Realty Income Corporation

Good morning. Good afternoon. My name is Simon and I will be your conference operator today. At this time, I would like to welcome everyone to the Realty Income First Quarter 2020 Operating Results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. Mr. Andrew Crum, Associate Director, Realty Income, you may begin your conference.

Thank you all for joining us today for Realty Income's first quarter 2020 operating results conference call. Discussing our results will be Sumit Roy, President and Chief Executive Officer, and Jonathan Pong, Senior Vice President, Head of Capital Markets and Finance. During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in any forward-looking statements. We will disclose in greater detail the factors that may cause such differences in the company's form 10Q. We will be observing a two-question limit during the Q&A portion of the call in order to give everyone the opportunity to participate. If you would like to ask additional questions, you may reenter the queue. I will now turn the call over to our CEO, Sumit Roy.

Thank you, Andrew. Welcome, everyone. We'll discuss in detail the economic impact of the COVID-19 pandemic. But first, I will highlight several first quarter results, which positioned us very favorably to start the year. During the first quarter, we generated AFFO per share of $0.88 and completed approximately $486 million in high-quality property acquisitions. Additionally, we raised approximately $752 million in well-priced equity at a price of $77.37 per share. We ended the quarter with a net debt to adjusted EBITDA ratio of five times, and our fixed charge coverage ratio of 5.5 times is the highest in our company's history. The impact of the COVID-19 pandemic has been and continues to be felt across geographies, economies, and industries, and our thoughts remain with all who have been impacted. We continue to manage the business with a focus on all stakeholders, our shareholders, clients, colleagues, and community. Accordingly, we have leveraged technology to ensure seamless business continuity with our employees working safely from their homes, and I want to thank my colleagues for their hard work and dedication to ensuring the strength of our business operations. Our real estate portfolio is deliberately designed to generate predictable cash flow through a variety of economic environments. but our portfolio is not immune to the economic shutdown that has resulted from COVID-19. Our tenants operate across 51 different industries. We have always maintained stringent investment parameters, targeting high-quality tenants who are leaders in their respective industries. Approximately half our rental revenue is generated from investment-grade rated tenants. Certain tenants have requested rent relief, and these requests have primarily been for rent deferral rather than rent abatement. We are reviewing rent deferral requests on a case-by-case basis. We view our tenants as partners and clients, and our relationship is symbiotic. However, the approach we have taken is to independently review the individual financial and business positions of our tenants, and we have not and will not accept rent deferral requests that we believe are solely opportunistic in nature. For April, we have collected approximately 83% of contractual rent, and we received essentially all of expected rent from investment grade rated tenants. While we have not historically pursued properties leased to investment grade rated tenants as a primary objective, during periods of economic uncertainty, high grade credit tenants do tend to provide more reliable streams of income all else equal. We disclosed in our financial supplement the percentage of contractual rent collected by industry. Our top four industries, convenience stores, drug stores, dollar stores, and grocery stores, each sell essential goods and represent approximately 37% of our rental revenue. And we have received almost all of the contractual rent due to us from tenants in these industries. Other industries, such as theaters, health and fitness, restaurants, and childcare have been challenged due to store closures and social distancing requirements. Of the 17% of rent not collected in April, 86% is from operators in these select industries. We believe that the strength of our corporate partnerships will be important as we seek mutually beneficial resolutions, and we are pleased to partner with leading operators in each of these industries. Additionally, we remain constructive on the long-term viability of each of these industries. The success of the theater industry has largely been tied to the quality of films produced by Hollywood, and the U.S. box office reached an all-time high as recent as 2018. Additionally, the economic business model for studios continues to suggest, in our view, that the theater distribution channel will remain attractive going forward. We also expect the non-discretionary and low price point propositions of the quick service restaurant, health and fitness, and childcare industries to support resiliency of their rent-paying capabilities once their businesses are fully opened. As we continue to manage our portfolio to support long-term value creation, we believe the breadth and depth of our asset management and real estate operations department, which is our company's largest department, is a key competitive advantage vis-a-vis our competitors. Moving on to investment activity during the first quarter. In the first quarter of 2020, we invested approximately $486 million in 65 properties located in 22 states and the United Kingdom at a weighted average initial cash cap rate of 6% and with a weighted average lease term of 14.1 years. On a total revenue basis, approximately 36% of total acquisitions during the quarter were from investment-grade rated tenants. 95% of the revenues were generated from retail tenants and 5% were generated from industrial tenants. These assets are leased to 25 different tenants in 17 industries. Of the $486 million invested during the quarter, $320 million was invested domestically in 61 properties at a weighted average initial cash cap rate of 6.5% and with a weighted average lease term of 14.8 years. And $166 million was invested internationally in four properties located in the UK at a weighted average initial cash cap rate of 5.1%, and with a weighted average lease term of 12.5 years, including our first industrial acquisition in the UK of two properties leased to an investment grade operator. During the quarter, we sourced approximately $18.1 billion. Of the $18.1 billion sourced during the quarter, $10.4 billion were domestic opportunities, and $7.7 billion were international opportunities. Of the $486 million in total acquisitions closed in the first quarter, 55% were one-off transactions. Our investment spreads relative to our weighted average cost of capital were healthy during the quarter, averaging approximately 247 basis points for domestic investments and 272 basis points for international investments, which were well above our historical average spreads. We defined investment spreads as initial cash yield less on nominal first-year weighted average cost of capital. Our disposition program remained active. During the quarter, we sold 17 properties for net proceeds of $126 million at a net cash cap rate of 6.2%, and we realized an unlevered IRR of 11.1%. Our portfolio is well diversified by tenant, industry, geography, and property type, which contributes to the stability of our cash flow. At quarter end, our properties were leased to approximately 630 tenants in 51 different industries located in 49 states, Puerto Rico, and the UK. 84% of our rental revenue is from our traditional retail properties. The largest component outside of retail is industrial properties at approximately 11% of rental revenues. Walgreens remains our largest tenant at 6% of rental revenue. Convenience stores remains our largest industry at 11.9% of rental revenue. Within our overall retail portfolio, approximately 95% of our rent comes from tenants with a service, non-discretionary, and or low price point component to their business. We continue to believe these characteristics allow our tenants to operate in a variety of economic environments and to compete more effectively with e-commerce. These factors have been particularly relevant in today's retail climate where the vast majority of recent US retail or bankruptcies have been in industries that do not possess these characteristics. We continue to feel good about the credit quality in the portfolio with approximately half of our annualized rental revenue generated from investment grade rated tenants. The weighted average rent coverage ratio for our retail properties is 2.8 times on a four wall basis, while the median is 2.5 times. Occupancy, based on the number of properties, was 98.5%, a decrease of 10 basis points versus the prior quarter. During the quarter, we released 93 properties, recapturing 99% of the expiring rent. Since our listing in 1994, we have released or sold over 3,200 properties with leases expiring, recapturing over 100% of rent on those properties that were released. our same-store rental revenue increased 0.2% during the quarter. The lower same-store rent growth is partially driven by a change in methodology as we are now recognizing percentage rent during the period it is accrued rather than during the period it is paid, which also resulted in higher same-store rent growth in the fourth quarter of 2019. Moving on, I'll provide additional detail on our financial results for the quarter, starting with the income statement. Our G&A expense as a percentage of revenue, excluding approximately $3.5 million of severance related to the departure of our former CFO, was 4.4% for the quarter, and our cash G&A margin, excluding severance, was 3.5%. We continue to have the lowest G&A ratio in the net lease REIT sector. Our non-reimbursable property expenses as a percentage of revenue was 1.3%. As a result of an early redemption of our $250 million 2021 notes, we recognized approximately $9.8 million loss on extinguishment of debt during the quarter. Briefly turning to the balance sheet, we have continued to maintain our conservative capital structure and remain one of only a handful of REITs with at least two A ratings. In April, we drew $1.2 billion on our revolving credit facility to increase our cash position as a conservative measure due to uncertainties related to COVID-19. Under the revolving credit facility, our 2A credit ratings provide for a borrowing rate of LIBOR plus 77.5 basis points. We currently have approximately $1.2 billion of cash on hand, and an additional 1.1 billion available under our revolving credit facility, which provides significant financial flexibility. Looking forward, our overall debt maturity schedule remains in excellent shape, as the weighted average maturity of our bonds is 8.3 years. Additionally, we have approximately 400 million of total debt coming due throughout the remainder of 2020 and 2021. In summary, our balance sheet is in great shape, and we continue to have low leverage, strong coverage metrics, and ample liquidity. In March, we increased the dividend for the 106th time in our company's history. We have increased our dividend every year since the company's listing in 1994, growing the dividend at a compound average annual rate of approximately 4.5%. And we are proud to be one of only three REITs in the S&P 500 Dividend Aristocrats Index for having increased our dividend every year for the last 26 consecutive years. Moving on. As we navigate through the current state of economic volatility and uncertainty, we believe a strong financial position is paramount. The timeline for economic uncertainty remains unclear, but we believe we are well positioned with significant financial flexibility. Further, we believe we are well positioned to capitalize on opportunities going forward once we receive additional clarity regarding the current crisis. To wrap it up, We've completed a very strong quarter and we're well positioned from both the balance sheet and portfolio standpoint heading into this period of uncertainty. The COVID-19 pandemic has resulted in an economic environment largely unprecedented, but I'm confident in the resiliency of our tenant credit profile, the quality of our real estate, and the talent of our team members to continue generating favorable shareholder value over the long term. At this time, I'd like to open it up for questions. Operator?