Realty Income Corporation (O) Earnings Call Transcript & Summary

We appreciate everyone being here for the conference call covering Realty Income's operating results for the first quarter of 2025. Our President and Chief Executive Officer, Sumit Roy, along with Jonathan Pong, our Chief Financial Officer and Treasurer, will walk through what we've reported. Throughout this call, certain remarks we make could fall under the definition of forward-looking statements according to federal securities laws. It's possible the company's actual results down the road could vary substantially from what gets covered in any such forward-looking statements. A more thorough explanation of the elements that might lead to those variances will be included in the company's Form 10-Q filing. When we get to the Q&A segment, each participant is limited to 2 questions. Should you wish to pose more questions, simply get back into the queue. At this point I'll hand things over to Sumit Roy, our CEO.

Thanks, Kelsey. Hello, everyone. The results we posted for the first quarter at Realty Income show how strong, steady, and resilient our business model is, built as it is on a global portfolio that is heavily diversified. Being able to produce dependable results no matter how markets shift continues to be a defining feature of what we do. Throughout our history, we've deliberately spread our business model across different kinds of clients, different kinds of assets, and different parts of the world — an approach that's proving more and more worthwhile given the macroeconomic uncertainty we face right now. U.S. retail makes up 65% of our portfolio, and that portion includes top-tier clients that have shown they can weather economic cycles. With that in mind, because of how solid our client base is and how actively we manage the portfolio, we anticipate that only a negligible share of our clients will be materially affected by tariffs, something we've already factored into the credit assumptions we updated. The mix and caliber of what we hold, together with the stability we've proven as an operator, leave us well placed to handle outside pressures, just as we always have. Now for the specifics of the first quarter. AFFO per share came in at $1.06, which is 2.9% growth versus a year earlier; that extends our long-running record of positive AFFO per share growth in every year but 1 across our 30-year history as a public company. Alongside our 6% dividend yield, that growth produced total operational returns of 8.9% in the quarter, which highlights the worth of our platform. We drew on our varied sourcing channels to direct investment activity toward the most attractive opportunities we found, especially in Europe. All told, we put $1.4 billion to work at a 7.5% weighted average initial cash yield, a spread of 204 basis points above our short-term weighted average cost of capital. Notably, 5 transactions above $50 million generated 72% of our investment volume, one of many illustrations of how our size and scale create value. When we compete for high-quality net lease investments in the market, we keep enjoying a meaningful portfolio discount. Within the U.S., we invested $479 million at an 8.3% weighted average initial cash yield; in Europe, which represented 65% of total investment volume this quarter, we deployed $893 million at an average initial cash yield of 7%. As we grow the business and look to take advantage of the appealing dynamics in this large, fragmented market, the region keeps presenting compelling opportunities. Our international footprint and capabilities set us apart from the majority of net lease platforms. Crucially, that gives us geographic diversification, which helps us handle uncertainties specific to individual countries; this push into Europe shows how moving into new verticals can deliver immediate value and reach scalability in a fairly short period. We think our spending on talent, paired with how easily we can tap deep access to global capital markets, has let us reach scale without introducing extra risk to the enterprise. Back to the quarter now. Our diversified portfolio keeps producing solid operational results, and it now includes more than 15,600 properties across 91 industries and nearly 1,600 separate clients. Because our leading industries—grocery, convenience stores, and wholesale clubs—are inherently defensive, we view our clients as well positioned to weather a range of economic cycles. More than 34% of the clients we serve carry investment grade ratings, and their average rent coverage stands at 2.9x. As a reminder, more than 90% of the rent we collect from retail comes from clients we regard as offering consumers at least one of the following: nondiscretionary goods, low price points, or a service-oriented component. Throughout our lengthy operating history, we have repeatedly observed that businesses of this kind prove highly resilient when downturns occur. Along with the considerable diversification of our portfolio, we believe this gives investors relative safety, something our long-term operating results bear out; we closed the quarter at 98.5% portfolio occupancy, roughly 20 basis points under the previous quarter yet above the 98.2% historical median for 2010 to 2024. Across 194 leases, our rent recapture rate reached 103.9%, and renewals by the existing client accounted for 92% of leasing activity. As has been our historical experience, we achieved these results while using minimal lease incentives, which came to under $700,000 for the quarter against more than $46 million of rent from new annual rents signed. We also stayed active in how we approach optimizing the portfolio. We disposed of 55 properties, generating total net proceeds of $93 million, with $63 million of that tied to vacant properties. On the whole, we believe these results show that we operate from a position of strength as we keep leveraging our structural advantages, among them a well-capitalized balance sheet, enhanced liquidity, and unmatched scale. Those traits let us remain agile, work to seize opportunities throughout our addressable market, and stay disciplined in our capital allocation decisions. Above all, the platform we have built directly reflects the talent and experience of our dedicated team members. Turning to the rest of 2025, we stay confident in our capacity to meet our expectations despite present market uncertainties, drawing on the benefits of our diversified platform, which spans multiple geographies, asset types, and funding sources. Accordingly, we are maintaining our 2025 AFFO per share outlook in the range of $4.22 to $4.28. In line with last quarter's update, our 2025 forecast incorporates the expectation of 75 basis points of potential rent loss, most of it stemming from properties acquired through prior M&A transactions. Recent geopolitical uncertainties have brought no material surprises or incremental headwinds to our business. And although we stay vigilant, we believe our resilient, time-tested business model puts us in a good position to navigate potential challenges. In addition, we remain on track to deploy approximately $4 billion in investments throughout 2025. Given the advantages of our platform, we are well positioned to increase our capital deployment should attractive opportunities materialize. Even with all the volatility we're seeing across markets, our short-term weighted average cost of capital right now sits below where it stood back in late February, when we first rolled out the guidance for our 2025 investments. Before I hand things over to Jonathan, I want to give a quick update on the private capital business we've entered, known as Realty Income's U.S. Core Plus Fund. This effort marks a logical progression for our platform and a strategic chance to expand the sources of capital we draw on as well as our investment capabilities; formal marketing got underway during the first quarter, and the initial interest and warm response from big, prominent institutional investors has been encouraging. To us, that's a plain signal that the distinctive nature of Realty Income's platform, its scale and its lengthy record of performance is coming through loud and clear in the marketplace. Our expectation remains that this will unfold in a deliberate, step-by-step manner, improving our ability to tap significant capital sources as time goes on. We're eager to bring the market up to speed on how this is going when the moment is right; so with that, let me pass it to Jonathan, who will walk through our financial results and outlook in greater depth.

Thanks, Sumit. Building strong relationships sits at the heart of who we are, and we appreciate the sustained backing of every one of our stakeholders. Before we get into the first quarter's financial results, I'd like to call attention to 2 announcements from April that, in our view, demonstrate the confidence our investors and lenders have shown in how durable this franchise is. Early in April, we completed a $600 million 10-year unsecured bond offering, priced at 5.34% semiannual yield to maturity. We're thankful for the support of a very high-quality set of fixed income investors who took part in that transaction, which drew strong demand even against a volatile and uncertain economic backdrop. Last week, we announced the recast and expansion of our multicurrency unsecured credit facility, bringing its total size to $5.38 billion, up from our previous facility of $4.25 billion. That facility is made up of a $4 billion revolving credit facility for Realty Income, split evenly into $2 billion tranches, with initial maturities in 2027 and 2029, respectively. Given our current A3/A- credit ratings, borrowings will carry interest at 72.5 basis points over SOFR. Additionally, this includes the recast of a $1.38 billion unsecured facility for our U.S. Core Plus Fund, which, as Sumit noted, is in its initial marketing phase. The fund's facility will consist of a $1 billion unsecured revolving line of credit with an initial maturity date in 2029, plus a $380 million delayed draw 3-year unsecured term loan, creating a solid source of liquidity for the fund and providing meaningful debt capacity to chase investment opportunities in the second half of the year. From a balance sheet perspective, we're well positioned to stay active as capital allocators, with ample liquidity and modest leverage, as we ended the quarter with net debt to annualized pro forma adjusted EBITDA of 5.4x. Our fixed charge coverage ratio of 4.7x remains in line with the 4.5 to 4.7x range we've delivered over the last 2 years. Our exposure to variable rate debt is still limited, accounting for just over 6% of our outstanding debt principal at quarter end. As we look at the rest of the year, we see our long-term and permanent capital needs as manageable, and our liquidity and access to diverse sources of capital as strong. We're confident in our ability to lean into opportunities should this period of economic uncertainty persist. I'd now like to turn it back to Sumit to wrap up our prepared remarks.

Appreciate it, Jonathan. To wrap up, our attention stays on carrying out our plan in a disciplined way, backed by a portfolio that holds up well, a solid balance sheet, and skilled people worldwide. Being the monthly dividend company, we've always given capital back to our shareholders over the years, which highlights how dedicated we are to providing income streams that are predictable and dependable; we keep growing the business in a considered manner and building lasting, durable value for our shareholders. At this point I'd like to take questions. Operator?

I'd like to dig a bit into the activity you managed to get done during the first quarter. From the looks of it, most of that activity happened in Europe. Could you perhaps share what you're currently observing over there? And maybe how those opportunities stack up against what's available in the U.S.?

Thanks, Smedes — that's a great question. What makes Europe so compelling for us is that, clearly, with the investments we managed to complete, 65% of the total volume originated from Europe. The bulk of the portfolio consisted of retail parks we're targeting in the U.K. and Ireland. What stood out as very compelling about that specific group of transactions was that the rents we were underwriting sat well below what would be considered market rents. On top of that, we were acquiring these assets at replacement — actually well below replacement cost; and the fact that we now control a very wide swath of retail footprint is already beginning to show itself through calls coming our way from very large retail operators such as Little and a few others, who are quite interested in helping us reposition some of these retail parks and give them a presence so they can keep growing, which is their stated objective in these markets. This backdrop is clearly very favorable for our investment purposes, and that explains why the bulk of the investments came in from Europe. That said, we saw plenty of opportunities here in the U.S. As you've probably heard me say, we source roughly $22 billion worth of product, and more than 60% of it was here in the U.S. But when you look at some of the credit we were being asked to underwrite on the higher-yielding side of the curve, we simply couldn't get comfortable with the downside risk — the tail risks, if you will — on some of those credits. Still, we are seeing plenty of opportunities; it's finding the right risk-adjusted opportunity that's pushing us to invest more in Europe today. And you should kind of expect that to be the run rate for the first half of this year.

All right. All right. Let me just pose one additional question. You mentioned rent recapture came in at 103.9%, yet for that identical store group — the same roster of clients — my understanding is re-leasing slipped roughly 50 basis points, though other line items made up for it. Is something happening in your talks with tenants renewing at those locations that pushed it down somewhat? Or does that fall within the normal range, or...

No. Here's the thing — clearly, when you review recent quarters, renewals with clients already in place have performed much better. So this one is somewhat of an anomaly. Still, our practice is to examine it as a whole. The breakup we provide lets you observe that existing clients account for the overwhelming share of renewals. I'd attribute this to an anomaly, yet my recollection is it remained at 99.7%. And renewals overall sat comfortably above 100%, though there were, I believe, 3 theater assets — 3 or 4 theater assets — that pulled it somewhat under the 100% level, which is nonetheless quite a strong result.

Sumit, on investments you've reached 35% of this year's guidance, and Q1 tends to be among the lighter periods as well. Your guidance clearly hasn't moved. I'm wondering whether that simply mirrors how much uncertainty exists at the moment, or whether Q1 was just especially busy relative to what the pipeline suggests?

Thanks, Brad — good question. Here's how I'd put it: we're cautiously optimistic in a big way. What we were keen to avoid was taking our Q1 results and projecting them across the rest of the year. Uncertainty is considerable right now. Plenty of deals are out there, as our sourcing volumes indicate, but the challenge is landing the right ones for us. With outside forces at play — rates possibly staying elevated for longer, plus geopolitical and trade-related dynamics that still need to unfold — we preferred to lean toward caution. That's essentially why we didn't want to get too aggressive and revise guidance and so on this early in the year. Being very deliberate matters to us. Staying very focused matters to us, ensuring that any equity we deploy gets used in a highly appropriate manner. So that's mainly why we decided to keep the volume figures where they were.

All right, understood. Then regarding how tariffs might affect things, you went over a few of the areas you believed would be strongly inflated. I'm wondering whether there's anything within the portfolio you'd single out as perhaps genuinely experiencing some effect?

No. Nothing beyond what we already pointed to, which I think was back in February, when we anticipated certain of these developments unfolding. I walked through a roster of customers whom we considered more vulnerable to the consequences of tariffs being imposed; in our view, that is completely captured in the figures we provided regarding our guidance and our bad debt expense. Our confidence is high, and Zips strikes me as an ideal illustration of a case where we achieved a 100% renewal, along with a recapture rate of 94.3%, a touch above what we had projected at the start of the year. So, we believe we did well at underwriting how much these exogenous factors could affect our portfolio. As a result, we aren't anticipating anything further right now.

Regarding the U.S. Core Plus Fund amid this kind of economic turbulence, do you see this uncertainty as something that keeps other private purchasers away or competitors out of the picture, and that it helps given Realty Income's size and scale? Or in what way does the private fund operate in a climate such as this?

Ryan, I appreciate that. That is genuinely a strong question. In ordinary times, I would tell you that the situation all of us are going through right now would not be favorable for bringing in private capital; yet here is where I believe we distinguish ourselves. I am not aware of another business in our industry capable of doing what we are doing. And from all the discussions we are holding with these prospective investors, we are quite optimistic about hitting the targets we have set for collecting capital at a moment when, for the majority of others — I would add, even on the private side, those with a track record of bringing in private capital — this would be a tough climate in which to gather capital. Still, we are quite optimistic. We anticipate telling you the outcome later in this year; and so far, so good is how I would describe it; regarding — and I'm not sure whether that's what you meant, Ryan, private investors putting money into our domain, we have witnessed a large number of them arriving and wishing to build a net lease sleeve into their investments. Yet they also typically rely on greater leverage, and one could argue that our product is suited to greater leverage within the private sphere. However, because of the expense of debt and because of the higher interest rate climate, that will keep hindering their capacity to place investments in our area. Our investment profile is generally core, core plus, and so for them to produce the type of returns they normally aim to produce on their equity, this is not a favorable climate in which to invest. Thus, for a range of reasons, it truly does suit what we offer, our track record, our standing, and we are quite hopeful about completing a successful raise before this year is over.

Just a few quick items from me. To start, I'd like to spend a moment on the balance sheet and where your liquidity stands. During the quarter you cleared quite a bit of ATM, I believe $631 million. What's left, as I understand it, is $69 million. So I'm wondering how you're viewing the different funding options you have available, and what capital is needed to hit the acquisition target for the full year?

If you look at the $4 billion we've guided to for investments, you're correct that we're carrying $265 million of forward equity that's still outstanding. On a run rate basis we also generate roughly $650 million of free cash flow, which is naturally equity-like in character; and then debt would cover the remaining, let's call it, $2.6 billion, plus handle around $1.3 billion of refis coming due over the remainder of the year. That works out to roughly $2.2 billion in debt we'd bring in. And clearly, because of the backing we've been fortunate to get from fixed income investors, we're quite confident we can accomplish that across different currencies. So what's still missing, naturally, is fresh public equity, which we'd need to issue to close that gap. Running those numbers, you arrive at somewhere between $750 million and $800 million of new equity we may need to bring in over the rest of the year. That said, it ignores any dispositions we could pursue; so we're feeling quite good about the balance sheet's position, and from this point the sources and uses of cash look very, very sensible and modest regarding what we'd need to obtain from the public markets.

Understood, that's useful detail, Jon. Then one additional item, perhaps regarding the other investment made during the quarter — it appears to be solely on the development project, with a yield of approximately 10% and a term of just under 4 years. So perhaps you could share some insight into whom or what you are extending credit to, maybe the risk characteristics, and then your willingness to potentially engage in additional deals of this kind in the near future.

That's a solid question, Haendel. Indeed, this was an opportunistic loan extended by us to a private global developer operating in the data center sector; the project is a data center park currently under development in Virginia. Our end client is one of the major hyperscalers, carrying a very high investment-grade rating; and we hope this will result in eventual ownership, or a route toward owning these assets; therefore we are quite enthusiastic about this relationship. Once more, it demonstrates who we are, our size and scale, and the readiness of these highly established, very reputable private developers to collaborate with us directly.

Two brief items. Could you expand a bit further on the cap rates for the quarter, and even more crucially, what direction you anticipate as we head into this unpredictable climate.

Of course, Ron. The cap rate we managed to set, even without this loan, came in at just a touch above 7%. My view is that you ought to anticipate cap rates landing within that same vicinity. What's primarily behind this is a good deal of the ambiguity present, at minimum, over the short term. After things shake out regarding what will truly affect future capital raising and how the landscape appears from an interest rate standpoint, it's possible to begin sensing — it's possible to begin noticing some strain on cap rates. Yet at this moment, we had anticipated seeing that early in the year, frankly, and it hasn't happened; so we're somewhat in a holding pattern. And as the market gains clarity regarding, as I mentioned, where these policies will ultimately settle, my belief is the cap rate picture will become far more transparent. Despite all that, this situation actually works to our advantage in certain respects. Our cost of capital has gotten better over the course of the year. Consequently, given that cap rates will stay within the vicinity I just referenced, it lets us generate these above-average spreads, which clearly is advantageous; and that doesn't lack risk, which explains why here in the U.S., we decided against going after particular deals. Still, I believe it will assist in generating additional opportunities down the road, and we're eager to observe how matters resolve.

Excellent, and for my follow-up, I wanted to ask about strategy — as you consider pushing up the rent escalators across the whole portfolio, could you speak to a few of those other categories, such as gaming, Europe, and the data centers, and share your latest thinking on lifting the portfolio's overall rent escalators?

Yes. Once more, a terrific question, Ron. Look, I believe our approach to rent escalators comes at it from two directions. First, there's the organic rent growth we're aiming for. And you're absolutely right that particular asset classes, meaning industrial and data centers, typically carry more built-in rent escalators; but second, there's the playbook I was attempting to point to that we're putting to work in Europe, where the properties we're acquiring, in our view, have rents sitting well beneath market levels; and we believe we can realize that mark-to-market on those rents when renewal dates arrive; so if you look at what we accomplished in Europe during the first quarter, I think the WALT came in at just about 4 years. And it's with the goal of seizing that upside that we're taking on, or that we're underwriting, which is one more avenue for expanding the top line without having to depend solely on pure investments to generate growth.

I'd like to spend a little time on the retail parks. Sumit, you said those came with rents that were below market. What I'm wondering is what the yield turns into once they reach market levels; also, how much capital has gone into retail parks so far? And is there a limit you foresee on that spending?

Greg, everything in life has limits. That said, I can tell you the team has performed phenomenally here. Our reason for pursuing retail parks was that we began noticing what the sum of the parts analysis showed. Grocery was our target; home improvement operators such as B&Q were our target. Basically, we were obtaining the remaining portions of the parks for almost nothing; that's where it began. Yields at that point were comfortably above 8%, reaching even 9%. Two things drove that. First, institutional investors held these assets while undergoing a natural capital recycling process, or their investment time horizon was reaching its conclusion, which opened up these opportunities for us. From our first investment, roughly 3 years back, to the present day, cap rate compression has been enormous. These same assets now trade in the mid-6s; that means compression of at least 250, 300 basis points since we first began acquiring them. The rents we underwrote were, according to our original analysis, somewhere from 5% to 6% under today's market rents. Another dynamic beginning to emerge is our capacity — since we hold so much of this retail space — to approach certain retailers, brand-new retailers, IKEA, Little which I mentioned earlier, and so on. These names approach us saying that to carry out their growth plans, they want to be in these locations we now control. We're holding holistic conversations about both building these relationships with growing retailers and potentially generating a value uplift by bringing them into our retail parks. Beyond that — honestly, I'm so excited I could continue. We also have repositioning opportunities involving additional land inherited through this strategy. These are the methods we're using to generate growth, top line growth, by carrying out the strategy we started 3 years ago. It has been super, super successful. In the U.K., I'd say we're in the middle innings. Seventh, eighth inning of — well, not eighth, but seventh inning of a 9-inning investment cycle in retail parks. But across the rest of Europe, and for this similar strategy we're considering Western Europe, it's still early days. Ireland is the sole additional nation in which we possess a retail park, and there we recently completed a sizable portfolio; once more, the dynamics are comparable. Plus, it's speeding up our ties with several of those exceptionally pristine retailers that are eager to expand and wish to do so in the spots we currently hold. Consequently, the increase in value is enormous.

All right. And following up on that, could you remind us about the vacancy exposure you accept when you buy these properties, plus what CapEx they might require.

Yes. That's a wonderful question. What we've underwritten is a specific level of vacancy that accompanies not every park, but a few parks that we — I'd put it at 1% to 2% within that ZIP code of vacancy, if you looked across all our retail parks; and that's where you begin to notice, when we renew either with the current tenant or re-lease to a different tenant, we're witnessing an enormous amount of uplift. For example, during the prior quarter, the first quarter of 2025, we recorded a positive 7% recapture rate on those vacancies we've backfilled. And the CapEx required isn't materially different from what we've been investing here in the U.S., and I believe in my prepared remarks, I conveyed that to you. So we feel quite confident about the strategy we've put in place in the U.K. and now in Ireland. And it's — the flow-through is enormous. We were running the analysis. It has a very comparable flow-through to a net lease investment around the 95%, 96% ZIP code, and that's basically our EBITDA margin.

To start things off, Sumit, during the remarks you prepared, you mentioned certain opportunities you'd reviewed in the U.S. that you chose not to pursue due to tail risk — so I wanted to ask, was that raised simply to illustrate how your underwriting process works? Or is it more about drawing a contrast between the U.S. and Europe along with what the market offers?

Michael, it was a mix of those two things. Clearly, whenever we underwrite a given lease term, what you're factoring in is the credit exposure tied to that specific lease plus whether that operator can keep paying rent across the lease's duration. Should you reach the judgment that such duration will be interrupted, that alone doesn't automatically rule it out, provided we hold a very strong level of confidence in our capacity to refill that spot. In our view, though, that isn't something intrinsic to net lease investing. Whatever interruptions we underwrite lead to a timing delay in recovering the value as well as a disruption within the value creation process, and that's truly what — be it over here in Europe, I mean, whether you're in the U.S. or in Europe, what we're attempting to determine is the total expected return profile for each investment we make. And we go after those offering the strongest results, which, for us, we're discovering to be in Europe.

Understood. And for my follow-up: occupancy fell by 20 basis points, and it sounds like you also disposed of some empty properties, which includes — during the quarter you reduced exposure to Family Dollar, Dollar General leases, and CVS. So could you walk us through some of the moving parts behind the dispositions and the slight decline in occupancy over that period?

Yeah. Look, this was — we fully anticipated this. If you look at what we told you, Michael, regarding where occupancy would land, we said the mid 98% ZIP code, and that remains what we expect. We did experience some larger-than-normal vacancies during the first quarter, and those have mostly been worked out. You brought up Family Dollar and Dollar General. Yes, a few Family Dollar assets were sold by us while vacant. But I'll also tell you that 38 Dollar Generals reached their renewal point, and on those renewals we achieved over 109%. There were roughly 5 Dollar Tree, Family Dollar renewals in that mix as well, and that came in above 108.3% or 108.4%. So these operators keep holding on to their sites and keep performing quite strongly, particularly given the environment all of us are facing. Family Dollar remains somewhat of an uncertainty. We'll see how things ultimately shake out; but when it comes to Dollar General, Dollar Tree, those will keep doing well, as I see it.

Only a few items from my end. I suppose I'll stay with the underwriting subject for a moment. Regarding the — perhaps the lower-quality or greater-yielding chances you chose not to pursue during Q1, and perhaps that's roughly the approach you're continuing with. I mean, could you assist us in grasping whether it's tied more to the industry segment those properties belong to? Is it the way the entity is capitalized? Are these deals backed by sponsors in a private equity manner? Perhaps just flesh out the image a bit further along those lines, if that's alright?