Realty Income Corporation · NYSE:O
Realty Income — Q4 2022 Earnings Presentation
64 slides from Realty Income's earnings presentation, Feb 22, 2023
Slide 1: Investor Presentation: Calculated Consolidation
Investor Presentation CALCULATED CONSOLIDATION February 2023
Slide 2: Safe Harbor For Forward-Looking Statements
Safe Harbor For Forward-Looking Statements This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. When used in th
Slide 3: Who We Are
Who We Are To build enduring PURPOSE MISSION We invest in people and relationships and places to deliver brighter financial futures dependable monthly dividends that increase over time • Do the right thing Continue to be a top 5 • Take ownership global REIT(1), creating • Empower each other long-ter
Slide 4: Seeking Continued Long-Term Profitable Growth
Realty Income: Seeking Continued Long-Term Profitable Growth WHERE WE ARE: WHERE WE ARE LOOKING TO GO: • S&P 500 company • Continue to be a top 5 global REIT(1) • One of 64 companies in the elite S&P 500 Dividend Aristocrats® Index • Continue to consolidate the ~$13 trillion global net lease • Top 5
Slide 5: Key Takeaways
Key Takeaways • Realty Income’s track record illustrates superior total return per unit of volatility. • Our external growth opportunities are broad including diverse property types and geographies. • Realty Income’s strategic merger with VEREIT® created the premier net lease REIT with increased siz
Slide 6: Table of Contents
Table of Contents • REALTY INCOME OVERVIEW AND INVESTMENT THESIS 75 • PERFORMANCE TRACK RECORD 109 • LEVERAGING SIZE AND SCALE TO DRIVE PROFITABLE GROWTH 15 16 • PRUDENT CAPITAL ALLOCATION FRAMEWORK 24 24 • RELENTLESS CURATION OF NEW GROWTH VERTICALS 31 31 • STRONG BALANCE SHEET 42 34 • DIVERSIFIED
Slide 7: Investment Thesis
Investment Thesis PROVEN TRACK RECORD STABILITY AND GROWTH OF RETURNS... OF EARNINGS... 14.6% 0.5 26 of 27 5% Compound Annual Total Beta vs. S&P 500 Years of Positive Earnings Median AFFO Per Share Return Since ‘94 NYSE Listing Since ‘94 NYSE Listing(1) Per Share(2) Growth Growth Since 1996 (2) CONS
Slide 8: Global Leader in a Fragmented Net Lease Sector
Realty Income is the Global Leader in a Fragmented Net Lease Sector SIZE, SCALE AND QUALITY GROWING INTERNATIONAL PRESENCE ~$60B ~$3.4B A3 /A- 4th largest global REIT(2) enterprise annualized credit ratings by $6.8B European Portfolio value base rent Moody’s & S&P 271 assets ~9 years remaining lease
Slide 9: Rising Short-Term Yields and Realty Income Outperformance
Rising Short-Term Yields Have Historically Been Correlated with Realty Income Outperformance In 2015, the Fed began raising its benchmark interest rate, which continued through 2018(1) TOTAL RETURNS: TOTAL RETURNS: YEAR 1 OF FED RATE HIKE CYCLE(2) TOTAL RETURN 3-YEAR DURATION OF FED RATE HIKE CYCLE(
Slide 10: Performance Track Record
Performance Track Record Superior risk-adjusted returns, particularly during economic downturns 10
Slide 11: Attractive Risk/Reward vs. S&P 500 Companies and REIT Peers
Attractive Risk/Reward vs. S&P 500 Historically, Realty Income delivered more Companies and REIT Peers return per unit of risk vs. majority of S&P 500 companies and S&P 500 REITs(3) S&P 500 Members(1)(2) S&P 500 REIT Peers(1)(3) 30% 20% Realty Income return per unit of market risk is in the 94th per
Slide 12: Stable Earnings and Low Dividend Volatility Supports Low Share Price Volatility
Stable Earnings and Low Dividend Volatility Supports Low Share Price Volatility ANNUAL TOTAL SHAREHOLDER RETURN AMONG S&P 500 COMPANIES: Downside Volatility Since 1994(1) 25% Realty Income is among names, such as JNJ, CHD, AZO, ROST, SO distinguished by low volatility of their total shareholder retu
Slide 13: Superior Stability vs S&P 500 REITs
Superior Stability vs S&P 500 REITs: Favorable Occupancy, Dividend Growth, Credit Rating and Total Return PORTFOLIO OCCUPANCY(1) DIVIDEND GROWTH(2) 25% 98.2% 96.6% 94.5% 7% 91.9% 4.4%(3) 0% 2.8% % of Years w/ Negative Growth Dividend CAGR Historical Median Lowest Year-End REALTY INCOME S&P 500 REIT
Slide 14: Superior Stability vs. Peers Through 2020 Pandemic
Superior Stability vs. Peers: Demonstrated Consistent Growth Through 2020 Pandemic 2020 EARNINGS PER SHARE Growth(1) Retail S&P 500 Retail REIT Net Lease REIT Peers Peers 2.1% Peers 0% +3.1% 2020 Dividend Growth -5% -10% -5.2% -6.8% -13.1% -15% 1 of 8 Retail Net Lease REITs(2) 1 of 15 S&P 500 REITs(
Slide 15: Lowest Operational and Financial Volatility During Great Recession
Realty Income Exhibited the Lowest Operational and Financial Volatility During Great Recession vs. A-Rated S&P 500 REITs 2007 – 2009 relative volatility rankings RENTAL GROSS EBITDA DEBT/ UNSECURED/ OCCUPANCY RANK EBITDA(1) REVENUE(1) MARGIN(1) MARGIN(1) EBITDA(2) TOTAL DEBT(2) RATE(1) 1 Realty Inco
Slide 16: Leveraging Size and Scale to Drive Profitable Growth
Leveraging Size and Scale to Drive Profitable Growth The net lease opportunity set is broad and diverse. 16
Slide 17: Size and Scale as a Competitive Advantage
Size and Scale as a Competitive CALCULATED CONSOLIDATION 3 Advantage Take advantage of attractive consolidation opportunities in the extremely fragmented net Inherent advantages of size and lease space scale drive… DISCIPLINED CREATIVITY 2 Selectively pursue large-scale sale-leaseback or portfolio t
Slide 18: Global Net Lease Investable Universe is Immense
Global Net Lease Investable Universe is Immense Quantum of opportunity and low market Europe is an attractive growth saturation affords ample runway for growth avenue with limited direct competition AGGREGATE NET LEASE PUBLIC NET LEASE Market EUROPE Peers UNITED STATES EUROPE Combined enterprise val
Slide 19: External Growth Opportunities are Broad and Diverse
Realty Income’s External Growth Opportunities International opportunities added >30% to Realty Income’s combined sourcing volume since 2019 are Broad and Diverse SOURCED VOLUME $95 100 in $ billions $84 INTERNATIONAL 80 UNITED STATES $64 $57 60 $39 40 $32 $28 $30 $32 $24 $13 $17 20 $6 0 2010 2011 20
Slide 20: Earnings Growth Remains Strong As Portfolio Grows
ANNUAL AFFO/sh(3) Earnings Growth 20% Growth Large portfolio transactions create upside “lumpiness”… Remains Strong 17.0%(4) 15% As Size of Portfolio 10% 9.2% (4) Continues to Increase 5% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Slide 21: Premier Sale-Leaseback Financing Partner
Filling the Void as a Premier Sale-Leaseback Financing Partner THE OPPORTUNITY MOMENTUM Aggregate Corporate-Owned Realty Income is Well-Positioned to Continue to Execute Real Estate(1) on Large-Scale Sale-Leaseback Transactions ~$1.6 AGGREGATE ACQUISITIONS VOLUME(2) 2015 – 2022 TRILLION ~ 40% of tot
Slide 22: Illustrative Sale-Leaseback Scenarios
Crystallizing Value Creation: SLB transactions: Inherently a deleveraging Illustrative Sale-Leaseback Scenarios and value-enhancing exercise for shareholders of corporate sellers $500 MILLION SALE-LEASEBACK TRANSACTION AT 6.0% CAP RATE $30 MILLION ANNUAL LEASE PAYMENT CORPORATE SELLER USES PROCEEDS
Slide 23: Net Lease Model Supports Cash Flow Stability
Efficiency of the Net Lease Business Lease structure and growth drivers support a more predictable revenue stream relative to Model Supports Cash Flow Stability other forms of retail real estate UNIQUE “NET LEASE” STRUCTURE DRIVES LOWER CASH FLOW VOLATILITY REALTY INCOME(1) SHOPPING CENTERS AND MALL
Slide 24: Prudent Capital Allocation
Prudent Capital Allocation Building a high-quality real estate portfolio through prudent, top-down, data-driven investment process. 24
Slide 25: Curating Best-in-Class Portfolio Through Investment Process
Curating Best-in-Class Portfolio Through Thoughtful Investment Process Supported by Proprietary Data From Over 12,200 Properties RESEARCH AND REVIEW OF REAL ANALYSIS OF CLIENT INVESTMENT COMMITTEE SELECTIVITY: ~ 9% STRATEGY ESTATE FUNDAMENTALS FINANCIAL STRENGTH DISCUSSION AND DECISION $95 BILLION 2
Slide 26: Returns Must Exceed Long-Term WACC
Investment Strategy Illustration: Returns Must Exceed Long-Term WACC WACC viewpoint balances near-term earnings per share growth with long-term value accretion KEY ASSUMPTIONS & CALCULATION: KEY ASSUMPTIONS & CALCULATION: LONG-TERM LONG-TERM COST OF EQUITY LONG-TERM WACC Weighted Average Cost of Cap
Slide 27: Investment Spreads Persevere as Interest Rates Rise
Investment Spreads Tend to Persevere Even as Interest Rates Rise RISING INTEREST RATES DO NOT POSE SIGNIFICANT EARNINGS HEADWIND TO THE NET LEASE BUSINESS MODEL 12% 5 Realty Income Acquisition Cap Rate (1) Average 10Y UST Yield (12M Lag) 9 10% 8% It takes ~12 months for cap rates to adjust to 6% cha
Slide 28: Cap Rates Poised to Push Higher
Cap Rates Poised to Push Higher as Owner-Occupier Debt Costs Rise 10-YEAR PUBLIC BOND YIELDS • Traditional financing costs afforded to corporate operators are near 6%, 8% making the sale-leaseback (SLB) financing option incrementally 5.67% 6% attractive 4% • As financing alternatives increase in 4.9
Slide 29: Benefits of Size and Scale
Benefits of Size and Scale Capacity to Buy in Bulk at “Wholesale” Prices While Maintaining Diversification SCALE AND SIZE BENEFITS ILLUSTRATED LARGER SIZE PROVIDES GROWTH OPTIONALITY $1.7B Encore Boston Harbor Transaction (Dec 2022) TRANSACTION SIZE & IMPACT(1) TO RENT CONCENTRATION • The Encore Bos
Slide 30: Greater EBITDA Flow-Through to Bottom Line
Benefits of Size and Scale: Greater EBITDA Flow-Through to Bottom Line Portfolio growth resulted in improved operating margins, which compare favorably vs. industry peers Operating efficiencies continue to scale as Realty Income grows G&A as % rental revenue(1) 5.8% 4.4% NET LEASE S&P 500 REIT 2000
Slide 31: Relentless Curation of New Growth Verticals
Relentless Curation of New Growth Verticals Size, scale, access to capital allows for significant opportunity to grow earnings through multiple channels Recently incubated real estate verticals include: • Consumer-centric medical • Vertical farming • Italy • Gaming(1) (1) See Wynn Encore Boston Harb
Slide 32: Defining Consumer-Centric Medical Real Estate
Defining “Consumer-Centric Medical Real Estate” ~10% of existing portfolio is human and animal health PROPERTY TYPE DIVERSIFICATION INDUSTRY CLASSIFICATION 1.9% Other The “Consumer-Centric” Medical Real 2.9% Gaming Estate includes industries categorized as: Drug Stores 13.3% Industrial Dialysis Infu
Slide 33: Demographic Trends Supporting Medical Real Estate
Demographic Trends Supporting Consumer-Centric Medical Real Estate Aging demographics support increased healthcare spending Total US Population(1) 85+ US Population (1) millions 65+ US Population (1) millions millions 0.7% 2.7% 3.1% CAGR 355 9 CAGR 73 CAGR 333 56 7 2020 2030 6 2020 2030 2020 2030 PE
Slide 34: Care Moving Towards Outpatient Visits
Delivery of Care is Increasingly Moving Towards Outpatient Visits 40% US Hospital Admissions vs. Outpatient Visits, % Change vs. 2002(1) Healthcare delivery is shifting toward an outpatient 35% Inpatient Outpatient model in the United States 30% 25% 39% 20% Cumulative growth in Outpatient visits 15%
Slide 35: Significant Addressable Market >$2 Trillion
Significant Addressable Market Depth of product and industry demand tailwinds expected to provide material runway for investment The U.S. leads the developed world in national healthcare expenditures Per capita spending of $13k per year is double the OECD average(1) creating societal need for chan
Slide 36: Clear Fit with Capital Allocation Philosophy
Clear Fit with Realty Income’s Capital Allocation Philosophy Real estate and industry characteristics are well-aligned with Realty Income’s investment criteria Investment Alignment Typical unit size and demographics align with our footprint Fungible real estate located in major population center
Slide 37: Recent Investment Illustrates the Opportunity
Recent Investment Illustrates the Opportunity 4Q 2022 Acquisition of $520 million Dental Portfolio Captive density (average 5-mile population greater than 100k) in high growth markets supports EBITDAR Client Leading Dental Support Organization Largest scale operator in its markets Investment The
Slide 38: Strategic Alliance with Leading Vertical Farming Operator
Strategic Alliance with Leading Vertical Farming Operator Strategic Real Estate Alliance with Plenty Agreement to fund up to $1 billion of development opportunities. Leading Operator in the Nascent Vertical Farming Industry Sustainable business operator Partnerships with leading fresh fruit su
Slide 39: Vertical Farming Growth Driven by Multiple Factors
Vertical Farming Growth Driven by Multiple Factors Resource Constraints Water Land Climate Productivity gains 11-14% increase crop land needed to 3-16% lower productivity by 2080 +2.2% Average Annual Yield increase in 1960s 40% deficit expected by 2030 meet 2030 demand. +1.2% Average Annual Yield in
Slide 40: Italy: Metro Wholesale Club Portfolio Investment
Italy: Investment of Metro Wholesale Club Portfolio Marks Entry to 4th International Country Metro Wholesale Club ● Attractive portfolio in new geography. Realty Income purchased a portfolio of seven wholesale clubs operated by Metro Group for $166.6 million, located across Italy in major cities lik
Slide 41: Strong Balance Sheet
Strong Balance Sheet Our conservative capital structure supports superior financial flexibility. 41
Slide 42: One of Only Seven S&P 500 REITs with Two A3/A- Ratings
Strong Balance Sheet – One of Only Seven S&P 500 REITs with Two A3/A- Ratings or Better Commercial Paper (1) STAGGERED DEBT MATURITY PROFILE GBP Denominated Notes in $ millions Term Loan $3,614 Revolver (2) Mortgages (3) $2,805 Unsecured Notes $2,441 $1,841 $1,865 $1,651 $1,092 $1,101 $950 $724 $652
Slide 43: Significant Liquidity and Low Borrowing Costs
Significant Liquidity and Low Borrowing Costs Support Enhanced Financial Flexibility $1,692 $0 Liquidity(1) Debt Obligations through 2023(3) Revolver Availability, $1,521 Excess (Net of $702mm Liquidity, borrowings $1,692 under $1.5 billion commercial paper programs)(2) Cash & Equivalents, $171 Sour
Slide 44: High-Quality Real Estate Portfolio
High-Quality Real Estate Portfolio Diversified exposure to cash flows guaranteed by best-in- class, blue-chip operators 44
Slide 45: Diversified High-Quality Portfolio
Diversified High-Quality Portfolio INDUSTRY DIVERSIFICATION(2) % of Annualized Contractual Rent(1) CLIENT DIVERSIFICATION – TOP 20 CLIENTS % of Annualized Contractual Rent(1) Grocery Stores 10.0% Convenience Stores 8.6% Dollar Stores 7.4% 4.0% 1.6% Restaurants - Quick Service 6.0% Drug Stores 5.7% H
Slide 46: Top 20 Clients Insulated from Changing Consumer Behavior
Top 20 Clients Insulated SERVICE-ORIENTED NON-DISCRETIONARY from Changing Consumer Behavior All top 20 clients fall into at least one category: Non-Discretionary Low Price Point Service Retail Non-Retail LOW PRICE POINT NON-RETAIL Note: Walmart represented by both Neighborhood Markets and Sa
Slide 47: Minimal Exposure to Retail Bankruptcies
Diligent Underwriting Process Has Resulted in Minimal Exposure to Retail Bankruptcies Realty Income’s strategy is to invest in clients with a 117 of 159 U.S. retailer bankruptcies since non-discretionary, low price point, and / or 2017 are associated with companies lacking at least service-oriented
Slide 48: Historically Stable Cash Flows and Occupancy
Historically Stable Cash Flows Supported by High- Quality Real Estate Portfolio Industry-Leading Occupancy Levels, O Consistent During Various Economic Cycles (1) Median of S&P 500 REITs O Historical Median S&P 500 REIT Historical Median CONSISTENCY BY DESIGN: 99.5% 99.0% Careful underwriting at acq
Slide 49: Value-Add Asset and Portfolio Management
Proven Track Record of Value-Add Asset and Portfolio Management Lease Expiration Schedule Provides Visibility into Future Cash Flows MAXIMIZING REAL ESTATE VALUE: 45.7% Weighted average lease Strategic management of rollovers term of 9.5 years Proactively addressing portfolio “watch list” Resolved o
Slide 50: Capital-Light Real Estate Portfolio
Capital-Light Real Estate Portfolio is a Differentiating Factor vs Other “HIDDEN” COST OF SUPPORTING PORTFOLIO REVENUE: RARELY CAPTURED IN NAREIT-DEFINED FFO MULTIPLES…. Property Types NAREIT-DEFINED FUNDS FROM OPERATIONS (FFO) (NOT INTENDED TO MEASURE CASH GENERATION OR DIVIDEND PAYING CAPACITY) Re
Slide 51: Growing International Portfolio
Growing International Portfolio Sale-leaseback transaction with Sainsbury’s in May 2019 was a foundation for a growth platform in Europe 51
Slide 52: European Portfolio Snapshot
European Portfolio Snapshot REALTY INCOME HAS CONTINUED TO GROW ITS EUROPEAN PRESENCE WITH INVESTMENTS OF ~$6.8 BILLION THROUGH SEPTEMBER 30, 2022 271 >35 ~24.1mm ~$369mm ~9 10.9% properties industries leasable square annualized years wtd. avg. of total portfolio annualized feet contractual rent rem
Slide 53: European Portfolio Snapshot (cont'd)
European Portfolio Snapshot (cont’d) CLIENT DIVERSIFICATION – TOP EUROPEAN CLIENTS(1) EUROPEAN PORTFOLIO BY INDUSTRY(1) % of European Annualized Contractual Rent % of European Annualized Contractual Rent Other, 20% 18.0% Grocery, 49% 16.7% Sporting Goods, 4% Wholesale Clubs, 4% 12.2% General Merchan
Slide 54: ESG Overview
ESG Overview We are committed to partnering with our clients on ESG initiatives to uphold our corporate responsibilities as a public company for the benefit of our stakeholders. 54
Slide 55: ESG Overview
ESG Overview OUR COMMITMENT GOVERNANCE Realty Income is committed to conducting our KEY BOARD CHARACTERISTICS business according to the highest ethical standards. We seek to compose our Board of directors with members who We are dedicated to providing an engaging, inclusive, contribute to diversity
Slide 56: Social Responsibility
Social Social Responsibility OUR COMMITMENT: We put great effort into cultivating an inclusive company culture. We are one team, and together we are committed to providing an engaging work environment centered on our One Team values of Do the right thing, Take ownership, Empower each other, Celebrat
Slide 57: Environmental Responsibility
Environmental Environmental Responsibility OUR COMMITMENT: We remain committed to sustainable business practices in our day-to-day activities by encouraging a culture of environmental responsibility at our corporate offices and within our communities. We work with our clients to promote environmenta
Slide 58: Appendix
Appendix • International Expansion Opportunity • Top Industry Investment Theses 58
Slide 59: UK Density Supports Long-Term Real Estate Stability
UK Density Supports Long-Term Real Estate Stability The UK, by population, 67.6M is approximately the Limited retail supply and supply growth also supports size of California and Current Population(1) long-term viability of stable cash flow generation. Texas combined. UK POPULATION AND PROJECTIONS(1
Slide 60: Grocery (10.0% of ABR)
Grocery (10.0% of ABR) U.S. Grocery Market Share(1) EXPOSURE TO TOP OPERATORS IN AN ESSENTIAL, U.K. Grocery Market Share(2) E-COMMERCE RESISTANT INDUSTRY 53% 66% Realty Income’s top two U.K. grocery Big 4 clients control ~43% of U.K. grocery Discounters Realty Income’s top two U.S. grocery market sh
Slide 61: Convenience Stores (8.6% of ABR)
Convenience Stores (8.6% of ABR) 2040 SNAPSHOT Quality real estate locations with inelastic demand In 2040, EVs will make up about 6% of all vehicles on the road, ~20% of all shoppers claim to visit a c-store while EVs will account for about to purchase food-to-go(1). 10% of all new vehicle sales. ~
Slide 62: Dollar Stores (7.4% of ABR)
Dollar Stores (7.4% of ABR) Growing industry: 89% of all shoppers across geographies, US Discount Store Market Size Dollar General & Dollar Tree: Counter-cyclical protection due to a trade income levels, and demographics shop at discount retailers. down effect and e-commerce resiliency. (in billions
Slide 63: Quick-Service Restaurants (6.0% of ABR)
Quick-Service Restaurants (6.0% of ABR) 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. STRONG VALUE PROPOSITION: In a recessionary environment, consumers tend to be more
Slide 64: Drug Stores (5.7% of ABR)
Drug Stores (5.7% of ABR) Of the scope of a typical primary care 80% physician treatable at an on-site clinic(1). Bundled service partnerships and vertical integration among incumbents insulates industry from outside threats. Of the US population lives within 85% 3 miles of a Walgreens or CVS(2). Co