Yahoo Finance Realty Income Corporation (NYSE:O) Q4 2023 Earnings Call Transcript
Realty Income Corporation (NYSE:O) Q4 2023 Earnings Call Transcript February 21, 2024
Realty Income Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Realty Income Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Steve Bakke, Senior Vice President of Corporate Finance. Please go ahead, sir.
Steve Bakke: Thank you all for joining us today for Realty Income's fourth quarter operating results conference call. Discussing our results will be Sumit 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 laws. 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-K. We'll 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.
Sumit Roy: Thank you, Steve, and welcome, everyone. Our fourth quarter and 2023 full-year results demonstrate the unique platform value that Realty Income has built, which differentiates us as a real estate partner to the world's leading companies. During the year, we accomplished several milestones, which illustrate the benefits bestowed to us by our size, scale and relationships. First, we set an annual high in property level investment volume closing on over $9.5 billion in high-quality diversified investments across eight different countries and through 271 discrete transactions at a weighted average cash yield of 7.1%. The year was punctuated with a particularly active fourth quarter as we closed on $2.7 billion of investments at a weighted average cash yield of 7.6%.
Our fourth quarter activity included a $527 million sale leaseback transaction with Decathlon, one of the world's leading investment-grade rated sporting goods retailers and included properties located in Germany, France, Spain, Italy and Portugal. Despite a volatile capital markets environment, we achieved an investment spread of approximately 115 basis points in the fourth quarter and approximately 120 basis points in 2023. We were able to achieve these spreads without sacrificing our focus on the quality of real estate or security of cash flow, which is a testament to our experienced team and the merits that sophisticated sellers see in transacting with our platform. Second, during the year we established a presence in the data center sector through a build-to-suit development joint venture with Digital Realty.
And we incubated new relationships with blue-chip partners such as Blackstone and the EG Group through large scale investments, including the $950 million investment for a 21.9% stake in the Bellagio and the $1.5 billion sale leaseback involving primarily Cumberland Farm convenience stores. Third, and in addition to the achievements noted above, we also announced the $9.3 billion merger with Spirit Realty Capital in an all-stock transaction in October, which closed subsequent to year-end on January 23. These accomplishments contributed to our 2023 AFFO per share of $4, representing an approximately 7% total operational return for the year, and importantly, together with the Spirit merger, set us up to deliver a compelling earnings growth backdrop in 2024.
We believe that the close of the Spirit merger last month along with meaningful debt and equity capital raising activity completed at attractive prices in December and January that Jonathan will describe in more detail, leave us well-positioned to deliver robust growth in 2024. We here initiated an AFFO per share guidance range of $4.13 to $4.21 per share for 2024, which represents an annual growth rate of 4.3% at the midpoint. We believe we can achieve this growth rate without the selling of additional public equity. Inclusive of our dividend, this positions us to deliver a total operational return of more than 10% at the midpoint of the guidance range based on the trading price of our common stock as of February 20, 2024. In addition to the $9.3 billion Spirit merger, we're also providing 2024 acquisitions guidance of approximately $2 billion, which is expected to be fully funded via a combination of our portfolios internally generated cash flow now exceeding $800 million after dividend payments on an annualized basis, as well as approximately $605 million of unsettled ATM proceeds and our $3.7 billion of cash and unutilized availability on our revolving credit facility as of year-end.
While we continue to source and review high-quality investment opportunities, we remain highly selective deploying capital only into attractive risk adjusted return opportunities that meet both our near-term and long-term investment spread requirements. Of our $2 billion initial investment volume forecast, approximately half is expected to come in the form of development financing, the vast majority of which is already identified. To reiterate, our favorable return profile in 2024 carries very little execution risk from an investment standpoint, allowing us the flexibility to remain patient, disciplined and opportunistic from a capital deployment standpoint. That said, as we demonstrated during the height of the pandemic, our platform affords us the opportunity to pivot quickly back into growth mode should market conditions change.
While we intend to remain disciplined in our investments to ensure appropriate risk-adjusted returns for our investors, we continue to highlight why we are best positioned to capitalize on compelling opportunities over the long term. First, the opportunity to consolidate the fragmented net lease real estate market is vast. We estimate $14 trillion total addressable market in the U.S. and Europe across traditional net lease and emerging verticals like data centers and gaming. Second, we have firmly demonstrated our capabilities deploying capital, having invested $9 billion or more including public M&A in each of the last three years since exiting the pandemic year of 2020. Over this time, we have generated annualized AFFO per share growth of approximately 6% and we have provided a total operational return to stockholders of approximately 10% per year.
Looking to 2024 and beyond, we are on track to achieve similar capital deployment and AFFO per share growth objectives this year. We are particularly energized by the prospect to participate meaningfully in verticals like data centers and gaming, where we are seeing opportunities to earn healthy initial yields with attractive contractual rent escalators. Third, the Spirit merger deepens our ability to access capital markets through increased trading volume in our publicly-listed stock, which has averaged more than $400 million of daily trading volume since the Spirit transaction was announced. This places us in the top 150 of S&P 500 companies and is more than 7x the net lease peer average over the same timeframe, leaving us even better situated to fund our business in a highly efficient and non-disruptive manner through our ATM equity program.
Fourth, our real estate portfolio is becoming increasingly diversified over time and consists of properties leased to relationship clients representing some of the world's leading companies in their respective industries. Diversified exposure to these clients reinforces the stability of our platform and accordingly are growing monthly dividend payments. Finally, the power of our platform is a crucial differentiator as we leverage our expertise across ownership of over 15,400 properties globally, inclusive of the Spirit portfolio. Our experience managing over 5,900 lease outcomes since 1996 provides learnings that feed into analytic AI tools that provide actionable insights, enabling us to more accurately identify acquisition opportunities and to maximize the value of our existing holdings.
Continuing with our key operational results from the fourth quarter, investment volume of approximately $2.7 billion was allocated to high-quality investments at a weighted average cash yield of approximately 7.6%. We completed $1.1 billion of total investment volume internationally at a weighted average cash yield of 7.8%. Investments were made across 119 distinct transactions, including 29 sale leaseback transactions equating to $884 million of volume. Our full year investment activity was $9.5 billion, of which 35% was derived internationally, serving as a testament to the value of our investment platform’s global footprint. Included in fourth quarter volume was a loan we made to ASDA stores in the UK at a 10.9% yield. The loan is backed by ownership interests and properties containing grocery stores and supermarkets and was extended as part of a sale leaseback transaction with ASDA.
In addition, fourth quarter volume included our previously announced $650 million of preferred equity investment in the Bellagio JV with Blackstone, which earns an 8.1% yield. Similar to the loan investment in ASDA, the Bellagio preferred equity investment was paired with investment in high-quality real estate. For both investments, our ability to offer a broadened suite of capital solutions to clients granted us access to high-quality net lease real estate investments at superior risk adjusted returns than we could have otherwise achieved. These transactions serve as templates for future sale leaseback transactions. Also in the fourth quarter, we made our initial investment in a data center development JV with Digital Realty. The initial $200 million investment represents an 80% equity investment in the venture and is expected to generate a 6.9% initial cash yield, 2% annual rent escalators and a long-term triple-net lease with an S&P 100 investment grade client upon completion.
Turning to portfolio operations, same-store rent grew 2.6% in the fourth quarter and 1.9% for the year, benefiting in part from lower net bad debt expense compared to the prior year. On a normalized basis, our contractual rent growth approximates 1.5% on an annual basis based on the current composition of our portfolio. This amount is up over 50 basis points from just five years ago and is a result of an intentional push by our team to generate enhanced organic growth. We remain committed to walking this growth rate higher over time through our deliberate underwriting strategy. Our diligent asset management efforts led to a recapture rate of 103.6% during the quarter and 104.1% for the year excluding the impact of the Cineworld bankruptcy. At year-end, occupancy was 98.6%, a 20 basis point decline from the prior quarter as a result of expected client move outs.
I will now turn it over to Jonathan who will add further color to the quarter.
Jonathan Pong: Thank you, Sumit. We completed an active quarter in the capital markets during the fourth quarter raising $1.6 billion of equity at a weighted average price of $56.25. Including activity subsequent to year-end, we currently have approximately $605 million of outstanding forward equity available to finance a portion of our equity needs in 2024. When combined with over $800 million of annual free cash flow available to us following the Spirit merger, we have the ability to finance all of our equity needs for our $2 billion investments guidance without having to tap into the public equity markets for the remainder of 2024. And this is before any capital recycling opportunities throughout the sales, which we expect to be north of the $116 million volume we achieved in 2023.
As Sumit mentioned earlier, our AFFO per share guidance midpoint implies 4.3% annual growth and assumes only $2 million of investments volume, with almost half are re-accounted for in our development pipeline. From a debt capital market standpoint, we de-risked our 2024 maturity schedule through approximately $2.2 billion of bond issuance activity in a 45-day span, beginning with our GBP 750 million sterling notes offering in December and culminating in our US$1.25 billion offering that closed last month. Combined, the two offerings blend to a weighted average tenure of approximately 10.2 years and weighted average yield to maturity of approximately 5.5%. Near-term, these two offerings allow us to fund our business given our current investment outlook without needing to tap into the debt capital markets in 2024, which we believe was a prudent approach given the persistent instability that has permeated the capital markets over the last two years.
There are also longer term strategic considerations that dictated this approach. Following our debut euro offerings in the summer of 2023, we believe these offerings also support our steadfast desire to maintain investor diversification across our multi currency debt complex, while pocketing future debt repayment risk in years with meaningful capacity. Last month, we also exercised the first of two one-year extension options available to us on our $1.1 billion multi currency term loan that we established in January of 2023. In conjunction with the extension, we entered into a two-year floating to fixed interest rate swap that effectively locked in a fixed rate of approximately 4.85% on this principle through its maturity date in January 2026.
In conjunction with the closing of the Spirit merger, we also assumed $1.3 billion of term loan debt from Spirit, as well as $1.3 billion in existing floating to fixed interest rate swaps, which resulted in an effective weighted average fixed rate of 3.9% on that debt. Of this term loan principal, $800 million matures in 2025 and $500 million matures in 2027. Moving on to key credit metrics at year end, we finished the year with net debt to annualized pro form EBITDA of 5.5x, in line with our targeted leverage ratio and this excludes the $605 million of outstanding forward equity we currently have available to us. Our fixed charge coverage finished the year at 4.7x, which was the high watermark for us in 2023, benefiting from higher investment yields in the fourth quarter and less and lower cost short-term borrowings outstanding.
In 2024, we do anticipate an increase of $45 million in annualized non-cash interest expense we expect to recognize from the amortization of below market debt on the Spirit debt we assumed. Note that this non-cash interest expense adjustment does lower annual FFO per share run rate by approximately $0.05 per share, but is not reflected in AFFO, thus explaining the primary reason why our initial FFO and AFFO guidance ranges are more closely bound than in 2023. We would note that purchase price accounting adjustments are ongoing for the merger and thus straight line rents and FAS 141 adjustments from the merger are likely to push FFO higher once finalized, and we will adjust our FFO guidance at that time. Of course, these are non-cash adjustments that do not impact AFFO.
Looking forward, I would like to reiterate Sumit's opening comments about our lack of reliance on the capital markets to fund our growth in 2024. From a liquidity perspective, we view our near-term capital availability as a strength of following our bond yield last month, we had into the rest of 2024 with approximately $4 billion of liquidity at year-end, variable rate debt representing less than 5% of our total debt capital stack and no capital market execution risk to fund our growth for the remainder of 2024. With that, I'll turn it back over to Sumit for closing remarks.
Sumit Roy : Thank you, Jonathan. Before concluding, I would like to extend my immense gratitude to Ron Merriman for his valued service to Realty Income on our Board of Directors the past 19 years. Ron's leadership, guidance and mentorship have been invaluable and we all owe him our sincere thanks. I would also like to extend a warm welcome to Jeff Jacobson, who will be joining our Board. I'm thrilled for all of us at Realty Income to benefit from Jeff's perspective as a former CEO of one of the world's premier global real estate asset management firms, LaSalle Investment Management and in his current role as the Chairman of the Board of Cadillac Fairview Corporation. In conclusion, our results in 2023 underscore the multiple avenues of growth at our disposal in the global commercial real estate industry, including through one-off and portfolio acquisitions, multiple asset types, corporate sale leasebacks, development and joint venture partnerships and via public M&A opportunities.
The depth of our platform, team and relationships enable us to leverage some or all of these sourcing avenues concurrently as opportunities arise. In 2023, we completed five transactions greater than $500 million in size and two of which were greater than $1 billion excluding the Spirit merger. These are transactions that Realty Income was uniquely positioned to execute given our size, scale and access to capital globally. These distinct competitive advantages support us in serving as real estate partner to the world's leading companies at an unparalleled scale. Moreover, we believe that serving as capital provider to a diverse spectrum of clients, who are leaders in their respective industries, furthers our core mission to deliver dependable monthly dividends that grow over time.
We will now open it up for questions.
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