Citi's 2025 Global Property CEO Conference. I'm Nick Joseph, here with Smedes Rose with Citi Research. We're pleased to have with us Realty Income and CEO Sumit Roy. This session is for Citi clients only, and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC25 to submit any questions. Sumit, we'll turn it over to you to introduce the company and team, 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.
Thanks, Nick. With me, I have Kelsey Mueller, head of IR, and thank you, everyone, for joining us today.
Sumit, I'm going to interrupt you for a second. Can you just pull the microphone a little bit closer to you. Because it's hard to hear back here.
Please.
I'm sure the mic's right into it.
Can you hear me now?
Much better.
Thank you.
Thanks.
So before I begin, I'd like to remind you that certain comments I'm about to make may be forward-looking, and I refer you to our filing to the SEC as to how they can differ. Additionally, please note that we are webcasting this fireside chat on Realty Income's website, a copy of which will be available for review. That may not be accurate. As highlighted in our release last week, Realty Income delivered a solid 4.8% AFFO per share growth in 2024. This marks our 14th consecutive year of growth, underscoring our predictability, discipline strategy, and our ability to navigate various market conditions. For our investors at the start of 2024, this growth, combined with the 5.4% dividend yield, resulted in total operational returns of 10.2% through the year-end.
Over the past 30 years as a public company, we've maintained an exceptional track record, averaging an 11% total operational return annually, without a single negative year. This level of consistency is a direct result of our unwavering commitment to generating stable, reliable returns for our shareholders. Looking at our fourth quarter performance, we delivered AFFO per share growth of 4%. Our investment activity accelerated significantly, deploying $1.7 billion into high-quality opportunities, highlighting our ability to generate and execute on a robust pipeline within a stable environment. Moving forward, we remain confident in our growth trajectory while staying disciplined in our capital allocation strategy. Our highly diversified portfolio of over 15,600 properties across multiple industries contributes to the historic stability of our model. As we shared last week, we are targeting investments of approximately $4 billion in 2025, based on a strong pipeline of high-quality opportunities.
We are well- positioned to continue deploying capital in alignment with the deal flow we are seeing across the market. For the year, we anticipate AFFO per share in the range of $4.22-$4.28, which represents a 1.4% growth at the midpoint. This guidance assumes approximately 75 basis points of bad debt expense, primarily related to the acquisitions through our recent M&A transactions, notably At Home, Party City, and Zips. As we noted at the time of these transactions, some rent loss from these tenants was expected, although the exact timing of this impact was uncertain. Importantly, our ability to take control of these underperforming assets presents an opportunity for upside, as we expect to have the ability to reposition these spaces with stronger, more resilient tenants in robust sectors.
Beyond our core business, our platform enables us to explore new avenues for growth, including our recently announced private capital initiative, as well as expansion into verticals like gaming, data centers, and international markets. Our strategy and capabilities position us to capitalize on attractive investment opportunities, as demonstrated by our $770 million sale-leaseback deal with 7-Eleven in the fourth quarter, which is now our largest client. This transaction is a testament to our ability to execute sizable deals at attractive valuations, further solidifying our leading position in the market. In summary, we remain focused on delivering long-term value through disciplined financial management, a diversified and resilient portfolio, and strategic partnerships. We are confident in our strategic vision and see continued runway ahead. I'll hand it back to you.
Okay. Before we get in, I just want to, you know, on our side of the business, we are really all about a bullet point. So I just want to summarize maybe a few reasons why I think, you know, investors should buy the stock, and to kind of paraphrase some of what you just said. So one, I would say you're focused on a very disciplined capital allocation strategy, a diversified portfolio that's across the United States and Europe. And then the third would be a willingness to explore new platforms to drive AFFO growth.
You should be sitting on this side.
Fair summary. Well, we can talk about that.
Nick, you may be in trouble.
Okay. Moving on.
Moving on. Sumit, you mentioned the 7-Eleven transaction. I feel like that's where we've received certainly the most questions over the past week, but it feels really like over the last six months, because I think there was a lot of kind of speculation of where that portfolio would ultimately end up. I think a lot of the questions are around what that going-in initial yield is, relative to maybe your cost of capital, and I guess questions around accretion and the reasons behind the deal, and maybe where the opportunity is to increase that return. So maybe we can start there, kind of why do that deal? Why put out that amount of capital at that yield?
Yeah. So I'm not going to speak to the specific yield. What I will speak to is we did our U.S. acquisitions right around 6.7 cap rate, cash yield, that is. And so given that this was dominating what we did in the fourth quarter, you can, you know, think about what the actual yield was in this transaction. Let me take you back to when we started having this discussion. This was September, October of last year, and we were right around our 52-week high at that point, coming out of what the Fed had done in August, the expectation of where the ten-year was going. And within that same four-month time frame since then to today, we've both hit our 52-week high and 52-week low, with next to no information about the company coming out into the market.
So the point I'm trying to make here is, you know, our stock trades in the short term as a reflection of what is the expectation on the 10-year Treasury, and we saw that firsthand. The negative correlation that we have to the 10-year Treasury is 0.83 during this time frame. This was a transaction that was marketed, and all else being equal, 7-Eleven wanted to do this with us. This was the sixth sale-leaseback that we've done with 7-Eleven, four of which never hit the market. They came directly to us, we negotiated the transaction, and we got this over the finish line. Given the size of this transaction, it was very important that they were able to share that this was a marketed transaction.
Having said all of that, the actual spread that we were able to lock in, given that we were very close to our 52-week high when we knew we were going to be the winning bid, was 190.
I think that's historically achieved. Oops, I lost my mic.
On that side.
Can you hear me?
Yeah.
Good.
Yeah.
Okay. So what we were able to lock in in terms of spread was north of the 150 basis points that we've historically achieved. But it's a fair question, you know, should we be buying assets that are potentially NAV accretive when net lease businesses don't trade on NAV? They trade on earnings growth. And the answer is absolutely not, which is precisely why we sourced $43 billion of transactions last year and chose to close on $3.9 billion. There was $3.6 billion that basically checked every box that we are looking for from a real estate perspective, from the quality perspective, from, you know, the client exposure perspective. But because we couldn't generate that initial spread, we chose to walk away from it. So the question that you're asking is the right one.
It was, but the point I want to make is we were able to lock in decent spreads and continue to expand the exposure to a client that we are very happy to have as our number one client today.
Maybe just one other one on 7-Eleven. Obviously, there's been news on the parent company and a potential buyout and changes on the corporate side. Does that change anything from a credit perspective for you?
Look, if it is going to get bought out, there are two potential buyers of this. One is Couche-Tard, which has grown through acquisitions, but I believe that, you know, antitrust issues will probably be a bigger hurdle and a bigger impediment for Couche-Tard to move forward. Time will tell. The second is a take-private by the family that owns a fairly large stake in 7-Eleven. Look, we recognize that there is a conglomerate discount that 7 & I, the parent company, suffers from, and they have said publicly that they are taking steps to separate the non-core businesses, and this is the crown jewel. The convenience store business is absolutely the crown jewel of 7 & I, and whether they are successful in taking this company private or not, time will tell.
But I can tell you that, you know, a Japanese company being taken private, the conservativeness of how they operate this business is not going to get compromised. So we'll be very comfortable either way.
I just wanted to ask you too, on the call, you talked about often you see, I guess, individual 7-Eleven sites selling at four and five caps, which I think is, you know, below, you know, whatever their actual number is that you paid. So, you know, should we do, you think there was sort of, I guess, a portfolio discount that was available to you? Would you be valuing this portfolio, you know, at a four and five- cap rate when you're looking at your own NAV? I'm just kind of curious, you know, that's a fairly large discrepancy in valuation, so.
It is, and I don't believe there's data to support what I said during the call. If you go to CoStar and you just look at transactions just in 2024, to represent the backdrop that we are all experiencing, you know, what have 15-year lease 7-Eleven convenience stores traded at? And you're going to get close to 45 transactions, and the average of that is 5.29%. So there's definitely a portfolio discount. There aren't that many people, none, I would say, on the public side who would be able to write a $771 million check to do, you know, a single transaction. There is a fair amount of competition on the private side, and that competition is continuing to grow. But like I said, you know, we are very comfortable with being able to go up against them and win our more than our fair share.
Okay. I want to just maybe, you know, back up as you talked about the acquisition pipeline for 2025. You're targeted $4 billion. You know, so big company, big numbers. You've got, I think you've talked about maybe 50/50 between the U.S. and Europe. Could you maybe just talk a little bit about, you know, large portfolio-sized deals, what you're seeing in the pipeline so far in the first quarter, kind of line of sight, I guess, really in this into the second quarter at this point, Europe versus the U.S., just kind of, you know, broadly, be interested to hear some color there.
Sure. So speed, last year we did almost 50/50 between international and U.S., and I would say through the third quarter last year, it was closer to 55%-56% international and 45% U.S. One of the advantages of the platform that we have and the swim lanes that we've created for ourselves is the fact that we will be able to play in a much bigger sandbox that we've defined for ourselves. For the first three quarters last year, we were seeing much better opportunities in the U.K. as well as Western Europe than we were here in the U.S. That hasn't slowed down, and had it not been for the $770 million sale-leaseback, I would have said that the international markets would have dominated what we did last year.
This year, given more visibility into the pipeline and going along the lines of what you just said, we are almost one quarter in. We feel like it's going to be more of a 50/50. But it is not going to be dominated, at least not based on the pipeline we see today, by north of a $500 million portfolio deal or sale-leaseback deal. What we are seeing are transactions that are much more bite-sized, and it's what I would call the flow business of sale-leasebacks and existing leases.
Okay. So that's got to keep you busy if it's smaller deal sizes and you've got to get up to $4 billion. You know, I just kind of want to ask you. I know you've had this question many times, so you're, you know, so with $4 billion of acquisitions, 1.4% AFFO growth, one of the, I don't know if I call it a criticism, but I guess an observation is that your AFFO growth is relatively low, and you have to do massive amounts of volume in order to achieve it on the external side, and that will only presumably compound over time as you get bigger. And I guess, how do you think investors should be thinking about, I mean, you talked about why we should buy the stock, so let's not repeat all that?
You know, is focusing on AFFO growth, you know, maybe the wrong metric? You know, how do you sort of think about, I guess, the value of, you know, kind of your growth versus smaller companies that also have an advantageous cost of capital?
Sure. Look, the reason to invest in Realty Income is our ability to generate total operational return. If I'm telling you day one, you know, and we are part of the Dividend Aristocrats Index, which basically means we've been growing our dividend every year for the last 25 years, in our case, it's close to 30 years, that's a big part of how we return value to our shareholders, and if that's close to 6%, I'm giving you on a monthly basis 50 basis points of value as cash dividends. That's one of the reasons why you should be thinking about us, and even with a 1.5% growth at the midpoint, we're going to get to 7.5% total operating returns in an environment where I just told you, within a four-month time period, we hit our 52-week high and 52-week low. That's the beauty of this platform.
And obviously, I don't need to go into the diversification benefits and how we've defined all those other things. We talked about that at the outset. But a business like ours that continues to deliver, regardless of what's happening in the environment, I think is a critical consideration that investors should take into account. But if you're chasing only growth, we may not be the right name for those investors.
Okay. You know, I wanted to ask you too, I mean, obviously, you've made acquisitions of publicly traded net lease REITs, so I'm not asking if you're going to do that now, but I mean, are you sort of constantly assessing the space and thinking about, you know, some of the public entities where you can have, you know, obviously a sort of a big bump from an acquisition perspective and looking at the gaps in your implied valuations?
Yeah. Look, that's a great question. We've shown that we are capable of doing large-scale M&A. That's been one of the ways that we've been able to aggregate assets. But we've also shown that that's not the only way. You know, two years ago, with a much more stable backdrop in 2023 and 2022, our organic investments, which is basically going and doing sale lease-backs and buying existing assets that are trading, was $9 billion in 2022, $9.5 billion in 2023. That's larger than most publicly traded companies that are trading out there today. And so, you know, there are advantages at points in time to do M&A, but there are also disadvantages. And the disadvantages are ones where we did the Spirit transaction that closed last year in January. We talked about the accretion.
Everybody came back and said, "Oh, but when we are doing the math, it's 3.5%. Why do you keep saying 2.5%?" And I said, "I say that because there are going to be certain clients that are not going to continue to pay rent." And when we talk about accretion, we talk about sustainable value creation. And the 75 basis points that we've talked about this year in terms of rent loss, it's dominated by names that we've acquired through the M&A transactions. And so, you know, people forget, and it's not an issue. I mean, it's my job to remind them that the timing of when those rent losses were going to happen wasn't clear.
But we, at least, we had a watch list where we put these names on the watch list, and we knew that they were not going to survive the duration of the lease that existed. And so that's the disadvantage. The other big disadvantage, I think, is there's a lot of volatility that gets introduced into your stock when you do a large-scale M&A. You know, the folks that were owning the target were owning it for a reason. They may no longer want to be owners of the acquirer post-close. And so that volatility also is not conducive to investing in net lease assets where you're trying to match fund, you know, pretty much real time. So those are the reasons why you have to stay on the, you know, for the right opportunity. Will we do it? Yes.
But I'll tell you right now that that hurdle is very, very high for us.
Can I just ask you on the credit reserve, where I know you've guided to 75 basis points, a little higher than last year? And so it sounds like some of that is because you're seeing some of the issues that you thought anticipated with Spirit are kind of coming to fruition in 2025. Because I think, and maybe I just misunderstood, but I feel like back at like June Nareit, you guys raised your guidance, and part of it was because you weren't seeing the credit losses that you had been expecting from Spirit. So was it just that it was better in year one and they just kind of got delayed, or is it a different set of tenants, or?
No. It's, like I said, it's the timing that you cannot forecast out. You know, look at the names I just mentioned to you, Party City. This is round two of Chapter 11 for Party City. They emerged right before we closed on the transaction. We still had them on the watch list. And sure enough, they filed again.
Yeah.
Right? At Home, though they haven't filed, it's one on our Watch List, and we expect something to happen this year. So look, will these things definitely result in rent losses? We don't know.
Right.
But we have to come out and we have to make certain assumptions, and we've shared those assumptions with you in terms of, you know, why our range is what it is.
Okay. Did you want to?
Yeah. I was just hoping you could clarify how a tenant finds their way onto your Watch List. And then once they're on their Watch List, if you look back historically, you know, what's typically the adverse outcome as a percentage versus how many find their way back off the Watch List and things are actually okay?
Yeah. That's a great question, so our Watch List today is 4.8%. I would say, and I don't have percentages, but just because something's on the Watch List doesn't mean that there is a negative outcome associated with it. There are certain things that we are watching out for. If there's a refinancing, if that occurs, they buy themselves another five, six years, operationally the business is doing well, it comes off the Watch List. But that is a milestone that we are tracking, which could have a very bullish outcome. And so there are a variety of reasons why things go on the Watch List. Margins are getting compressed. Why is that? Oh, maybe there are tariff pressures that are coming to the fore. They're able to figure out ways to not rely on, you know, imports. That's a way they get off the Watch List.
But I don't have a percentage for you, Nick, in terms of that 4.8%, which ones are going to have a negative outcome. But let's define what negative outcome means. It doesn't mean, let's assume there's a 100% negative outcome on the 4.8%. We're not going to lose 4.8% rent. Our recovery during bankruptcies has been 82%. So at worst, it's going to be 18% on average rent loss of that 4.8%, either because we can find other clients who can step in or the clients on the watch list don't want to give up those assets. There's a variety of reasons why that's the recovery rate that we have.
Does that 82% recovery just, can you, is there some context you can put around it? I mean, is that an average for the industry? Is that, are you better than others on the recovery or kind of maybe just?
I can't talk about what others have been able to recover. I can only tell you that we've been around for 55 years, 30 of which as a public entity, so we have a lot of data and we've experienced over 70 bankruptcies, and so, you know, this is the historical average that we've been able to generate.
Well, I'm sure we can move away from, you know, credit loss expectations, but we did have some questions from the audience, and one was specifically on At Home. You mentioned them, you know, in passing a moment ago, but any kind of color you can add on the At Home issue, and then we can move on to some other topics.
Yeah. No, no more than, look, we're keeping a close eye on those guys. You know, tariffs will be a big, big part of what happens. They are, at the end of the day, a furniture company that relies on a lot of imports. Tariffs do get introduced, which I believe was supposed to happen sometime today. They, you know, they will be impacted. Furniture business is a low-margin business. And so they do have things beyond furniture, but, you know, it's just a credit that we feel like we need to keep a close eye on. I have no more news than what's out there in the public.
Maybe just, I mean, as a landlord, you're obviously behind the operator, so they're going to bear the brunt of, you know, tariffs and economic ups and downs, you know, more directly. But is there anything now that sort of you're maybe sort of, maybe let's not go down that road now that we have 15% or, I don't know, it's 25% tariffs on Canada and Mexico now? You know, just there has to be some impact, I would think, in terms of the way that you're thinking about your investments or not.
Of course. I mean, at the end of the day, we are exposed to retail. And, you know, if you go across the subsectors of retail, and we could spend the next two hours talking about that, tariffs will have a disproportionate impact depending on the kind of retail. And even within a particular subsector, two operators will be experiencing very different outcomes. So case in point, the dollar stores. Dollar General has only 3% of its goods coming from China. So the tariff is not going to have that much of an impact.
It's only 3%?
Only 3%. Dollar Tree, on the other hand, is 20%. And so even within a sector, you have to go beyond to really try to take into account what the impact will be of tariffs. Having said that, you know, Dollar Tree said that they have the ability to pass through 85% of the increases due to tariffs onto the consumer. But that is something that we're going to keep a close eye on. The consumer is not as healthy as it was two years ago. And so how sustainable is that? But if an operator has the balance sheet strength, which thankfully both these names do, they'll be okay. You might not know this, but Amazon has 70% of its goods on the retail side coming from China. Now, am I worried about Amazon? No.
Right.
You know, because the vast amount of profitability comes from their AWS business and their logistics business. So, but you have to go sector by sector and look at where are their goods coming from, which are the countries that are going to be, you know, tariffed, if that's even a word, and what is the flow-through impact going to be?
Okay. I mean, just as an observation on our end, we've seen pressure on the lower-end consumer across a number of the industries we follow on the real estate side. So it'll leave, you know, this will be kind of another, well, death blow is a strong word, but let's, we do have a couple of other questions. Can you provide more color on the private capital platform? So, you know, I know you've talked about this at length, but I don't know if there's anything you can add in terms of initial size or timing or assets targeted or, you know.
Look, I think again, it speaks to the strength of our platform, right? I'm not sure if there are other net lease companies that could have done what we are embarking upon, and the reason why we're doing this, the strategic rationale for doing this is look at what's happened to us over the last four months. This level of volatility in our cost of capital precludes us from executing on one of our core strengths, which is our ability to source transactions, and I just mentioned to you, and I mentioned this last week as well during the earnings call, there were $3.6 billion of transactions that we passed on because we couldn't meet the spread requirement day one. We passed on it. Otherwise, it was below replacement cost. The rents were close to market rents. Great clients that we would have loved to have exposure to.
Having the private capital business up and running would have allowed us to execute on that, and not at the detriment of the public balance sheet. This would have been additive. This would have allowed us to grow earnings for the public shareholders even more without using a dollar of public capital. That's the beauty of this platform.
I guess, you know, not to be too simplistic, but you've been talking about it for a while now. What's the, you know, the issue? What's the gating issue? Like, why aren't you able to capitalize on these opportunities that you've seen that you're now having to pass on?
Yeah. So there are two philosophies, right? We decided to speak to you before we did anything on this front. That's what we did in the third quarter. We said, we're going to share it with our shareholders that this is something that we believe is very important to our long-term future. And before we did anything, we wanted to make sure that you were aware that we were going down this path. So that was the beginning. Fast forward today, that's three months, four months post that third quarter call, we have a data room that's open. We have our offering memorandum done. We have our limited partnership agreement done. We have the seed portfolio information out in the data room, and we've started to have our initial conversations with potential investors who may be interested.
This is not like going and talking to a public shareholder and being able to convince them to come into our stock. This is going to take a long time given the nature of what we are trying to do, which is open-ended, perpetual life, you know, vehicle. And what we've been told, this is brand new for us as well, that, you know, don't expect somebody to write a check after the first meeting. So this is going to take time. And we want to do it the right way. We don't want to enter into closed-end funds where we have timelines. That's not how we create value, where we are forced to do certain things that we wouldn't be forced to do if it were, you know, on our public balance sheet. So this needs to be truly complementary to the platform that we already have today.
And so it will take time. And my hope is in the next six to nine months, we'll be able to start raising capital. And we will keep you abreast.
Okay. So six to nine months, start raising capital. So probably in a year or so, maybe starting putting that capital to work just as a very broad.
I don't think, as soon as we raise capital, we are putting it to work.
Okay. Okay.
We have a pipeline that's already being, you know, created. It's a shadow pipeline, obviously.
Yeah.
Stuff we cannot do on our balance sheet, but one that we could if we had the capital available on the private side.
You mentioned the data room, and we did get a question specifically. Can you provide more color on the data room discussed on the fourth quarter call? So maybe just give a little context as to what exactly that is as you're thinking. I guess it's to do with opportunities in the private fund, but.
Yeah. I just mentioned the data room has our offering memorandum, our limited partnership agreement, and the seed portfolio, the data around the seed portfolio that we're going to be $1.4 billion of assets that we're going to be seeding this fund with.
Okay. I think I've answered the questions on there. That one we already talked to.
Yeah.
Sorry. We're just looking through, make sure a couple of them are the same questions.
No issue. We hit all the questions.
I did just want to ask you, you know, you talked about dispositions activity. I think it's increasing in 2025. Any particular segments that you're thinking about, you know, moving away from or reducing your overall exposure and kind of, you know, how's the market in general from the buyer's perspective that you were looking to sell to?
Yeah, so, Sweet, I don't believe we said we are going to increase our disposition targets in 2025. We said it'll be similar to what it was in 2024, which was, you know, close to $589 million, so almost $600 million of assets that we're going to be recycling. Look, as the environment becomes more stable, our ability to dispose of assets at reasonable valuations obviously also increases, and this is a natural, you know, asset recycling that we are doing just given the amount of product that we brought on balance sheet through large-scale transactions that we've done in the past, including M&A, and so, you know, our expectation for this year is that it'll be in a similar neighborhood to what we did last year.
Okay.
Yeah, sure. So we have our rapid-fire questions, as you know, to end every session. What will, I guess, same-store growth, but let's assume credit loss as well. So what will kind of net same-store growth be for the net lease sector overall next year in 2026?
I would say less than 1%.
Will there be more, fewer, or the same number of public net lease companies one year from now?
The same.
Great. Thank you very much.
Thanks for your time.