Realty Income Corporation (O) Earnings Call Transcript & Summary

Property CEO Conference. I'm Nick Joseph joined by Smedes Rose with Citi Research. Pleased to have with us Realty Income and CEO, Sumit Roy. The session is for Citi clients only, and disclosures have been made available at the access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC 26 to submit any questions. Sumit, I'll hand it over to you to introduce your team and company, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today, and then we'll get into Q&A.

Sounds good, Nick. Thank you. To my left, I have Jonathan Pong, our CFO; to my right, I have [ Dan Ochinero ], who works very closely with Jonathan, and is helping me with my prepared remarks and answering questions. Thank you, and good morning. It's great to be back with Citi, and thank you to everyone for joining us today. And thank you, Smedes, for facilitating. Before I begin, I'll remind you that some of my comments today may be forward looking in nature, and I refer you to our SEC filing for a discussion of the risks and factors that could cause actual results to differ. 2025 was a year in which Realty Income's platform, discipline and global reach came together to deliver steady results while positioning the business for its next phase of growth. We generated AFFO per share of $4.28 for the full year, supported by $6.3 billion of gross investment volume, 98.9% occupancy and 103.9% rent recapture rate, reinforcing the durability and predictability of our cash flows. As we think about the investment case today, I would frame Realty income around 3 attributes that have defined the company for decades and continue to guide how we operate: trust, reliability and disciplined growth. First, trust. Built through stability by design. Our portfolio of more than 15,500 properties is diversified by client, industry and geography, with long-duration net leases and embedded rent escalators that provide visibility into future cash flow. Approximately 90% of our rent comes from nondiscretionary service-oriented or low price point businesses that have historically performed well across economic cycles. This structure has allowed us to deliver steady and reliable income growth, our dividend for more than 3 decades and consistently generate 8% to 12% total operational returns which is defined as AFFO growth plus dividend yield even during the periods of market distress and volatility. Second, reliability. Driven by disciplined capital allocation and risk management, in 2025, we deployed approximately $6.2 billion of capital on a pro rata basis at a 7.3% initial cash yield while maintaining conservative leverage and strong credit metrics. Importantly, that activity was underpinned by a high degree of selectivity. We sourced a record of more than $120 billion of opportunity globally and chose to close only a small fraction that met our risk-adjusted return thresholds. That discipline is central to how we protect capital, preserve balance sheet flexibility and compound value over time. Active asset management is a key extension of that discipline. Our proprietary predictive analytics platform provides early store level visibility into operating performance and tenant trends, allowing us to identify elevated risk well before it becomes apparent in reported results. These insights inform proactive decisions around dispositions, re-leasing and capital recycling. And have been instrumental in supporting high occupancy, strong rent recapture and resilient cash flows across the portfolio. Third, growth. Deliberate, flexible and increasingly global. Europe continues to be a meaningful driver of our business, representing approximately 19% of annualized base rent today. Our established European platform gives us access to a large fragmented market with attractive risk-adjusted returns, longer lease terms and differentiated financing opportunities. At the same time, the U.S. remains a core market. And as we move into 2026, we are seeing improving momentum across both geographies. In parallel, we've taken important steps to expand and diversify how we fund growth. During 2025, we successfully launched our inaugural U.S. Core Plus private fund, raising more than $1.5 billion of third-party equity from a high-quality institutional investor base. We also established and expanded strategic partnerships, including with GIC and Blackstone that allow us to pursue larger, more complex opportunities while preserving our underwriting standards and balance sheet strength. The rationale behind these initiatives is straightforward. They enhance our capital flexibility, expand our investable universe and allow us to deploy capital across property types and across the capital structure without compromising the core DNA of the company. Importantly, these various platforms are designed to be complementary to our public REIT model and accretive to long-term per share value, not a substitute for it. Looking ahead, we enter 2026 with a resilient core business, a strong balance sheet, ample liquidity and a deep global pipeline. Our priorities remain unchanged, allocate capital with discipline, protect the durability of our cash flows and continuously scale the business. We believe this approach positions Realty Income to continue delivering dependable income today while building the foundation for sustained growth over the long term. With that, I'll open it up for questions.

All right. Thank you. So you brought up a number of different things there. I thought maybe it might just be interesting to start out sort of big picture. You noted that you finished 2025 at $6.4 billion of investment. I think the guidance for $8 billion this year, that would include your fund business, which I guess, would not have been included in last year's numbers. Could you talk about just for the on-balance sheet it seems like we've seen a lot of momentum and activity for you guys as well as for others. What are you seeing -- what do you think is driving some of those opportunities that you're seeing? Kind of putting -- let's put aside the funds for just a moment and sort of on a comparable basis. I'm assuming it's like $6 billion to $7 billion, something like that, and we've got another $1 billion that will go into the -- your private stuff?

Right. So off the $8 billion, you're right, $7 billion is on balance sheet. $1 billion is going to be in the fund and other channels. What is driving the momentum? That's a great question. Look, 2.5 years ago, we thought about our business and what we identified as a single point of failure was our one source of equity capital, which was the public markets. And what we also realize that at points in time, the public markets tend to be untethered from the actual fundamentals of the operations of the business. We continue to perform yet we were trading at the lowest multiple that we've ever traded at in our history, and it seemed to persist that continued trading volume. And regardless of what we were doing on the operations side, regardless of the channels we were creating, that value was not manifesting in our stock price. And so one of the questions that we needed to answer internally was how do we diversify from this one single point of failure. How do we create channels that will allow us to execute this platform that is built to do $10 billion to $12 billion a year on a consistent basis. And how do we create value for our public shareholders through the answer to that question. And that's how we landed on the open-ended perpetual life Core fund, the flagship fund that we launched. It was the single most difficult answer. Everybody told us, it is going to be very difficult to do. Alternative asset managers were trying to do it. They were finding it difficult. And yet we said, we didn't want to go down the closed-end fund route. That's not how we think about investing in real estate. Our investment is long duration. The longer we hold, the less CapEx that we need to put in, and we're just collecting rent. That's how we create value. And so we needed capital that was very akin to our public equity capital, which was perpetual in nature, permanent in nature. And that's why we arrived at the most difficult answer, and we chose to go down that path. Fast forward to today, it has been quite successful. We've raised about $1.5 billion already. We are scheduled to raise $1.7 billion, and that will be the end of the cornerstone round. Along with creating this particular channel, we also wanted to form relationships with like-minded investors. GIC, we announced a partnership with them where we are going to be pursuing build-to-suit single-tenant net lease industrial assets here in the U.S. And we also leveraged that relationship to sort of embark into Mexico now our largest -- U.S.'s largest trading partner, given all of the nearshoring trends and onshoring trends that we are starting to see. And what gave us additional support was the client base that wanted to go in and build industrial assets or at least occupy industrial assets alongside us. And so leveraging GIC to go into a market where we didn't have the knowledge base, et cetera, was something that was very important to us. And then being able to attract transactions like the Blackstone transaction and CityCenter, where we invested $800 million with them and created a win-win situation on a very bespoke basis. I would argue that there are very few companies today who could do an open-ended fund, who could have a long-term relationship with GIC on a programmatic basis and who would attract Blackstone on a bilateral basis, where they pick up the phone, they call us. It's not a marketed process and enter into these types of transactions. That's what gives us momentum. That's what gives us the confidence. And now that we have created a diversification away from a single point of failure, which was our public equity and where it was trading, we have the confidence to be able to fully utilize a platform that's built for a lot more. That manifested in the pipeline that we were able to create and that pipeline allowed us to come in with an $8 billion forecast.

Okay. One of the knocks on Realty, and I think I brought this up with you last year, just in that lease world, the bigger you get, the more you have to do because it's an external growth vehicle. And you guys are kind of the epitome of that. And it seems like you've kind of -- I mean, you've kind of really broken through those concerns as these numbers keep going up. I mean do you think having the private -- I mean I know there's capital coming into the private fund and through these partnerships. But do you think just for regular kind of straight down the fairway acquisition volume, like you're getting more people coming to you or there's more opportunities being developed like sort of a virtuous circle, I guess, a little bit.

We are already starting to see that. I mean I mentioned Blackstone because everybody is familiar with Blackstone. They're the largest owner of real estate. But if you go to the U.K., oftentimes, we are the first call before any transaction is taken to the market, not any, but some of these larger transactions that are taken to market because we can do things fast. We can do it in a very efficient way and without making it public, which some of our counterparties want. And so look, for us, volume has never been the challenge. I think I've said this before in this conference that we are not opportunity constrained. We have always been capital constrained in terms of what we could do. Even last year, if you looked at the sourcing numbers, it was a high watermark for us, $120-plus billion of sourcing. Yet we ended up doing $6 billion, that's 5%. That doesn't mean that there was nothing else that we wanted to do. It's because we couldn't do it. We didn't have the right cost of capital to do it. And we've shared those numbers in the past as well, $2 billion to $3 billion that we had to pass on, not because it didn't meet the overall return profile, but it didn't meet my initial day 1 spread that our public investors invest into us for. So creating these channels now will allow us to do more and I will argue, Smedes, that having these channels actually helps us to create a higher return on every public equity that we are investing into our business. We have a chart in our investor deck that actually highlights that, that if we take an investment, call it, a 7% cap investment, and we are 20% owners for which I need public equity. And 80% is coming from private sources. And I get fees associated with managing this asset on that 80%. I have effectively gone spread plus fees on every dollar of public investment that I'm making. So it is a way to accelerate our growth. It is a way to enhance our return on equity being invested and play a game that is no longer just tied to spreads. It is spread plus fees.

Okay. Forgive me if I'm getting this wrong, but I think kind of the midpoint of your guidance for this year is around 3% AFFO growth on the $8 billion. So would you expect that to accelerate to 4% or 5% or more percent as you move forward? Like kind of what's the long-term growth story, I guess, for Realty at this point?

Yes. So if you look at historically, our long-term growth has been right around 5%. And everything we're doing is to get back there. And I already talked to you a little bit about the math. It's not going to happen overnight. But going from 2% last year to 3% this year. That's a 50% jump, if we keep that same trend rate, I think we're going to get back to our historic levels.

Should we assume 4% for next year?

That'll be 33% not 50%, but anyway.

I wanted to ask you also a little bit because I've been in -- obviously, we've had a number of different net lease meetings and one person was kind of like, no one should be including lease termination fees and their AFFO numbers. I'm not saying I agree with that. I'm just curious as to how you're thinking about because it has been a focal point really all of last year, and it's also this year, they've accelerated. You've talked about a more active approach to your portfolio. So maybe either you or Jonathan, I know this has been an area for you. Talk about lease termination fees, how you're thinking about it. What's kind of the impetus behind being more proactive around your portfolio and getting some clients out, I guess.

Look, I think I respect by the way, everyone's opinion on this, but we have to run the business the way we think it best. For us, we -- the biggest team that we have is our asset management and property management teams. We have tools that we have invested in for the last 7 years that are allowing us to identify risks in assets well in advance of lease expiration. The reasons could be as simple as the retail corridor has shifted and what used to be a great retail location in 7 years from now when the lease is going to be expiring, the chances of renewal has now diminished. So that foresight, that knowledge is what is allowing us to be far more active on the capital recycling side, which is the reason why we sold $744 million worth of -- we did dispositions last year, and we are marking it to a similar number in 2026. So with all of this intelligence that we're gathering and our ability to create a risk profile real-time because of tools that we have created that rely on machine learning and deep learning to help assess the comprehensive risk of a location, we are compelled to do certain things i.e., reach out to our clients, talk to them about certain locations that doesn't seem to be very profitable for them today. And the likelihood of it changing and becoming profitable is only going to diminish. So it's a win-win situation for us to go and engage in that conversation and try to find a higher and better use for that particular location today, when we get it back with the lease termination, then it would have been 7 years from now when the lease terminates and it's a vacant asset.

This is a way to go to them and be like, we don't think you're going to renew for the various reasons. So why don't you go ahead and just pay us a little break up fee now...

It could be that. Yes, it could be that. And that's a win-win for them because it's not a profitable store, but yet they have obligations that's going to last another 7 years. So it allows them to pay us a termination fee and get -- no longer have that obligation. We are either able to already have parallel conversations to somebody who could backfill that position with that business being more appropriate for that location. That's -- we call it double dip. It's a win situation for our existing clients. So it's the right outcome for a new client who wants to be in that location, and we are able to accelerate the outcomes that otherwise we'd all have been waiting for if it was a passive strategy. But we can do that because we have the right tools to be able to do that. And we want to be more proactive. We want to, at the end of the day, create the best economic outcomes for each one of these locations.

You mentioned machine learning. We talked about AI in the last couple of calls before. Do you want to talk about that and indeed, we're required to talk about that. But I wanted to ask you first just about your Las Vegas investment at CityCenter. I think it's preferred $800 million structured. I know there's kind of a minimum return that you would get. But kind of at the end of the day, is that a property that you would foresee just wanting to own outright. I mean, does that fit with your thoughts around gaming? You've talked about expanding there?

Yes. I would love to own it. That's the only reason why we are entering into a transaction that has a path to a ROFO. We do actually have a ROFO on that asset, but we can't afford it on the cap rate basis that these things will trade at today. So for us to create a win-with situation, we entered into this press structure when they were going through a refinancing. Blackstone was going through a refinancing. Those are precisely the type of assets that are continuing to do very well in Vegas, the very high whatever the right word is, the high end.

So benefiting from kind of the key economy that we've talked about...

Exactly. And MGM and Wynn both have talked about that. I mean if you look at what the Bellagio and CityCenter is producing in terms of EBITDA, they're still comping very positive. But then you look at the middle and the lower end of the spectrum, they're struggling. But we are -- our only exposure today to the strip is the Bellagio, where we own a 22% interest. And so with this investment, we have a path to ownership, if things align and if Blackstone ultimately wants to sell, 2 very iconic assets in CityCenter.

There's been -- and I realize the higher end properties have done better relative to the lower end counterparts. But do you think the concern -- there's been broad-based concerns around Vegas and visitation down and just lots of issues that have been in the media. I mean do you think this is impacting the pricing of the higher-end casinos? Or are they just kind of hanging in there with the very low cap rate/very high multiples of EBITDA.

Well, for us, there's equity behind us. So we have room. They don't have to trade at those levels. But those are the levels that are being marketed around when you do appraisals, et cetera, on those assets. Look, I think the biggest issue is when you look at some of these other concepts, by the way, I'm long Vegas with all of the sporting that is coming down their way, they're soon going to have a Major League Baseball team. It's about, okay, you have this pocket of capital discretionary capital that's going to be spent in Vegas, who's got the best mousetrap to attract that capital. And I'm going to argue that it is these higher-end ones. And until the middle and the lower end guys don't figure out that you can't have Starbucks selling $8 cups of coffee when your room is for $40, that is where that is causing a lot of heart ache. And until that -- it's not resolved, they're not going to be able to attract any of this discretionary capital. But in terms of momentum in Vegas, et cetera, I'm very comfortable with the investments that we have.

Okay. And just to finish out on that and then we're going to switch topics. But so on the regional kind of casino basis, you obviously have the Encore Boston. Any other cities or properties are attractive to you on that point on the sort of the more regional side?

Yes, New York, but...

New York.

There was only 1 asset in New York that was very attractive of the 3 that have been given out, but I don't think they need equity.

Which one do you like?

The Hard Rock or which -- that's the only one that I can think of -- that doesn't require equity capital. And it's the best, in my opinion, in terms of location, in terms of the scope, in terms of access. I think it will be a phenomenal site and Stevie Cohen and his group and Hard Rock, I think they're going to be formidable.

So if you could be involved in that, you'd be interested. I mean, obviously, your cost of capital is different from theirs...

We would be, but we can't. The banks are tripping over themselves to actually finance the business. I don't think they need any additional capital. So -- but talking more broadly about gaming. Look, we said we're going to go into gaming on a very selective basis. I think we've proven that to be true. That doesn't mean that we are not going to do stuff outside of Vegas. We did it in Boston. That asset has continued to perform very, very well. So it is about choosing the right partners and Hard Rock is definitely one of the better operators, and we'd love to partner with them. Win an MGM on the assets that we are exposed to. That's what we are looking for. And if it doesn't fit that ilk, it's not going to be of interest to us.

Okay. You've obviously used technology for many years. You have a large portfolio, lots of tenants, lots of underwriting and obviously, that's a big undertaking. So what is the opportunity of AI deployment to make that even more efficient than where you are today, both in terms of asset management, but then also on the acquisition process side?

So Nick, we are already using our tools through the entire workflow from when we source a transaction to actually helping us underwrite the transaction apply a comprehensive risk on each location that we are looking at. Then once it gets folded into our portfolio, the monitoring of those assets with the tool is an ongoing real-time exercise. And it helps identify disposition targets, which then get acted upon by asset management. So we have tools that do use elements of AI throughout the life cycle. We've also bought tools off-the-shelf to create scale and address -- minimize the risk associated with looking at invoices that are coming in through the AP process, and we have automated that entire process from looking at an invoice, transcribing that invoice electronically into a format that then goes through a workflow process, that's where humans come in to make sure that there aren't any that they are comfortable with the representation, then it gets approved. And then on the back end, there is Karibu that basically goes through the payment of those invoices, et cetera. Those are discrete solutions. What we are working on today is a quantum leap solution, which is to take all of our data and basically create a data lake house where regardless of where the data sits, some of it sits in Yardi, some of it sits in Spreadsheets, some of it, it's in other systems, et cetera, and bring it all into this data lake house, create Metadata from it. So first and foremost, let's create a normalized set where if you're calling something a location and calling it a building somewhere else, we have the same understanding of what it is. So one attribute per what that data looks like and then create the interrelationships. Once we finish that work, I think that's when we are going to start to create agentic AI and multi-agentic AI to help drive more scale benefits in our business. Today, we are about 60% to 70% of the data is very well organized, but still 30% to 40% of our data is in disparate sources that need to be brought in and then the interrelationships between all of these data needs to be established. Without doing that, I don't believe any company should be utilizing AIs to solve very discrete small problems because all of that will need to be redone when you really are trying to become an organization that is AI-centric. And so we are still a little ways away. We will create these discrete solutions, but that's not the long-term benefits of AI. I believe the path that I've just described to you that we are on is really what's going to be the quantum leap in terms of scale benefits that AI can bring.

Do you think that will mean -- I mean you already are very efficient from a G&A as a percentage of GAV or as a percentage of revenue, is this more on the margin? Or could this meaningfully change those metrics?

We will have to hire fewer people to do more. And that's ultimately the goal we want to get to. We saw what Jack Dorsey came out and said, it's a completely different business. Coding is getting disrupted. You can start to see that in the private capital side that was so exposed to that business. Our businesses at the end of the day is still people-centric. We don't have very clean data out there. CoStar is considered to be the source of all truth. Guess where they get their information. They call us and they say, what did you lease this asset at. And when we say we don't -- we were not sharing that information with you, they come up with a number. So we have a long ways to go. And at the end of the day, it is a tool, just like Microsoft Office was a tool just like the Internet became a tool to enhance scalability. That's what AI is going to do for us. It will help us underwrite better. It will help us abstract leases better. It will help us source information better. But at the end of the day, humans will be making the ultimate decision, and we'll own that decision.

All right. Yes. So you've sort of mentioned it, but you think in addition to just like corporate efficiencies you're going to help you underwrite future leases better and understand, I guess, where the puck is moving in terms of underlying real estate value, I guess?

I think so. Creation of an IC memo is still a cumbersome task. And all of that could be automated with the right agents, with the data being brought in, in a fashion that agents can use to create IC Spreadsheets, and IC packages, which goes beyond Spreadsheets. So yes, it's ultimately managing scale.

I wanted to ask you, just as your scope gets bigger and bigger and the investment dollars that we're talking about, regardless of on-balance sheet or through funds. What percent of your transactions, I guess, come through existing relationships? And how do you continue to forge new relationships? What are you kind of -- I guess, what boxes need to be checked? I would imagine you've turned down more than you accept, but kind of what makes it through the...

We sourced $120 billion, and we did $6 billion. So I'd say that's accurate. Look, I think the more established one gets in the market, the easier it becomes to create new channels of sourcing transactions. The more success that we are able to display with our partners, the more opportunities we're getting with them and Blackstone is a perfect example. When we did our first deal with them on the Bellagio that -- we got the second deal, which was the CityCenter. And now that we have successfully completed that, we hope that there'll be more channels to doing a lot more with the Blackstone. It's a similar story with GIC, we got to know GIC because they owned our stock. And we started talking about the net lease model. And they became big believers in the net lease business. They went and bought their own -- they took STORE private. And now they want to lean into it with one of the largest, if not the largest player in the space to continue to build out certain other elements of net lease investing that they don't have in-house right now. So I think those are the things that differentiate us. That's why people should think about us as a company to own is because we are uniquely doing things that I don't believe there's anybody else on this floor today in the net lease sector that has the ability to do.

Are there any other large sovereign wealth funds that own your shares?

They actually ended up -- GIC ended up investing in our -- as an LP in our open-ended fund just to show support. By the way, they don't do that anymore. They said we have a mandate that we don't invest in open-ended funds as a limited partner. We like to have JV structures where we have a say in the deal. But because of our other things that we are pursuing, we want to show support. That's a partnership.

I mean would you be surprised if in a year from now, you're working kind of with another sovereign wealth fund, sort of a similar type thing?

Look, it is very much a fact that all of the capital sources on the private side are looking to identify a few unique managers that they want to work with, who are executing very specific investment thesis. On the net lease, I think we are the team that people would like to partner with. And that's my belief. And so yes, if there are others that have unique strategies that they want us to work with, we'll be open to that.

We're going to round out with 2 quick questions.

Our 2 rapid-fire questions. Same-store NOI growth will include credit loss for the net lease sector overall next year in '27?

Net of credit loss, I would say 1%.

And then more fewer the same number of public net lease companies a year from now?

There are few of today. I would say the same.

Thank you very much.

Thank you for your time.