Realty Income Corporation (O) Earnings Call Transcript & Summary

Good morning. Welcome to Bank of America's 2026 Global Real Estate Conference. I'm Jana Galan, BofA's net lease REIT analyst. We're pleased to have with us Realty Income's CFO and Treasurer, Jonathan Pong, VP of Corporate Finance, Ryan Shannon, and Investor Relations, Alex Waters. Jonathan will start with a few opening remarks, and then we'll jump into Q&A and welcome the group to ask their questions as well.

Thanks, Jana. Thanks for having us. So for those of you that may not be as familiar with realty income, we are about $90 billion enterprise value. We're an S&P 500 REIT that importantly, and we take great pride in this. We are part of the S&P 500 dividend aristocrat and that's for having increased our dividend for now 31 consecutive years. We were founded in 1969, public since 1994. We view ourselves as the largest net lease company in the world. We own predominantly retail properties. So close to 80% of our annual base rent comes from retail, and this is essential retail properties our top tenant, for instance, includes the Dollar General and #2 is close behind that at 7-11. We own 15,600 properties in all 50 U.S. states. We're also in countries outside poster Europe. Some of the recent news for Realty Income we announced just Monday morning a new joint venture with KKR. This follows on the heels of a joint venture that we announced in March with Apollo. And really, the impetus of these joint ventures that we're doing, and it's part of a broader private capital strategy that we have established over the last 2 years is to continue to diversify our sources of equity away from the public markets. We'll continue to utilize the public markets, but this is a very capital-intensive business, given how much we raise to finance new acquisitions to grow earnings per share or AFO per share. So these joint ventures really allow us to tap into institutional pools of capital. They are really looking to provide their beneficiaries, the same type of income that we have provided our investors since 1969. And so I'm sure we're going to that in more detail, but that's really where we've been spending a lot of our time over the last 2 days at various investor meetings. With that, I'll conclude the prepared remarks, and we can go right into some of the questions here.

And Jana, before we start, I just want to make sure we are covered from a forward-looking statement position. But as a reminder, we may make statements that may be considered forward-looking statements under federal securities laws. The company's actual future results may differ significantly from matters discussed in any forward-looking statements. We will disclose in greater detail the factors that may cause such differences in the company's filings with the SEC.

Thank you, Alex. So -- big picture, Realty Income has evolved significantly over the last decade. How would you describe Realty Income today and what makes the company unique amongst your net lease peer set?

I would summarize by saying we've got a lot of levers to grow. So when you think about our business 10 years ago, we were not global. I think we weren't even in all 50 U.S. states. I know about 12 years ago, we were only about $15 billion enterprise value. So it'd be at $90 billion today to be in 10 different countries globally, and to now have multiple forms of capital to help finance our business beyond just the public equity markets. It really differentiates ourselves amongst our net lease peers. From our standpoint, we are much more diversified. We have the benefits of scale. We have a 95% EBITDA margin. And so this is a very efficient business, and it's one that gives us opportunities to invest across different property types, different transaction sizes that tend to be much larger and larger deals for us, we do wholesale discounts when we're competing against smaller peers who tend to invest in just smaller deals because they don't have the ability to diversify as much as we do. We have more liquidity. We're the only net lease REIT that has ratings really across the board, 1 of only 4 REITs that have 1 solid A rating. The other 3 are Prologis, Simon Properties and Public Storage. So there's a certain operational reputation that we also have that we've been using to really expand our business rather than just focusing on public capital. I think a lot of commercial real estate today that's held in private hands, appreciates the track record, the performance and really the specialty that we have in sourcing, underwriting and managing net lease real estate, and we've done that very well, I think, for 57 years now.

So as you think about the company today, I guess, in 10 years from now, do you feel like some of these paths it's still early? Or is it more you feel like some of it -- you feel you're middle stage and a lot more experience.

So not quite the first inning we've been at this now for the better part of 18 months or so, but you're starting to see the fruits of these efforts. And should be told, we started working on this strategy and creating this vision, I would say, 5 years ago. And so it's taken us a little bit of time to get rolling here. But I think a lot of what we've announced, whether it's early this year with the GIC joint venture, which is a development joint venture, our U.S. Core+ fund, where we closed on a $1.7 billion cornerstone equity raise in March. The Apollo joint venture, which we announced in March and now the KKR, which is a euro joint venture, we're now showing that we can expand that across borders. And so for us, we think that not lease is going to be an increasingly relevant property type or in a property type, it's really a subsector that can be any type of property. It's just a lease structure, but the demand for income given the aging baby boomer that has all that wealth that's looking to generate perpetual income until they die effectively as more of it as that sounds, it is a mega trend that I think we're uniquely positioned to take advantage of. So that can lend itself to more private capital vehicles and ultimately, was due for the Realty Income shareholder. It allows us to generate capital-light fee revenue and allows us to minimize the amount of public equity that we need to raise and that's a clear differentiator as we continue to grow globally and as we continue to invest in different property types that do require external capital. We want to diversify and not be beholden to just that one source public equity capital that our peers have to rely on solely.

Can I ask the question as you're shipping in structure, do you finally think about this income generator. Are you thinking yield plus growth? And how do you underwrite your yield at a spread both whatever cost of capital you're assessing? I'm not asking you to what -- how do you create your meal?

Great question. Mike, how you put it. At the end of the day, we are thinking about a long-term cost of capital, and we are underwriting long-term IRRs on an unlevered basis. Now as a public company, we do have to think about the day 1 or year 1 earnings accretion. And so for us, we think about cost of capital in 2 different ways. We make investment decisions at the end of the day based off of that long-term IRR, which burdens every dollar of equity, the same way, whether it's coming from free cash flow or whether it's coming from external capital. We think about our debt cost as our indicative cost of 10-year debt to match duration of asset and liability. I mean, think about that cost of debt has a blended approach across all the currencies that we invested euro, sterling and dollars. That's really the long-term cost of capital. And every deal that we underwrite over the initial lease term has to meet or exceed what is effectively a long-term unlevered weighted average cost of capital that's in the 8% area. When we think about the short-term weighted average cost of capital -- it's a very straightforward concept for every dollar that we invest, the source of those funds does that dilute our earnings. Yes, we understand there's an opportunity cost to that. But as a cost that dilutes earnings over the next 12 months, there's no cost. That's just internally generated cash. but we also have to raise external equity from the public markets, let's put the private capital to the side. That external cost of equity is really a function of our stock price. And so it's basically our AFFO yield. Obviously, as stock prices come down, that cost goes up and vice versa. And then the cost of debt is really the same. It's the cost of that 10-year cost of unsecured debt, which for us is another differentiator given that we have the highest credit ratings within our peer group. And we do demand a meaningful spread on that short-term weighted average cost of capital because we obviously want to be accretive on a per share basis as we are deploying that capital. But when we're thinking about just the net lease investment in general, day 1 yield is relevant for the public market. and really for both the public and private investors. We're looking for a long-term contractual growth in our leases that allow us to blend out to a very attractive long-term IRR. And it's really that growth piece. That growth piece is what private capital allows us to do more of because we are now able to invest in assets that maybe don't have that very high yield day 1, but it has a modest year of decent yield, but more importantly, it gives us 2% or 3% rent growth throughout a 15-year lease term or in some cases, even 20 years. So you're blending out now we're a 15- to 20-year hold with very good credit quality and with aggregate cash flows that really every commercial real estate investor is looking to achieve, and we're doing with a fraction of that you see in other property types.

So the company has evolved. Is your competition at this point really for the third-party capital. So let's just say the Prologis is, the PSAs, the Blackstones or your triple net peers?

I think it's really both. In these conferences that we have, there's obviously quite a bit of capital formation on the public side, amongst other net lease and peers and competitors. And that to a fairly competitive market that has put a lid on cap rates here in the U.S. When you think about investments abroad, especially in Europe, we do feel as though there is significantly less competition. It's very complicated. It's very resource-intensive to build an international business, and we've been doing it for the last 7 years. There is less public competitors that are operating in that market, and there's less private capital formation investing in that lease. So we feel like that's a very attractive region for us to continue investing. On the private capital side, we're not the incumbent or the new kid in the block. And so truth be told, that we have to prove ourselves in the Spark with joint ventures with key partners, we very much believe and showing that we can do what we've been capable of and what we've shown through our company's history, but we need to prove it in the context of these new joint ventures, and we fully intend to do that. For the Core+ fund, which is a perpetual open-ended performance in the early days of the first time fund manager is extremely important because we are competing against folks that have been doing this private capital model for a lot longer than we have. So we are very grateful and appreciative that we're able to raise $1.7 billion as a first-time fund manager in an environment where open and perpetual capital in commercial real estate is not exactly a very significant volume of the market today. But I think when people heard our trigger, how we run the business, how we have a very unique mouse trap in this one single niche. We are very grateful for the support that we got. And now we just got to show that performance really over the first 3 years. That's really the key time frame to show what kind of returns you can provide for investors on the private side.

Maybe turning to external growth. It's been a tremendous year, and yet you've raised guidance once again for 2026. Curious where you're seeing the most opportunities today across asset classes and geographies?

And definitely Europe, I think this is a competitive advantage because when you think about the competitive moat, especially as we're competing against European institutional capital, we do have access to the U.S. capital markets, which is extremely deep, extremely efficient and gives us cost and access that many competitors in Europe don't have. We have a $5.5 billion revolver. That gives us immediate liquidity. We can do deals of significant size. We have a program available to us in the U.S. called an ATM, which is basically giving us immediate liquidity. And to equity proceeds, and we are a very liquid stock that trades between $300 million and $400 million a day in the stock exchange here. And so we can leverage that to raise quite a bit of equity if we wanted to. We also have a significant platform of 580-odd individuals today globally. We have a London team that is now pushing 70 individuals and so it's a real company with every function represented. So we think all these competitive advantages that we've been able to benefit from in the U.S. are completely transportable across borders. And that's where we see, as a result, significant opportunities for us to deploy capital. I also think in a high rate environment, and the ability to invest across the capital stack, especially in debt investments that are strategic in nature is where we're seeing a lot of good opportunities. And -- to be clear, we're investing in debt securities that are associated with tenants or partners where we would want to own the real estate. We're not a merchant vendor. We're not a bank. We're looking to strategically place capital to build a relationship to invest in a more senior part of the capital stack. And importantly, in many cases, we utilized that as a way to potentially convert that investment into common equity ownership into the real estate after a period of time. And so if you can be more senior in the capital stack, if you can generate yields that are in the high single digits, and to do it in a strategic manner, that's something where we see a lot of opportunity in a high rate environment with the 10-year now north of 5%.

And if you look at investment yields today, kind of where are they with what you saw in the first half of the year? And what's your outlook for investment spreads going forward given this higher rate environment?

Sure. So I think investment cap rates -- and I will just share it as of 6/30, have been pretty stable. It remains to be seen with where we are today with the backup in yields on the long end of the curve. How quickly cap rates and investment yield and just .

What you're thinking about it because it looks to some of the investors that it's kind of a credit agency and drama 2.0 is not if I'm not doing it, someone else on the other side of a stretch well if you see what I mean. Well, you guys are the real market maker because you do invest tons of money, and that's really manic. And it looks like there is a gap between book values -- and you really to pay on this famous question around what spread do you need? And are you going to contract that spread or you going to lower the price?

So it really depends on the opportunity. not all deals are created equal and not all cap rates and yields carry the return per unit of risk dynamic. All things equal with a 5% 10-year yield and with the cost of capital that is higher today than it was 3 months ago. I think everyone investing in net lease is not going to be as active or won't have the ability to be as active unless they get more creative. And for us, one of the themes is that we've got multiple levers to pull. We don't have to just rely on the retail investment grade net lease market in the U.S., for instance. And so we are seeing opportunities across the capital stack, across geographies and importantly, at the source of those funds, we're not just raising ATM equity here in the U.S. We also have access to private forms of equity. We have $1 billion of annual free cash flow. As of the end of the second quarter, I believe we had $1.2 billion of unsettled forward equity that provided immediate liquidity at a known cost to us. We got ahead of a lot of our debt needs by doing a convertible debt offering that raised $1 billion at 3.75% recently. So we've got a lot of ways to generate very meaningful spreads. But to be clear, if the cap rate environment continues to be pressure in certain areas, we have never felt like we should be buying for the sake of buying and posting numbers. We're focused on per share accretion, but we can do that in multiple ways, and we're going to continue to have that mentality. It's all based off of, yes, long-term IRRs. But as a public company, we also are focused on year 1 earnings accretion.