Realty Income Corporation

Good day and welcome to Realty Income Third Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, you'll have the opportunity to ask questions. Please note that this event is being recorded. I'd like to turn the conference over to Ms. Andrea Baer, Corporate Communications Manager. Please go ahead.

Thank you all for joining us today for Realty Income's third quarter operating results conference call. Discussing our results will be Sumit Roy, President and Chief Executive Officer, Christy Kelly, Executive Vice President, Chief Financial Officer and Treasurer, and Jonathan Pong, Senior Vice President, Head of Corporate 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 10-Q. 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 re-enter the queue. I'll now turn the call over to our CEO, Sumit Roy.

Thank you, Andrea. Welcome, everyone. At Realty Income, we pride ourselves on having a consistent and dependable business model. For 53 years as an operating company, we have persevered through a variety of macroeconomic climates, and our track record of stability, notably during periods of volatility, is particularly relevant during current times. We sit here today well positioned and operating very well across all areas of our business. We are grateful for all of our team members who make this success possible. To start off, we capitalized on opportunities to bolster our balance sheet in the third quarter, including raising over $2 billion of equity on the ATM, with approximately $700 million of proceeds received during the third quarter, as well as over $1.3 billion remaining subject to our settlement on a forward basis in alignment with our capital strategy. In addition, we issued $750 million of 10-year senior unsecured notes in October to further increase our liquidity. Between cash and cash equivalents, our availability under our credit facility, our liquidity as of the end of the third quarter was over $2.5 billion, which when combined with the $1.3 billion of our unsettled forward equity and approximately $744 million in net bond proceeds, equates to liquidity of approximately $4.6 billion had the forwards and net bond proceeds been received at quarter end. Moving on to acquisitions. During the quarter, we acquired approximately $1.9 billion in high-quality real estate, bringing us to approximately $5.1 billion in acquisitions year-to-date. A significant portion of the properties purchased in Q3 were part of portfolio deals or large transactions. We believe these deals were accessible to us because of our size, scale, relationships, ability to close, access to and cost of capital, together with our research and technology-driven analytic capabilities. For realty income, our competitive advantages allow us to design and execute on strategies that benefit all those we serve, including our clients. The pending $1.7 billion Encore Boston Harbor transaction, which we continue to expect to close this year, remains an example of this dynamic. Based on our current total portfolio annualized base rent, the transaction would comprise approximately 3% of our total portfolio annualized contractual rent once closed. Further leveraging our international capabilities, we made our advent into Italy last week, investing approximately 165 million euros in seven high-performing wholesale clubs operated by Metro AG in major Italian cities like Rome and Florence. Metro is a pan-European leader in the wholesale club industry and operates almost 700 stores across Europe. Metro is publicly listed and investment-grade rated and has continued to perform well during and since the pandemic. We're delighted to add them as a client and hope we'll be able to add to this initial portfolio over time. During the third quarter, we did experience cap rate expansion, registering a 6.1% cash cap rate on investments, which compares favorably to the 5.7% cap rate we realized on investments in the second quarter. This resulted in a third quarter investment spread of 165 basis points based on actual capital raised which is higher than our year-to-date total of 161 basis points and above our historical average. As we move towards year-end, we continue to see cap rates push higher as capital costs increase. This is consistent with the historical correlation we've come to expect, which has tended to preserve investment spreads as the market adjusts. Transaction flow remains strong with sourcing volume totaling approximately $18 billion this quarter, bringing year-to-date sourcing volume to approximately $78 billion. We remain selective as we have acquired approximately 6.5% of sourced volume year-to-date. The international market continues to be an important part of our strategy, and it remains an active component of our volume, representing approximately 33% of investment volume in the third quarter. Capital recycling continues to be a strong component of our funding strategy, which also has the dual purpose of culling non-core properties from the portfolio. During the third quarter, we sold 34 properties, generating net sale proceeds of $142 million at an unlevered IRR of 12.8%, illustrating the full-cycle attractiveness of owning net lease real estate under long-term leases. We intend to continue to act opportunistically to dispose of assets at moments in time when we can obtain attractive risk-adjusted returns. In addition to the disposition of properties on our balance sheet, We also sold our interest in seven properties owned in an industrial JV that we assumed as part of our varied merger. The gross purchase price totaled $905 million at a low 4% cap rate. Our share of net sale proceeds was approximately $113.5 million. Our core portfolio continues to perform, and by and large, our clients have generally continued to perform very well despite the cyclical market changes and shifts in consumer behavior. A point to note, as previously publicly announced, one of our clients, Cineworld, commenced Chapter 11 bankruptcy in September. Despite being one of its largest landlords, Cineworld represented only 1.5% of our total portfolio annualized base rent as of Q3. We'll continue working closely with Cineworld as this process continues towards resolution. For some color regarding theaters, for the third quarter 2022, we collected approximately 85% of the contractual rent across our theater portfolio, as Cineworld Group PLC was not yet required to pay rent for the month of September. For the month of October 2022, we have collected 100% of the contractual rent across our theater clients, including Cineworld. For some specifics, our Cineworld portfolio consists of 41 properties, 17 of which are subject to a single master lease agreement and 22 of which have been accounted for under cash basis accounting since the third quarter of 2020. Through September, we have recognized 23.5 million of cumulative reserves on these properties and representing primarily contractual rent and expense recoveries that have not been collected dating back to the beginning of the COVID-19 pandemic in 2020. These 22 properties on cash basis accounting currently account for approximately $1.6 million of monthly contractual base rent, or 40% of our total exposure to Cineworld. Based on current public information and our internal analysis, We continue to believe our portfolio of Cineworld assets are generally comprised of the stronger performers in the operator's portfolio. Our locations are freestanding, single-tenant assets typically with large land areas and close proximity to population centers, supporting potential conversion to residential, industrial, or life science uses. We have received reverse inquiries from multifamily and industrial developers exploring opportunities on these sites, We believe there is alternative and adaptive reuse potential if Regal were to vacate any locations as part of bankruptcy. Moving on to some of the most important key operational metrics delivering value that continue to demonstrate a consistent, well-positioned real estate portfolio. At the end of the third quarter, our occupancy was 98.9%. In Q3, we released 169 leases and achieved a rent recapture rate of 108.5%, bringing our year-to-date recapture rate to 106.7%. As we look forward, less than 4% of our contractual base rent comes due through the end of 2023, providing strong visibility into our near-term portfolio performance. At quarter end, approximately 43% of our portfolios total annualized contractual rent was generated from investment grade rated clients. Our properties leased to clients on our portfolio watch list represented less than 4% of our portfolio's annualized contractual rent. Lastly, our same store rental revenue increased 1% during the quarter and 2.4% year to date. And we continue to expect full year same store growth to be approximately 2%. At this time, I'll pass it over to Christy, who will further discuss results from the quarter.