Realty Income Corporation (O) Earnings Call Transcript & Summary

This is the conference call about operating results for the fourth quarter and the full year of 2024. Sumit Roy, our President and Chief Officer, along with Jonathan Pong, our Chief Financial Officer and Treasurer, will be going over what we found. On this call, we might make statements that count as forward-looking under federal securities law. What actually happens for the company down the road could end up differing significantly from whatever gets discussed in any of those forward-looking statements. You'll find a more detailed disclosure of the factors that could lead to such differences in the company's filing on Form 10-Ks. When we get to the Q&A part of the call, a two-question limit will be in effect. Should you wish to ask more questions, you can reenter the queue. At this point I'll hand things over to our CEO, Sumit Roy. Thanks, Kelsey.

Hello, and thanks to each of you for joining. During 2024, Realty Income delivered AFFO per share growth of 4.8%, which made it our fourteenth year in a row of growth. Paired with the 5.4% dividend yield our investors received, that produced a total operational return of 10.2% for the year. Across our thirty years as a public company, annual total operational return has come in at roughly 11% on average, and not once has a year shown a negative return, since we stay committed to providing steady, dependable returns to our shareholders. On today's call, we'll walk through three main themes that we see as defining our continued long-term success. The first is a demonstrated history of results and returns. The second is our assurance about continuing to generate growth in our core business as time goes on. And the third is the possibilities our platform offers for moving into new channels that create additional value for our shareholders. Turning to that first theme, our demonstrated history. What we achieved in 2024 speaks to the platform we've assembled. It's one that can perform across many different macroeconomic environments, highlighted by increases in AFFO per share in every year of our thirty-year history as a public company except one. All year long, we stayed disciplined with how we allocated capital, deploying $3.9 billion at a weighted average initial cash yield of 7.4%. The capital funding those investments came at appealing prices, giving us an investment spread of 243 basis points, which is above our historical average of 150 basis points. Now for the specifics of the fourth quarter. Our distinctive business model and one-of-a-kind competitive strengths keep underpinning the company's solid results. Fourth quarter AFFO per share came to $1.05, which was growth of 4%. During the quarter, we put $1.7 billion into high-quality opportunities at a weighted average initial cash yield of 7.1%, or a 7.5% straight-line yield assuming CPI growth of 2%. Of those investments, roughly 57% of the annualized cash income produced came from investment-grade clients. We closed 73 discrete transactions, among them six transactions with total considerations above $50 million, and one of those exceeded $500 million, which collectively accounted for nearly 80% of our investment volume. The span of sizes among these transactions shows the unmatched depth and breadth of our sourcing and acquisition platform. Within the US, we invested $1.1 billion at a weighted average initial cash yield of 6.4% and a weighted average lease term of about 14 years. And within Europe, we invested $650 million at a weighted average initial cash yield of 8.2% and a weighted average lease term of about 7 years. Altogether, these investments closed at a spread of 155 basis points over our short-term weighted average cost of capital, backed by roughly $230 million in adjusted funds from operations after dividend payments. Now for operations: we've assembled a diversified portfolio exceeding 15,600 properties with high-quality clients that have demonstrated resilience across a range of economic cycles and keep producing stable returns; that, together with our proven and seasoned asset management team, meant we delivered yet another year of excellent returns. Thanks to the extensive proprietary portfolio data we hold, combined with our in-house predictive analytics capabilities, we think our decision-making has gotten stronger and our abilities have improved further, which the fourth-quarter results demonstrate. Portfolio occupancy finished the quarter at 98.7%, matching where it stood the previous quarter. Across 266 lease renewals, our entry capture rate came to 107.4%, which produced roughly $52 million of new annualized cash rent. Going back to 1996, we have resolved more than 5,800 expiring leases, achieving a 103% recapture rate; we keep growing and building out our predictive analytics tool platform, a key piece when analyzing acquisitions, and it plays a bigger and bigger role in shaping disposition strategy. Under our continuing capital recycling approach, we evaluate our portfolio on a regular basis to spot and fine-tune growth opportunities. When done at the right strategic moment, dispositions do more than raise portfolio quality — they free up organic capital that we can put back to work in better assets, driving long-term value growth. Along those lines, during the fourth quarter we disposed of 80 properties, realizing total net proceeds of $138 million, with $50 million of that tied to vacant properties. Across the full year, net proceeds reached $589 million from selling 294 properties, which backs a capital recycling program that is increasingly active and that we expect to carry on in 2025. Turning to our second theme, we stay confident in our capacity to keep generating growth in our core business over time. Looking ahead to 2025, we see an appealing pipeline of investment opportunities spanning a wide range of property types, industries, and geographies. Given today's investment spreads and what we can see in the deal pipeline, we project investment volume of about $4 billion for the year. Based on the transactions we observe in the marketplace, we are well-positioned to ramp up capital deployment. For the year, our expectation for AFFO per share falls between $4.22 and $4.28, which equals 1.4% growth at the midpoint. Several assumptions feed into this outlook. On the tenant side, our forecast builds in a provision for 75 basis points of possible rent loss, plus an impact from a large office tenant moving out. Most of these effects come from properties we acquired through M&A transactions — deals we underwrote knowing that our size and scale leave us well-positioned to maximize real estate value. Together these items create a $0.04 negative impact on AFFO this year, yet they also give us a chance to cycle out of weaker clients and into stronger ones in robust industries. With market dynamics favorable across retail and industrial real estate, we expect strong releasing outcomes, anticipating rent recapture at a level in line with our historical leverage. On top of that, in 2024 we recognized $21 million in nonrecurring lease termination fees, which gave 2024 a $0.02 AFFO benefit that we are not assuming repeats in our current 2025 forecast. And we are within the NetLeaf page. During 2024, we kept making our standing even stronger as a dependable real estate ally for the biggest corporations around the globe. Repeat deals with clients we've served for years, along with major international brands such as 7-Eleven, Morrisons, and Carrefour, deepened those ties. Along those lines, during Q4 we completed a sale-leaseback worth $770 million involving 7-Eleven, and it now ranks as our largest customer, accounting for 3.5% of annualized rent. That deal demonstrates how we can find, assess, and finalize premium sale-leasebacks, and because of our size, scale, and relationship-focused method, we're able to take on sizable transactions at appealing valuations. It also represents the sixth sale-leaseback we've done with 7-Eleven over our history — a relationship that started nearly ten years back. Our newly announced private capital effort is another path toward future expansion, giving us a chance to put our established platform to work and widen our investment possibilities. As the year unfolds, we're eager to report back on how the fund business is progressing. On the whole, we feel Realty Income's strategic standing, fiscal prudence, and varied holdings keep delivering both steadiness and growth over the long haul. With that, I'd like to hand things over to Jonathan so he can walk through our financial results in greater depth. Thank you, Sumit. 2024 marked yet another year of strong performance throughout every part of our operations.

We also have strong conviction that the distinctive nature of our platform, along with the money we're putting into our people, will keep producing reliably robust operating performance. Looking at the balance sheet, we're in a solid position to stay active in allocating capital, given substantial liquidity and only moderate leverage, as we close out the year with net debt to annualized pro forma adjusted EBITDA at 5.4 times. Our fixed charge coverage ratio sits at 4.7 times, which aligns with the 4.5 to 4.7 band we posted during 2023 and 2024. When the quarter ended, we had $3.7 billion in liquidity available, comprising $445 million of cash, unsettled forward equity, and remaining room on our $4.25 billion revolving credit facility. Our variable rate debt exposure is still small, making up just 4.2% of the total debt principal we owe as of year-end. The steadiness of our cash generation and the reliability of our balance sheet continue to be a core advantage of our platform, supporting our lengthy history of raising the monthly dividend. We take pride in being among 66 businesses in the S&P 500 Dividend Aristocrats Index, recognized for raising our dividend for thirty straight years. The latest raise kicks in with the March monthly dividend payment, amounting to a 1.5% bump to its present monthly dividend and a 4.5% gain versus the same period last year. This marks our 129th dividend hike and our 656th consecutive monthly dividend declared since we listed in 1994, and we stay thankful for the enduring backing from our income-focused shareholders. The breadth and depth of our cash flow diversification, plus the income-focused character of our investments, lead to reduced earnings swings across economic cycles and set our platform apart both within the wider real estate sector and the investment landscape overall. We would be careless not to also recognize the skill, expertise, and dedication of nearly 500 professionals around the world who work hard to grow and safeguard the dividend. From where we stand, combining these attributes gives Realty Income a distinct edge to tap into this ecosystem and propel capital partnerships in future years. As we noted in our earnings press release, our board approved the common stock repurchase program worth $2 billion. To clarify, we plan for any buyback activity to keep leverage unchanged, since we intend to use money from asset sales or free cash flow to finance whatever we do under the program. Although we're still confident about our capacity to find, evaluate, and finalize top-tier investment opportunities at favorable spreads or cost of capital, it makes sense for us to keep this instrument on hand to put capital to work swiftly if a chance arises. I'll now turn things back to Sumit to wrap up our prepared comments.

Appreciate that, Jonathan. To wrap up, what we achieved in 2024 shows we have a demonstrated history of delivering results, backed by how steady our portfolio is, the skill and experience of our people, and the strength of our balance sheet. Our goal is to serve as the real estate partner for the top companies around the globe. And the ties we've established across many years keep bringing added value to our firm, which the fourth quarter made clear. As we look ahead, our pipeline is still active, and the chances to work alongside operators who excel at their craft are heartening — evidence of what our company brings to the table. At this point I'd like to turn the call over to questions. Operator?

Fereal Grenad from BOA has our first question today. Go right ahead. Hello, and I appreciate you taking my question. To start, I'd like to ask about your cap rates—both what you expect moving forward and what visibility you have right now. What direction do you see cap rates taking? And how does that factor into your cost of capital at present?

That's a good one, Fereal. Given the pipeline we have on hand at the moment, my expectation would be that cap rates land very close to the level we averaged during 2024.

All right, thanks. Then when it comes to recycling capital, I'd like to hear your thinking there. At the close of 2024, as I recall, you offered some guidance. Going forward, what portion of your acquisitions do you expect capital recycling to cover? Or anything else you could add.

Sure; at this point in the year, full guidance and visibility on that are somewhat premature, though for modeling purposes you may take it as given.

All right. Thanks.

Our following question today is from John Kilichowski at Wells Fargo. Kindly proceed. Thanks. Good afternoon. Perhaps we could begin with the buyback plan. I'm wondering, what's the level for you at which those shares, or, you know, at which your equity turns into something a bit more appealing compared with other choices for your, you know, your capital? And does the guidance factor in any repurchases?

Well, John, you know, that depends on what the market is showing us right now. Consider what has taken place over the past 4 months, ever since the Fed began cutting rates; in October, we reached our 52-week peak at nearly $65. Then, within just 3 months, we had fallen to $51. Against that kind of environment, where, you know, our business fundamentals aren't necessarily—this is a device we think we ought to have. Let me be very clear: buybacks will be funded solely by free cash flow from operations and disposition proceeds, done on a leverage-neutral basis. And it's a choice we felt we had to keep for the coming 3 years, which our board has approved. That's in case we keep witnessing this degree of market swings. Ultimately, we are investors; and should the strongest economic call be to repurchase the stock, given the volatility we're seeing, then that's the one we'll opt to make. Yet what we expect and hope is that we won't need to rely on this device. Still, it's one we believed we required as an available option.

Got it. And then, maybe I can move on to how solid the portfolio looks overall when you take the guidance into account. Compared with a year ago, non-reimbursable expenses are up a bit, and your bad debt provision sits at seventy-five bps — I think a year earlier you were closer to the thirty bp level. What I'm trying to figure out is whether those numbers mainly show caution on your end as you head into the year, or whether you're seeing something in the market among your tenants that pushes you toward being more careful about tenant credit.

Hi, John. On your first question, the guidance we gave is 1.4 to 1.7% for unreimbursed property expenses. That's closer to a new run rate, though we baked in some assumption there for carry costs associated with vacant properties. And so, obviously, our hope is to do better than that. In 2024 we finished near the lower end of that range; but at the upper end, closer to 1.7, it's really just uncertainty about how quickly we can get rid of some vacancies. Now on bad debt expense, in 2024 we came in around fifty basis points as a percentage of revenue for bad debt expense. So the seventy-five reflects a bit of an increase. As Sumit mentioned in prepared remarks, there truly aren't any surprises. A small set of three tenants makes up most of it; and these are mostly tenants we underwrote through earlier M&A transactions. So some conservatism. I think it's just about getting those properties back, and in a lot of these cases, we expect to do pretty well on their recapture. There could be some short-term disruption, but overall, nothing that should concern us too much from where we stand — and that includes roughly $75 million tied to these situations.

Thanks.

Hi there, good afternoon. When you look at the transaction market right now, how do you weigh the balance among the US, Europe, and credit investments as you think about this year?

Yeah. Greg, it's still too soon to say for certain, though it's clear that the opportunities we found last year across the borders were in Europe and the UK. That's where most of our deals got done. Things shifted fast once the cost of capital backdrop and the markets moved. More sellers became willing to bring assets to market. Our cost of capital had gotten better, and we could complete deals at a spread we found acceptable given the risk we were taking on. We closed out the year at roughly a fifty-fifty division between international and the US. I'd say that, you know, as I sit here right now, that same division is likely where we land for 2025, though I want to add a caveat that it's still a bit early; and considering where things stood just two months back, it once again comes down to the sort of platform we've built, the pipeline we managed to create, and the speed at which we created that pipeline, which speaks to what we keep emphasizing about having a highly differentiated business model compared with anyone else in the space; and that's what gives us the confidence to put out a $4 billion, you know, guidance figure on the acquisition side. It comes from a mix of the pipeline already in hand and the visibility already in hand. That's why I could respond to the question about, you know, cap rates and where we expect to finish the year in 2025; and credit investments will definitely form a part of this composition, though it won't be outsized relative to, you know, what we delivered in 2024, it'll sit in a comparable ZIP code. But that's the visibility we have as of today.

All right, so can you share a bit about how things are going with additional capital deployments in Continental Europe? Which nations have you expanded into while growing the London and Amsterdam teams, and what makes the opportunities there appealing at this moment?

Yeah, that's an excellent question, Greg. This ongoing build-out of a highly seasoned group explains why our G&A expense level is staying roughly where it's sat over the past 12 months to 18 months. The reason is that we keep adding people in the UK and also in Amsterdam. Once that full-time group is set, that's what will let us keep scaling. As for new markets, nothing we've gone into hasn't already been made public. I believe Poland was the final one we'd flagged as a target market. Still, much of where we put money to work in Q4 was in markets where we're already well established. The UK accounted for most of it, and Spain ranked second for the number of Q4 investments we made; even so, these are the same nations where our presence already exists. Decathlon clearly gave us room to grow. Among the locations we operated in were Germany and Portugal. Beyond those, there's France, Italy, Spain, the UK, Ireland, and Poland. Those are the markets we're concentrating on.

Great. Thank you.

Good morning. Thanks for taking my question. During the fourth quarter, there were announcements that other REITs are expanding into the private fund space. Does that change how you view competition in that arena, and recognizing that those REITs aren't in different property sectors, how do you assess private capital appetite for net lease assets versus other real estate assets?

Brian, in some ways, this is a reaffirmation of the strategy that we announced. Look, we pride ourselves in being a very transparent company. We try to talk to our investor base prior to doing anything. And that's what we chose to do during the last quarter announcement. The point was to show the market that moving into private sources is just a logical next step for the business. In this area, we think we belong in the core plus space; for private investors, it's an ideal way in, letting them take real advantage of a platform we provide — roughly five hundred people, built up and refined across fifty-five years — together with the tools we've created. We think there's room for us; and, well, our marketing process has only just kicked off. The data room is now open. This part of our company genuinely has us thrilled. When you see other operators—and I mean highly successful ones—deciding to enter this arena, it confirms that the approach we've set out is the right one. So our confidence is high. We will capture our portion of the capital; we'll continue updating you on our progress the same way we've always done; yet we believe the sheer size of capital accessible here is so enormous that staying out of it would prevent us from carrying on with things we've already described—specifically, broadening where our equity capital comes from. And so far so good.

That wraps up my questions. I appreciate the additional detail.

Thanks, Brian.

Hey, I've got just a couple of quick questions. Going back to the pipeline, I'm curious whether there are any bigger deals in there, or whether it's mostly smaller ones — and maybe you could talk about the data center and gaming verticals and what activity looks like in those areas.

That's a great question, Ronald. So, here's the thing. Looking at the pipeline we have right now, there isn't one very large transaction — and by very large, we mean $500 million and above. These are your ordinary, right-down-the-middle kinds of opportunities, and we're quite pleased to have assembled a fairly strong pipeline. On the question of asset types, you brought up gaming and data centers. Let me start with gaming. By its very nature, gaming tends to be quite episodic. We do have a few conversations in progress. There's clearly a great deal of interest in your own backyard, Ron, as you're aware; we'll see how that all unfolds, but we believe there's a very long fuse attached to it when it comes to actually crossing the finish line. Data centers are a fascinating area. It's one we're quite enthusiastic about. That said, we're extremely deliberate about whom we choose to partner with, which leases we're comfortable being exposed to, which markets we're prepared to commit to, and above all, which operators or developers we want to build a long-term relationship with; we've all read headlines about Microsoft and other very large hyperscalers announcing they'll pull out of certain developments, and so on. Things like that keep us very diligent about whom we ultimately want to work with. The discussions we're having, and the ones we choose to move forward, are those we feel highly confident in when it comes to their competence and their track record. And not a borrowed track record — their genuine track record as an institution, plus their capacity to deliver product. Those factors have grown very important in our underwriting process. And ultimately, it comes down to the physical real estate: where is it situated, who is it being built for? What sort of leases are involved? Because no two data center leases are alike. And clearly, we've come to understand that through the many discussions we've had. So we think cloud services and AI will keep driving substantial demand for data centers. But we have to be extremely selective about which ones we invest in and who we invest alongside. That's my take on the data center space.

That's quite useful. My follow-up concerns the seventy-five basis point bad debt guidance. Separately, did a write-down on straight-line rents occur during the quarter? The real question, though, is whether this year is simply an unusually large one, or should we anticipate it settling back as the calendar moves forward? Or does it have a somewhat extended tail as the portfolio you purchased keeps rolling through? Thank you.

Hi, Ron. Regarding your first question, you're correct. In the fourth quarter, we recorded a straight-line rent write-down, mostly tied to the three tenants. The impact came to roughly $8 million, which is part of why straight-line came in somewhat below our run rate in Q4. Turning to how that expense load will trend going forward: I believe as we approach the midpoint and the end of the year, we'll clearly tighten the range somewhat. It's late February right now, and since many of these possible reserves are concentrated among three tenants representing roughly $0.03 per share of potential reserve, we're simply looking at a broad set of outcomes for them. Still, as additional information comes in, I think we'd hope to reduce that and trim our conservatism around it.

That wraps up my questions. Thank you very much.

Hi there, good afternoon; Maddie Fargis here, filling in for Smedes. Regarding the debt side, it appears you have slightly less than $2 billion of debt coming due in 2025. Could you discuss a bit your strategy for handling securities? And then perhaps looking forward, what about your debt maturing across the next couple of years too?

Hi Matty. As you’re aware, we’ve made a deliberate choice to spread out our maturities across each year. That’s something we’ve done quite purposefully. Looking at the current year, there’s still $1.9 billion maturing at roughly 4.2%, more or less. If we were to issue in US dollars right now—and this would all be ten-year unsecured—you’d likely see around 5.3. For Sterling, it would probably be 5.6, while euros might come in at 3.8. So much depends on which currency we use for refinancing, but if you assume dollar pricing and dollar debt, that’s maybe about a hundred basis points of headwind. All right. And if you take half your convention, since the average maturity date falls around mid-year, that could mean roughly a penny of dilution for 2025. Looking ahead, we’ve cycled through many periods. We’ve experienced a wide range of interest rate conditions. Recently, it’s been a headwind; a decade earlier, it was clearly a tailwind. Having that staggered maturity schedule and the options to access three different currencies, frankly, gives us flexibility, optionality, and the patience to wait for the right opportunity. That’s how we’ll keep managing our maturity risk. We also have a $4.25 billion revolver, of course. That gives us ample liquidity sources, so we don’t feel rushed to strike a deal on any specific day, week, or quarter.

Alright, thanks. Just to go back to the guidance for a moment. The range you've given for income tax expense appears to be above what we saw for the whole of 2024. Could you walk us through what might be behind that rise — any ins and outs worth noting?

Alright, so on the European front, it's been a busy year for us. Especially over in the UK. Over there, we're subject to a statutory tax rate. At this point, we've managed to bring that down to roughly 10 to 11% of NOI. And as we continue building out that European platform and acquiring properties in the UK, that run rate and those income taxes are going to start climbing. So in 2024, we recorded $66 million in income taxes, and that really reflects that 80 to 90 run rate. If you look at the Q4 income tax figure, that basically tells you what the new quarterly run rate is going to be. I'd stress that for every deal we bring before investment committee, we always factor in the impact of income taxes within our underwriting. Both on a near-term basis and on a long-term underwritten IRR basis.

Great. Thank you.

Hey, Rick. Thanks. Sumit, during your prepared remarks you brought up the sale-leaseback figure of 7.11 for the quarter. My guess is that cap rate came in fairly low. So I'm wondering whether you might discuss what gets traded off when you weigh a strong initial spread against the possibility that those properties would be a stronger fit inside the private capital vehicle.

Brad, there's quite a bit packed into that question, so let me attempt to address all of it. I won't get into the specific cap rate on 7-Eleven; however, as you're aware, the whole US deal we closed, which came in at more than a billion dollars, carried a 6.4 cap rate; and that clearly was the dominant piece, you know, of what we completed during that quarter. Another thing I'd add is that we have a lot of confidence that we managed to secure this portfolio at a minimum of a hundred basis points below where such assets change hands. If you examine just 2024 alone, and you count up how many 7-Eleven properties carry a fourteen-year or fifteen-year walt and incidentally, you'll find roughly forty-five transaction hits there. You'll see the average cap rate. The number's right around the bottom of the five range. And obviously, you know, deals like these trade anywhere from the upper fours up to roughly the middle of the five range. That's the spread you see for these kinds of assets. So, yeah — this is our sixth sale-leaseback deal together with 7-Eleven. They chose us as their partner, and it shows once more what we're all about. We're really pleased with this specific portfolio. You also brought up a second point, or at least you alluded to whether the fund business might have been a better fit for this. And yes, it would have been. I wouldn't necessarily say "better suited" is the best phrasing, but considering the return profile this deal offers to the fund business, it would still be a solid transaction. That said, we're quite at ease keeping it on our balance sheet. Here's a slightly different point I'd like to raise: during 2024, we originated roughly $43 billion in transactions, and this year we invested about $3.9 billion. We believe that if our fund business had been operational, we could have completed two additional deals. The reason is that some deals came our way that met nearly every criterion, but the upfront margin wasn't there, and without that margin we can't execute the way we need to on our balance sheet. So when we describe the fund side of the business as complementary, that's the idea — it fills in the gaps in what we can accomplish publicly, and it lets us genuinely leverage the platform we've constructed. That's exactly why we're thrilled to be in a position to bring in capital privately and use it to round out what we've already built on the public side. I appreciate the question.

Yeah, thanks for taking that. Then perhaps for Jonathan — regarding the office move-out you brought up during the prepared remarks. To start, does that account for the full $0.04 you referenced, or was it only part of that figure? And stepping back a bit, I realize it's a modest piece of the portfolio, but is this the largest possible shock within the office holdings, or could additional pressures emerge there?

I wouldn't characterize it as the $0.04. You know, it was heavily tied to a single asset, though a few others were involved too. For 2025, that effect landed closer to the one and a half cents range. On everything else — bear in mind that much of the office we've added came through M&A. At this point we don't foresee anything reaching that kind of materiality; this one specific asset within the portfolio has been on our radar for a while, so it wasn't unexpected. It occurred late in the year, which is why the annualized effect shows up.