Realty Income Corporation

Good day and welcome to the Realty Income Q1 2024 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 a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would like now to turn the conference over to Mr. Steve Bakke, Senior Vice President of Corporate Finance. Please go ahead.

Thank you all for joining us today for Realty Income's first quarter operating results conference call. Discussing our results will be Suman Roy, President and Chief Executive Officer, and Jonathan Pong, Chief Financial Officer and Treasurer. 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'll 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 will now turn the call over to our CEO, Sumit Roy. Thank you, Steve.

Welcome, everyone. Our results for the start of 2024 illustrate our focus on thoughtful, disciplined growth and continue to demonstrate the consistency of our global operating and acquisition platform. We believe our value proposition to investors is a simple one, a demonstrated ability to generate consistent, positive operational returns regardless of market volatility and economic environment. A projected 2024 operational return profile of approximately 10 percent, which comprises an anticipated dividend yield close to 6 percent, and AFFO per share growth of approximately 4.3 percent, assuming the midpoint of guidance, is a validation of our value proposition. To summarize the results from the quarter, we would highlight several key takeaways. First, diversification. diversification by geography, asset types, and client relationships. We believe our business model is unique in the real estate sector, as we have optionality to grow in different regions with investments in a multitude of real estate products where we see superior risk-adjusted returns. During the first quarter, we invested $598 million at an initial weighted average cash yield of 7.8%, across three property types, retail, industrial, and data centers. Over half of this volume, representing approximately 323 million, was invested in Europe and the UK at an 8.2% initial weighted average cash yield. Investment volume in the U.S. was modest during the quarter. Of the $275 million of U.S. volume, which was invested at a 7.3% initial weighted average cash yield. All but $16 million was invested in previously committed development takeouts. This quarter's bias towards international volume is a testament to the diversity of geographies we consider to allocate capital. To further elaborate, our investment volume during the quarter consisted of 87 discrete transactions with three transactions over $50 million, which speaks to the breadth of our platform. Our ultimate focus with any growth vertical or new region is to serve as real estate partner to the world's leading companies and to ensure the investment outcome matches the consistent risk-return profile of our investments, which have proven resilient over almost five decades as an operating company and three decades as a public company. Second, the health of our portfolio remains solid across all key operational metrics. We finished the quarter with occupancy of 98.6%, consistent with the prior quarter and our projections. And we delivered another strong leasing quarter with rent recapture of 104.3% on the 198 leases that we renewed or re-leased during the quarter. At quarter end, our list of tenants on the credit watch list comprise approximately 5.2% of total portfolio annualized rent, which is in line with our historical average and with no individual client representing more than 1% of our total portfolio annualized rent. Consequently, we would highlight the diversification of our portfolio, which today consists of over 1,500 clients in all 50 states, the UK, and six other countries in Western Europe, all of which helps insulate us from potential disruptive interest rate and credit events that could impact the durability of our cash flow. Finally, our balance sheet and access to capital continues to represent a major competitive advantage and affords us significant flexibility to fund our business without the need for external capital. After the Spirit merger closed in January, Our annualized free cash flow available for investments is approximately $825 million. This provides us significant organic investment capacity to finance our growth plans without being required to tap into the debt or equity markets to meet current investment guidance. I would also note this also excludes any additional capacity generated by a disposition program which I will discuss later. In spite of volatility in the capital markets, we posted a nominal first-year investment spread of over 340 basis points in the first quarter, which is well above our historical spread of around 150 basis points. The primary driver of these outside spreads is the significant portion of investment volume funded through free cash flow. which by virtue of being a non-dilutive source of capital, meaningfully reduces our nominal first-year cost of capital. To be clear, our investment decisions remain based on our long-term weighted average cost of capital, which considers only our cost of stock for equity and long-term 10-year unsecured debt. This establishes the minimum return hurdle we seek to exceed across our aggregate investment activity, In all cases, our long-term WAC has exceeded our nominal first-year cost of capital with respect to our transactions. This long-term oriented underwriting model is what drives our focus on acquiring high-quality real estate leased to solid operators who are leaders in their respective industries because we believe these opportunities have significantly lower residual value risk. In addition, to reach our longer-term growth hurdle rates, we are increasingly prioritizing meaningful contractual rent escalators in our leases with conservative rent coverage metrics that we believe will be even more resilient through a variety of economic cycles. In summary, activity in the transaction market remains uneven. Many potential sellers of real estate remain sidelined given this uncertain interest rate environment, which is amplified by mixed inflation-related data over the last six months. Sellers remain reluctant to transact, and the breadth and depth of domestic investment opportunities have compressed as a result. However, as experienced in prior cycles, we remain optimistic that the market will provide more opportunities in the second half of the year as the economic outlook becomes clearer. Turning to portfolio operations, as previously mentioned, our recapture rate was 104.3%, contributing to same-store rent growth of 0.8 percent in the first quarter. Excluding the negative impact from our Cineworld Theater portfolio, following the lease amendments finalized late last year, our same-store portfolio was up 1.4 percent, largely in line with the contractual rent growth embedded in our portfolio. One of our competitive advantages in the marketplace is our asset management and real estate operations functions, consisting of over 80 individuals who we believe are among the most talented in the industry. Since becoming a public company in 1994, we have now resolved over 6,000 lease expirations at a blended rent recapture rate of 102.5%, which is a testament to our acquisition underwriting, quality of our real estate, and the skill of our asset management and real estate operations team. During the quarter, we sold 46 properties for total net proceeds of $95.6 million. Our recycling efforts are a function of a more active investment management initiative. Our active decision-making on dispositions is supported by our proprietary predictive analytics platform. In recent years, we have harnessed the collective contributions of our predictive analytics team, the credit underwriting group, and the fundamental input from our asset management group to inform our acquisition strategy. We believe the combined benefits of these three groups provide us a significant differentiation in the industry as a result of the quantum of data we have gathered across our portfolio over our long operational history. So now, in addition to our acquisition program, we're using the data to more proactively manage the portfolio and guide our active disposition program. I will now turn it over to Jonathan, who will add further color to the quarter.