REALTY INCOME CORP Q3 FY2024 earnings call

• Realty Income highlighted continued momentum, with increased 2024 investment volume guidance to approximately $3.5 billion and raised AFFO per share guidance to $4.17 to $4.21.
• They invested $740 million in Q3 in high-quality opportunities with a blended initial cash yield of 7.4%.
• International markets contributed a greater share of investment volume year-to-date.
• Portfolio operations showed 98.7% occupancy, and rent recapture on renewals was 105% totaling ~$38 million in new annualized cash rent.
• The company has a strong balance sheet with A3/A- credit ratings, net debt to annualized pro forma adjusted EBITDA at 5.4x, and fixed charge coverage ratio at 4.6x.
• Progress is being made on a private capital fund, which offers access to larger equity pools, less pricing volatility, and incremental fee earnings.

Realty Income delivered AFFO per share of $1.05 in the third quarter, representing a 2.9% growth compared to the prior year. They invested $740 million in Q3 at a blended 7.4% initial cash yield. Of this, $378 million was invested in the U.S. at a 7.4% initial cash yield and $362 million in Europe at a 7.3% initial cash yield. The company completed 70 discrete transactions, including four over $50 million, which accounted for nearly 60% of investment volume. Portfolio occupancy was 98.7% at quarter end, and they sold 92 properties for $249 million in Q3. Year-to-date asset sales totaled $451 million, with an expectation of $550 million to $600 million for the year.

• Increased 2024 investment volume guidance to approximately $3.5 billion.
• Raised the low end of AFFO per share guidance for 2024 to a range of $4.17 to $4.21.
• Implied fourth quarter investments of approximately $1.3 billion.

• Volatility in the cost of capital.
• Competition from private arms in the transaction market.
• Credit risks, though the credit watch list decreased to 4.2% from the prior quarter.

Q: John Kilichowski from Wells Fargo asked about acquisition guide, cap rate compression, and 7-Eleven deal.

A: Sumit Roy responded about cap rate vs cost of capital, fourth quarter pipeline, and 7-Eleven transactions, stating that despite cap rate compression, cost of capital improvement made transactions accretive, and they are in the one-off market daily with transactions at 5 to 9 cap rates.

Q: Greg McGinniss from Scotiabank asked about private capital fund cost of equity and investment philosophy.

A: Sumit Roy discussed the difference between private and public markets focus on spread vs long-term IRR, and how private capital allows pursuing assets with higher long-term return potential but lower initial yield.

Q: Brad Heffern from RBC Capital Markets asked about overlap in investment profiles between the fund and core business.

A: Sumit Roy said interests are aligned, and the fund will pursue transactions that enhance the box for both entities.

Q: Smedes Rose from Citigroup asked about the scope of the private capital fund.

A: Sumit Roy stated it's too early to determine the size, but believes it will benefit public shareholders.

Q: Jay Kornreich from SMBC asked about opportunities in Europe and if acquisition volume in Europe would outpace the U.S.

A: Sumit Roy said Europe had 56% of year-to-date investments, momentum will continue, and the $1.3 billion expected in Q4 will revert to historical U.S.-international norms.

Q: Linda Tsai from Jefferies asked about bad debt year-to-date and C-store write-down impact.

A: Jonathan Pong said bad debt expense was ~$6 million year-to-date, and the C-store write-down is built into guidance with historical recapture rates around 84-85%.

Q: Ronald Kamdem from Morgan Stanley asked about fund differences and dividend policy.

A: Sumit Roy said fund investors have different mandates, and the fund will pursue investments with similar flow-through to public equity.

Q: R.J. Milligan from Raymond James asked about fund investments and cost of equity.

A: Sumit Roy explained the difference in focus on day one spread vs long-term hurdle rate, and the fund will allow pursuing assets meeting long-term hurdles with lower initial yield.

Q: Greg McGinniss from Scotiabank asked about developments and fund contributions.

A: Sumit Roy said developments will be leased up with expected incremental yield, and the fund will pursue new transactions rather than contributing existing properties initially.

Q: Wes Golladay from Baird asked about development pipeline leasing.

A: Sumit Roy said they partner with Panattoni and are confident in leasing up developments with expected incremental yield.