REALTY INCOME CORP Q4 FY2024 earnings call

• 2024 saw AFFO per share growth of 4.8%, with a 5.4% dividend yield resulting in a total operational return of 10.2% for the year, and no negative return in its 30-year public company history.
• In 2024, it invested $3.9 billion at a 7.4% weighted average initial cash yield, with a 243 basis points investment spread, exceeding the historical average of 150 basis points.
• In the fourth quarter, it invested $1.7 billion at a 7.1% weighted average initial cash yield, 57% of the annualized cash income was from investment-grade clients. It completed 73 discrete transactions, including six transactions over $50 million.
• In the US, it invested $1.1 billion at a 6.4% weighted average initial cash yield and a 14-year weighted average lease term. In Europe, it invested $650 million at an 8.2% weighted average initial cash yield and a 7-year weighted average lease term.
• Operationally, it has a diversified portfolio of over 15,600 properties. In the fourth quarter, portfolio occupancy was 98.7%, and the entry capture rate on 266 lease renewals was 107.4%, generating approximately $52 million in new annualized cash rent. In 2024, it recognized $21 million in nonrecurring lease termination fees, providing a $0.02 AFFO benefit.
• It closed a $770 million sale-leaseback transaction with 7-Eleven, which is its top client at 3.5% of its annualized rent. It launched a private capital initiative to expand investment opportunities.

In 2024, Realty Income achieved AFFO per share growth of 4.8%. For the fourth quarter, AFFO per share was $1.05, representing growth of 4%. In 2024, the company invested $3.9 billion at a 7.4% weighted average initial cash yield. In the fourth quarter, it invested $1.7 billion into high-quality opportunities at a 7.1% weighted average initial cash yield. Approximately 57% of the annualized cash income generated was from investment-grade clients. The company completed 73 discrete transactions, including six transactions with total considerations over $50 million, with one being over $500 million, which together represented nearly 80% of its investment volume. In the US, it invested $1.1 billion at a 6.4% weighted average initial cash yield and a weighted average lease term of approximately 14 years. In Europe, it invested $650 million at an 8.2% weighted average initial cash yield and a weighted average lease term of approximately 7 years.

• It forecasts AFFO per share in the range of $4.22 to $4.28 for 2025, representing 1.4% growth at the midpoint.
• It expects to invest approximately $4 billion in 2025. The outlook incorporates a provision for 75 basis points of potential rent loss and an impact from the move out of a large office tenant, which results in a $0.04 negative effect on AFFO this year, but also presents an opportunity to cycle out of underperforming clients. The $21 million in nonrecurring lease termination fees in 2024 are not assumed to repeat in 2025.

• Tenant credit risk: There are potential rent losses, especially for tenants in industries affected by macroeconomic factors and policies.
• Market volatility risk: Affects the cost of capital and investment returns.
• Debt maturity risk: Nearly $2 billion of debt matures in 2025, and refinancing may be affected by market conditions.

Q: Please comment on cap rates and expectations going forward and current line of sight, and how it applies to cost of capital today.

A: Sumit Roy said he would assume that based on the current pipeline, cap rates are going to be right around where they averaged in 2024.

Q: How are you thinking about capital recycling and how much of it would fund acquisitions going forward?

A: Sumit Roy said it's a little early in the year to give complete guidance and visibility on that front, but you can assume for modeling purposes.

Q: What's the threshold for share repurchase program where equity becomes more attractive than other options for capital, and are any repurchases contemplated in guidance?

A: Sumit Roy said it's a function of what's seen in the market today. The company will only use free cash flow from operations and disposition proceeds to do buybacks on a leverage-neutral basis, and it's an option the company believes it needed to have.

Q: Regarding the non-reimbursable expense and bad debt provision, are these numbers more a function of conservatism or seeing something in the market from tenants?

A: Jonathan Pong said the guidance for unreimbursed property expenses is closer to a new run rate, albeit with some assumption for carry costs associated with vacant properties. For bad debt expense, in 2024 it finished close to fifty basis points as a percentage of revenue, the seventy-five basis points is a bit of an uptick due to a handful of tenants, and it's a little conservative but nothing to be overly concerned about overall.

Q: How are you thinking about the split between US versus Europe versus credit investments for the year?

A: Sumit Roy said it's too early to tell, but it's probably going to be about a fifty-fifty split between international and the US for 2025, but it's a little early.

Q: Could you give info on progress on further investments into Continental Europe, which countries you've moved into and what excites about opportunities there?

A: Sumit Roy said it's continuing to build out the team in the UK and Amsterdam. The countries focused on include the UK, Spain, Poland, Germany, Portugal, France, Italy, Ireland, etc.

Q: With announcements of other REITs expanding into the private fund space, does this alter your view on competition in that arena and how do you gauge private capital appetite for net lease assets versus other real estate assets?

A: Sumit Roy said it's a reaffirmation of the company's strategy. The company believes it has a place in the core plus arena within this space and is excited about the private capital initiative as it diversifies sources of equity capital.

Q: Just wondering if there's any sort of larger sort of deals in the pipeline in data centers and the gaming verticals and what the activity is looking like there.

A: Sumit Roy said in the pipeline there are no very large transactions defined as $500 million and above. In gaming, it's very episodic with a few conversations ongoing. In data centers, it's an interesting space but very selective due to factors like who the operators are and the leases, as cloud services and AI drive demand but need to be hyper-selective.

Q: On the bad debt guidance of seventy-five basis points, was there a write-down in the quarter on straight-line rents and is it a unique outsized year or will it normalize?

A: Jonathan Pong said there was a straight-line rent write-down in the fourth quarter, primarily associated with three tenants, about an $8 million impact. As for the go-forward trajectory, as they get closer to the midpoint and end of the year, they'll narrow the range and expect to bring down the conservatism.

Q: Just on the debt side, it looks like you have just under $2 billion of debt maturing in 2025. Can you talk a little bit about your plan to address securities and do your debt coming due over the next couple of years as well?

A: Jonathan Pong said they have intentionally staggered their maturities. A lot depends on the currency in which they refi. They have a $4.25 billion revolver, providing flexibility and optionality to manage maturity risk.

Q: Your guidance range for the income tax expense it looks like it comes in higher than full year 2024. Can you talk a little bit about what's maybe driving that increase some puts and takes there?

A: Jonathan Pong said they've had an active year on the European side, particularly in the UK, and as they built up the European platform and bought properties in the UK, income taxes have crept up.

Q: Sumit, you mentioned in the prepared comments the sale-leaseback was 7.11 in the quarter. I'm just curious if you could talk about the trade-off there between quality initial spread and those assets potentially fit in better with the private capital vehicle?

A: Sumit Roy said there's a lot to it. The US transaction in the quarter was at a 6.4% cap rate. They feel confident they got the portfolio at a discount. The sale-leaseback with 7-Eleven is fine on balance sheet, and the private capital business is complementary to the public side.

Q: Just starting with going back to the private capital fund, as you've had several additional months to assess how it would take form after initially announcing it, are there any updates you can provide us to the initial size you foresee for it and when you anticipate beginning?

A: Sumit Roy said it's too early to tell, the data room just opened last week, and they've had a few initial meetings, but too early to tell in terms of target size.

Q: As we think about funding for this year, let's say you have $92 million of unsettled forward equity, $45 million of cash, with the guidance showing $4 billion of acquisitions intended for, just would be curious to hear a thought on how you plan to on the acquisition pipeline and if you would raise equity at current trading levels.

A: Jonathan Pong said when you look at the combination of cash, unsettled forwards, and annual free cash flow, and the disposition program, they have equity-like sources of capital that cover a significant portion of the buying power, and they made assumptions into their forecast based on the weighted average cost of capital to come up with the $4 billion number.

Q: Can you offer some color on tenant credit? Which tenants or categories are currently on your watch list? What are the embedded reserves? And does the seventy-five bit reserve that you mentioned earlier include only known store closures or bankruptcy at this point or any does it include any speculative bankruptcies or shortcrustries?

A: Sumit Roy said the seventy-five basis points includes general reserves and some conservatism. The credit watch list is right around 4.8% today, and it's slightly higher than the third quarter, and they are keeping a close eye on it and modifying it as they go forward.

Q: Just on the fourth quarter, you saw the cap rates compress by thirty basis points. Just curious what drove the compression there and what does that tell us about the competition in the transaction market today?

A: Sumit Roy said the Fed starting to reduce rates led to potential sellers coming to market, causing a meeting of the reservation price and downward pressure on cap rates. There's more competition on the private side, but the company is well-positioned with its relationships and platform.

Q: Upal Rana asked what needs to happen for you to achieve the high end of your guidance there.

A: Jonathan Pong said it really comes down to where they end up landing on the reserve side, the ten-year yield, stability in the rate market, and their ability to rid themselves of vacant properties with significant carry costs.

Q: Jason Wang asked about development spending was down and development yields were up. Year over year in 2024. Just wondering what drove that how much development is included in guidance this year, and what the underwriting assumptions are for new developments?

A: Sumit Roy said the higher yields on development are a function of the vintage of the developments being originated. The proportion of development in the pipeline should be similar to 2024, as it's repeat business with deep relationships.

Q: To follow-up on something that was talked about in the 3Q or maybe 2Q call, but have you guys gotten the space back from the C-store tenant? And if you have, what's the current assumption for what happens to that space that's embedded in guidance?

A: Sumit Roy said they've got most or all of the space back from the C-store tenant and are in the midst of talking to other C-store operators.

Q: In regards to the tenant watch list and tenant credit in general, could you talk a little bit about how you're looking at that? From the US, the rest of Europe perspective. And then it says Europe constitute any unit or part of that anyway?

A: Sumit Roy said there's less contribution from Europe on the watch list. There were intentional strategies to pursue assets with certain clients and resolve them, and outside of that, it's very pristine with no names from Europe on the watch list.