.6% 2.9% 1.6% 2.9% 2.5% 1.4% 1.2% 11 12 Different Investment-grad
Slide 29: Portfolio Diversification: Industry
Portfolio Diversification: Industry Exposure to 51 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 30: Portfolio Diversification: Property Type
Portfolio Diversification: Property Type Core exposure in retail and industrial single-tenant freestanding net lease properties RETAIL (84.1%) INDUSTRIAL (10.7%) Number of Properties: 6,348 Number of Properties: 119 Average Leasable Square Feet: 12,000 Average Leasable Square Feet: 224,500 Percentag
Slide 31: 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 2.8 <1 4.3 <1 2.1 <1 <1 2.3 <1 <1 2.8 1.8 1.1 4.5 <1 <1 <1 5.8 2.7 <1 1.7 <1 1.5 2.8 8.8 1.6 2.5 1.4 2.9 3.1 Top 6 States 2.1 2.3 <1 <1 2.1 % of Rental Revenue 1.5 2.0 3.7 T
Slide 32: Defensive Retail Portfolio
REALTY “INCOME The Monthly Dividend Company®
Slide 33: 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 34: 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 Q1 2020 Tenant Industry % of Rent Tenant Industry % of Rent Hometown Buffet Casual Di
Slide 35: 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 36: Not Materially Impacted by Recent Retailer Bankruptcies
Realty Income Not Materially Impacted by Recent Retailer Bankruptcies 75 of 104 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 37: Asset Management & Real Estate Operations
ASSET MANAGEMENT & REAL ESTATE OPERATIONS
Slide 38: 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% 3,285 Lease Expirations since 1996 2,822 463
Slide 39: 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 96.8% rate of 99% on expired leases ✓ Distinct managem
Slide 40: 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 41: Investment Strategy
INVESTMENT STRATEGY ?
Slide 42: 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 43: 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 44: 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 45: 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): $16.4 billion 51% 87% in property-level acquisition volume of volume leased to of volume associated with Investment grad
Slide 46: Capital Structure & Scalability
CAPITAL STRUCTURE & SCALABILITY
Slide 47: Conservative Capital Structure
Conservative Capital Structure Modest leverage, low cost of capital, ample liquidity provides financial flexibility Total Enterprise Value: $24.7 billion Common Stock, 69% Unsecured Notes: $6.04 billion (1) Revolving Credit Facility: $615 million Net Debt, 24% Equity Market Cap: 31% Unsecured Term L
Slide 48: 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 7.2 Years 3.6% Debt Profile Weighted Average Years Until Maturity Weighted Average Interest Rate(1) Unsecured 95% Unsecured Secured $1,386 $1,199 $1,062 £(2) Fixe
Slide 49: 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 50: Dependable Dividends
DEPENDABLE DIVIDENDS ?
Slide 51: 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 90 consecutive quarterly increases $2.796 $2.73 $2.65 106 total increases since 1994 NYSE listing $2.53 79.4% AFFO payout (based on
Slide 52: Corporate Responsibility
REALTY JJINCOME The Monthly Dividend Company®
Slide 53: 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 54: 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 55: Appendix
APPENDIX ? 55
Slide 56: Top Industries Overview
TOP INDUSTRIES OVERVIEW ? si ENO PARKING
Slide 57: Convenience Stores (11.9% of Rent)
Convenience Stores (11.9% of Rent) Quality real estate locations with strong store-level performance Industry Considerations (I) Strong performance independent of gas sales: ~70% of inside sales are generated by customers not buying gas(1) (II) Larger-format stores provide stability: Larger format s
Slide 58: Drug Stores (9.0% of Rent)
Drug Stores (9.0% of Rent) Industry tailwinds, high barriers to entry, key real estate presence Δ in 30-day Prescriptions by Pharmacy Format (2013 – 2019)(1) 19% (13%) Retail Pharmacies Mail Order Pharmacies Industry Considerations Walgreens: 27 of 28 Quarters of Positive (I) Consumer preference ske
Slide 59: Dollar Stores (8.0% of Rent)
Dollar Stores (8.0% of Rent) Counter-cyclical protection due to a trade down effect and E-commerce resiliency Dollar General: 30 Consecutive Years of Positive Same-Store Sales Growth(2) 9.5% Counter-cyclical sales growth trends supports portfolio during recessionary periods 7.3% 5.7% 9.0% 6.0% 4.0%
Slide 60: Grocery (7.7% of Rent)
Grocery (7.7% of Rent) Exposure to top operators in a largely e-commerce resistant industry U.S. Grocery E-Commerce Market Share Remains Modest(2) 55% 48% 25% 15% 14% 4% Media Consumer Apparel Sporting Home Grocery Electronics Goods Furnishings Industry Considerations U.S. Grocery Market Share(3) (I
Slide 61: 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 62: Health & Fitness (7.2% of Rent)
Health & Fitness (7.2% 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 / Baby Boomer age group has the highest attendance frequency (II) E-co
Slide 63: Theaters (6.3% of Rent)
Theaters (6.3% of Rent) Stability throughout economic cycles / Experiential component supports e-commerce resiliency Industry Considerations (I) Content-Driven Industry: Studios pushed major blockbuster releases until late 2020 and 2021, creating a pent up demand (II) High variable cost structure li
Slide 64: Quick-Service Restaurants (6.0% of Rent)
Quick-Service Restaurants (6.0% of Rent) High-quality real estate, reliable sales growth Industry Considerations (I) Consistent demand: Approximately 75 million Americans eat fast food every day(1) / positive trend of same-store sales growth supported by value-seeking consumers (II) Fungibility of r