Realty Income Corporation

Good afternoon and welcome to the Realty Income Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Steve Bakke, Vice President of Capital Markets and Investor Relations. Please go ahead.

Thank you all for joining us today for Realty Income's second 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 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, Steve. Welcome, everyone. We successfully executed on our strategy in the second quarter and continue to see momentum across the business. I would like to sincerely thank our one team, whose focus and commitment continue to propel our business forward, serving all our clients and stakeholders. We believe the strength of our platform and quality of our real estate portfolio were evident in the quarter's results. Despite the challenging interest rate environment, AFFO per share grew 3.1% from last year to $1 per share. Combined with our dividend, we are pleased to have delivered a total operational return of over 8% on a trailing 12-month basis. Delivering stable and consistent growth is foundational to our mission at RealtyIncome. Underlying this growth, our team continues to source and invest in high-quality properties at accretive spreads to our cost of capital while partnering with our clients who are leaders in non-discretionary, low-price point, and service-oriented industries. Partnering with industry leaders across over 13,000 properties in a diversified real estate portfolio offers us durability of cash flows that results in the predictable nature of our revenues, earnings, and dividend payments. Our investment activities remain robust as we continue to demonstrate that size and scale are unique advantages in the sale leaseback and portfolio transaction markets. In the second quarter, we closed on approximately $3.1 billion of high-quality real estate investments, which brings our year-to-date investment activity to over $4.7 billion. Cap rates in our acquisitions appear to have stabilized after a meaningful adjustment period to a higher interest rate environment, though in select situations, we continue to find unique opportunities to source and close on larger transactions where our relationships platform and access to capital allow us to take advantage of more favorable terms. Our second quarter initial cash lease yield of 6.9% represents a 120 basis point increase compared to the second quarter of 2022 and resulted in a realized investment spread of approximately 133 basis points when calculating our WAC on a leverage neutral basis using the cost of equity and debt raised in the quarter. In addition to closing our 1.5 billion US convenience store acquisition from the EG Group, we remained active internationally during the second quarter, closing on $416 million of investments at an initial cash lease yield of 7.1%. This international activity includes the addition of a new geographic vertical in Ireland where we acquired two properties for $54 million at healthy cash yields. Given the transaction velocity we have achieved in the first half of the year, we are increasing our outlook for investments to over $7 billion for 2023. Year-to-date, we have acquired 15% of source investment volume compared to an average of 7% over the last five years. In today's more constrained environment for capital, We have found the size and scale of our platform have become increasingly meaningful differentiators as we seek accretive growth opportunities. Shifting to operations, our portfolio continues to perform, and we ended the quarter with occupancy of 99%, the third consecutive quarter at that level. This matches our highest occupancy at the end of a reporting period in over 20 years. Additionally, Our rent recapture rates increased from last quarter to 103.4% across 201 new and renewed leases, bringing the year-to-date recapture rate to 102.7% across 377 new or renewed leases executed in the period. As further testament to the stability of our portfolio and the leading clients with whom we partner, Our client watch list declined from last quarter and now represent less than 4% of our annualized rental revenue. This is the lowest level in the last five years. Finally, our same-store rental revenue increased 2.0% in the quarter, a tangible result of our purposeful decision to seek investment opportunities with higher internal growth characteristics, as well as the benefit of uncapped CPI-based rent escalators presently present in nearly 30% of the leases in our growing international portfolio. Our efforts to increasingly pursue leases with meaningful contractual rent escalators has helped contribute to a portfolio with contractual rent growth at approximately 1.5% per annum as of the second quarter, or 2% annual growth on a levered basis. Before turning it over to Christy, I would like to recognize the tremendous value she has brought to Realty Income, first as a board member and then as chief financial officer. Her leadership and counsel through a very active period for our company has left a lasting positive mark. As well, I would also like to congratulate Jonathan on his upcoming promotion to CFO. Christy?