Realty Income Corporation

Good afternoon. My name is Cree, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Realty Income Fourth Quarter and Year-End 2020 Operating Results Conference Call. I'd like to 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'd like to ask a question during this time, simply press star then the number one on your telephone keypad. If you'd like to look for your question, press the pound key. Thank you. I would now like to turn the call over to Andrew Crum, Associate Director at Realty Income. You may begin, sir.

Thank you all for joining us today for Realty Income's fourth quarter and year-end 2020 Operating Results Conference Call. Discussing our results will be Sumit Roy, President and Chief Executive Officer, and Christy Kelly, Executive Vice President and Chief Financial Officer. 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 the forward-looking statements. We will disclose in greater detail the factors that may cause such differences in the company's Form 10-K. 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.

Thanks, Andrew. Welcome, everyone. As we remain in a remote work environment to promote the safety of our employees and community, I continue to be impressed by the resiliency and talent of our team to drive our business forward through the current pandemic. Additionally, I remain appreciative of the support and resiliency of our clients and partners who continue to perform under challenging circumstances. On the personal front, we were excited to welcome Christy Kelly to our management team in January. as Executive Vice President, Chief Financial Officer. And in February, Michelle Beshor joined our team as Executive Vice President, Chief Legal Officer, General Counsel, and Secretary. Mike Pfeiffer, who served as Executive Vice President, Chief Administrative Officer, General Counsel, and Secretary, will retire after over 30 years of service. Mike will remain serving our company through June 2021 as Chief Administrative Officer and will continue leading our team members as well as assisting Christy and Michelle through their transition at Realty Income until his well-deserved retirement. Words cannot fully reflect Mike's many contributions to our company for over three decades, and I'm so immensely grateful for his partnership with me throughout the years. Moving on to financial matters, including a summary of the quarter and year. During the fourth quarter, we invested over $1 billion in high-quality real estate. including $467 million in the UK, bringing us to over $2.3 billion invested during 2020, approximately $921 million of which was invested in the UK. Investments during the year were largely concentrated in the grocery and home improvement industries, both of which continue to thrive during the current economic environment. We maintained low leverage and ample liquidity throughout the year while enhancing our financial flexibility. Highlights include the establishment of a $1 billion commercial paper program, our successful debut public issuance of sterling denominated unsecured notes, and record low coupon rates for five-year and 12-year dollar denominated bonds in the REIT sector. We have also been active in the equity capital markets to accretively fund our acquisition pipeline. During the fourth quarter of 2020, we raised approximately 655 million of equity, primarily through our ATM program. And in January, we raised an additional 670 million of equity through an overnight offering. Accordingly, our balance sheet is well positioned to address what continues to be an active investment pipeline. To that end, we are introducing 2021 acquisitions guidance of over $3.25 billion as we are well positioned to continue the momentum we experienced at the close of last year and in January. In the fourth quarter of 2020, we invested approximately 1 billion in 70 properties located in 22 states and the UK at a weighted average initial cash cap rate of 5.4% and with a weighted average lease term of 13.4 years. On a total revenue basis, approximately 68% of total acquisitions during the quarter were from investment-grade rated tenants. 71% of the revenue is generated from retail tenants. These assets are leased to 31 different tenants in 19 industries. Of the $1 billion invested during the quarter, $541 million was invested domestically in 59 properties at a weighted average initial cash cap rate of 5.2%, and with a weighted average lease term of 15.1 years. During the quarter, $467 million was invested internationally in 11 properties located in the UK at a weighted average initial cash cap rate of 5.7%, and with a weighted average lease term of 11.7 years. During 2020, we invested over $2.3 billion in 244 properties located in 30 states and the UK at a weighted average initial cash cap rate of 5.9 percent and with a weighted average lease term of 13.2 years. On a revenue basis, 61 percent of 2020 acquisitions are from investment grade rated tenants. Eighty-seven percent of the revenues are generated from retail and 13 percent are from industrial assets. These assets are leased to 56 different tenants in 26 industries. Two of the most significant industries represented are grocery and home improvement. Of the 2.3 billion invested during 2020, nearly $1.4 billion was invested domestically in 220 properties at a weighted average initial cash cap rate of 5.8%, and with a weighted average lease term of 14.9 years. And approximately $921 million was invested internationally in 24 properties located in the UK at a weighted average initial cash cap rate of 6.1% and with a weighted average lease term of 10.8 years. Transaction flow remains healthy as we sourced approximately $17.1 billion in the fourth quarter. For the full year, we sourced approximately $63.6 billion in potential transaction opportunities, the most we have ever reviewed in a given year. Of these opportunities, $42.4 billion were domestic opportunities, and $21.2 billion were international opportunities. Investment-grade opportunities represented 50% of the volume sourced during the year. Of the $63.6 billion sourced, 56% were portfolios, and 44% of approximately $28.2 billion were one-off assets. Of the $1 billion in total acquisitions closed in the fourth quarter, 66% were one-off transactions. Our investment spreads relative to our weighted average cost of capital were healthy during the quarter, averaging approximately 130 basis points. Moving to dispositions. During the quarter, we sold 60 properties for net proceeds of $77.5 million, realizing an unlevered IRR of 8.7%. This brings us to 125 properties sold during 2020 for $261 million at a net cash cap rate of 7.8%, and we realized an unlevered IRR of 11.6%. Our portfolio remains well diversified by clients, industry, geography, and property type, which contributes to the stability of our cash flow. At year end, our properties were leased to approximately 600 clients in 51 separate industries located in 49 states, Puerto Rico, and the UK. Approximately 84% of rental revenue is from our traditional retail properties. The largest component outside of retail is industrial properties at approximately 11% of rental revenue. Walgreens remains our largest tenant at 5.7% 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 our 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 remain constructive on the credit quality of the portfolio with over half of our annualized rental revenue generated from investment grade rated tenants. Occupancy based on the number of properties was 97.9% at year end. During the fourth quarter, we released 77 properties recapturing 100.3% of the expiring rents. During 2020, we released 314 properties recapturing 100% of the expiring rent. Since our listing in 1994, we have released or sold over 3,500 properties with leases expiring, recapturing over 100% of rent on those properties that were released. In light of COVID-19, rent collection across our portfolio has remained stable over recent months. During the fourth quarter, we collected 93.6% of contractual rent due, and further improvement in rent collection percentages is primarily dependent upon improvements in the theater industry, which I will touch on shortly. We collected 100% of contractual rent for the fourth quarter from investment-grade rated tenants which further validates the importance of a high-quality real estate portfolio, leads to large, well-capitalized clients. While we have not historically prioritized investment-grade rated tenants as a primary objective, during periods of economic uncertainty, high-grade credit tenants tend to provide more reliable streams of income, as the last several quarters have exemplified. Our top four industries, convenience stores, grocery stores, drug stores, and dollar stores, Each sells essential goods and represent over 37% of rental revenue. And we have received nearly all of the contractual rent due to us from tenants in these industries since the pandemic began. Uncollected rent continues to be primarily in the theater industry, representing approximately 80% of uncollected rent in December. As the theater industry remains challenged, I would like to update the investment community on our latest view. The industry represents 5.6% of our contractual base. While we do expect the industry to downsize in the future, we continue to believe it will remain a viable industry in a post-pandemic environment, especially for high-budget blockbuster movies. You might recall that the U.S. box office reached an all-time high as recent as 2018, and 2019 produced the highest-grossing worldwide film of all time in Avengers Endgame. We continue to believe, particularly for blockbuster movies, that a theatrical release will be the preferred distribution channel for studios going forward, given the superior economics afforded to them versus streaming platforms. That said, we do acknowledge that the industry is changing and that there likely will be a rationalization of theaters in a post-pandemic reality. Under this scenario, underperforming theaters may not survive. We continue to maintain a full reserve, the outstanding receivable balance for 37 of our 77 total theater assets and continue to recognize revenue on a cash basis for these 37 assets. During the fourth quarter, we established a full reserve for one additional theater asset and we disposed of one theater asset previously on cash accounting. To be clear, We do not expect to lose the entirety of rent associated with these properties longer term, even in the event of potential closures. As of year end, the total allowance for these 37 theaters totaled $23.7 million, including $1.8 million of which is a straight-line rent receivable reserve and thus has no AFFO impact. Moving on. Our same-store rental revenue decreased 3.2% during the quarter and 1.7% year-to-date. Our reported same-store growth includes deferred rent and unpaid rent that we have deemed to be collectible over the existing lease term, but excludes rent where collectability is deemed less than probable. The decrease in same-store rental revenue is primarily driven by reserves we recognized in the theater industry. and to a lesser extent, the health and fitness industry. Now to provide additional detail on our financial results for the quarter, I would like to hand it off to Christy.