The operator welcomes listeners to the Realty Income Fourth Quarter 2023 Earnings Conference Call. The CEO, Sumit Roy, and CFO, Jonathan Pong, will discuss the company's results, which may differ from forward-looking statements. The two-question limit will be observed during the Q&A portion of the call. Sumit Roy highlights the company's accomplishments and milestones in 2023, including a record-high investment volume and diversified investments across eight countries.

In the fourth quarter of the year, we closed on $2.7 billion of investments with a 7.6% cash yield. This included a significant sale leaseback transaction with Decathlon and a presence in the data center sector through a joint venture with Digital Realty. We also established partnerships with Blackstone and the EG Group through large investments. Additionally, we announced a $9.3 billion merger with Spirit Realty Capital, which contributed to our 2023 AFFO per share of $4 and sets us up for strong earnings growth in 2024.

In 2024, the company expects to see robust growth due to the recent Spirit merger and successful capital raising activities. They have set an AFFO per share guidance range and anticipate a total operational return of over 10%. They plan to fund approximately $2 billion in acquisitions through internal cash flow, ATM proceeds, and available credit. The company remains selective in their investments and has identified development financing opportunities for half of the expected investment volume. They have minimal execution risk and will remain patient and disciplined in their capital deployment.

The company is confident in its ability to pivot back to growth mode if market conditions change. They have a large potential market to consolidate and have successfully invested billions of dollars in the past few years. They are excited about opportunities in data centers and gaming and the recent Spirit merger has improved their access to capital markets.

The company's real estate portfolio is becoming more diverse and includes properties leased to top companies. This diversity helps to stabilize the platform and increase dividend payments. The company's experience managing leases and using AI tools allows them to identify acquisition opportunities and maximize the value of their holdings. In the fourth quarter, the company invested $2.7 billion at a 7.6% yield, with $1.1 billion of that being international investments. One notable investment was a loan to ASDA stores in the UK at a 10.9% yield. The company also made a $650 million preferred equity investment in a joint venture with Blackstone.

In the fourth quarter, the company made a preferred equity investment in Bellagio and a data center development JV with Digital Realty. Same-store rent grew 2.6% and occupancy was 98.6%. The company also raised $1.6 billion in equity during the quarter.

The company currently has $605 million of outstanding forward equity and over $800 million in annual free cash flow to finance their equity needs for their $2 billion investments guidance in 2024. They expect to achieve this without tapping into public equity markets and also anticipate capital recycling opportunities. They have also de-risked their 2024 maturity schedule through bond issuance activities and plan to maintain investor diversification across their multi currency debt complex.

In the past month, the company exercised an extension option on a $1.1 billion term loan and entered into a floating to fixed interest rate swap. They also assumed $1.3 billion in term loan debt and existing interest rate swaps from a merger, resulting in a weighted average fixed rate of 3.9%. The company's net debt to EBITDA ratio and fixed charge coverage are in line with their targets. However, there will be an increase in non-cash interest expense in 2024 due to the amortization of below market debt from the merger. This will lower annual FFO per share, but not AFFO. Purchase price accounting adjustments are ongoing and will likely increase FFO once finalized.

The speaker is discussing the non-cash adjustments that do not affect AFFO and the company's liquidity and ability to fund growth without relying on the capital markets. They also express gratitude to a board member and welcome a new member. The speaker concludes by highlighting the multiple avenues for growth available to the company and their success in completing large transactions in 2023.

Realty Income has a unique advantage in executing transactions due to their size, scale, and access to global capital. They are able to serve as a real estate partner to leading companies and provide dependable monthly dividends that grow over time. The company has started the year with $2 billion in acquisitions and has visibility into half of them. The potential for upside in this number throughout the year depends on factors such as interest rates, opportunities, and the company's ability to use creative financing solutions. If cap rates were to adjust, the company would be well positioned to take advantage of this.

The company is prepared to react quickly if the interest rate environment changes and the cost of capital decreases. They have a solid business plan that does not rely on funding from capital markets and are confident they can meet or exceed their goals. If the environment remains similar, the company may face challenges in the transaction market, but they are prepared to navigate through a potentially murky environment. The lack of movement in cap rates is due to market volatility.

The speaker discusses the impact of the current cost of capital environment on real estate transactions and cap rates. They suggest that if there was certainty that this environment would remain for the next three years, there would be more willingness from sellers to transact and cap rates would adjust accordingly. They also mention the hesitation in transactions due to expectations of the Fed cutting interest rates later in the year. The speaker believes that if everyone were to accept the current cost of capital environment as the norm, transactions would increase and cap rates would move more significantly. The speaker also addresses a question about development funding and explains that the return on investment will vary depending on the lease, but typically there is no lag in receiving NOI once the project is completed.

The company is discussing the funding of development build-to-suit projects and how it affects their income statement. They clarify that most of their pipeline consists of takeouts, where they enter into a forward contract and buy the asset once it's developed. They view development as another tool for driving growth and use it when clients have aggressive expansion plans and offer higher yields than the market.

The company is focused on developing properties in order to generate higher yields compared to the transaction market. However, due to changes in the cost of capital and cap rates, the yields on these developments may be lower than expected. Nonetheless, the company sees development as a valuable tool for partnering with leading operators and providing them with opportunities for growth. The company's current pipeline is mostly comprised of smaller deals, but there may be some larger portfolio deals in the market.

The company is still having conversations with clients, but there is a disconnect in their expectations for transaction prices. They have closed on some transactions in the first quarter, but are not disclosing the pricing. The occupancy guide is slightly below current levels and there are assets on the watch list. The company's focus is on large transactions to meet their clients' needs and they hope to take advantage of opportunities when the market improves.

Sumit Roy, CEO of a company, discusses the company's first quarter numbers and the movement in cap rates. He mentions that their flow business is ongoing, but they are being more selective to maintain their spreads. The company's occupancy rate is expected to be above 98% and they tend to hold onto some vacant assets in order to reposition them and create more economic value. The company's normalized level of occupancy is around 98.5%. In response to a question about the relative attractiveness of Europe versus the U.S., Sumit Roy states that he does not find either region particularly attractive, but Europe may have a better cost of debt.

The speaker discusses how the volume of transactions is lower in Europe due to a disconnect between buyers and sellers. However, there are still opportunities for transactions in the UK. The cost of debt is also lower in Europe, making it a favorable market. The company is continuing to look for opportunities, but the low volume of transactions is not unique to the US. The speaker also mentions that there may not be a significant reduction in G&A expenses due to recent growth and investments in resources and technology to create a strong platform for the company.

The speaker, Sumit Roy, responds to a question about the company's investment spreads from Haendel St. Juste. Roy clarifies that the company's minimum required spread is 200 basis points, but they have been able to achieve 150 basis points on average. He also mentions that the company will generate over $800 million in free cash flow and that they can still do deals at 2% cap rates and generate 200 basis points. However, this was easier to achieve in the past when their cost of capital was lower.

The speaker clarifies that there will be times when the company's cost of capital and cap rates change between entering into a contract and permanently financing a transaction, affecting their pipeline and ultimately resulting in a lower spread. They also mention their strategy of balancing investments with varying basis points.

The speaker explains that predicting volatility in the current market is difficult, which is why they have a plan to deliver at least 10% without relying on acquisitions. They mention that the integration of the Spirit portfolio is going well and they have not been negatively surprised, but it is still too early to tell. They also mention that there have been some positive surprises and that they were conservative in their underwriting, but there is still potential for upside. The speaker declines to provide specific numbers for potential credit loss.

Sumit Roy responds to a question about how the company is spending their time during the current low deal volume period. He explains that the company is focused on asset management and looking for ways to grow the portfolio and earnings through non-traditional means. They are also planning on recycling assets and capital. However, he believes that the acquisitions environment can change quickly and the investment team is actively staying in front of clients and finding creative solutions to potential deals.

The company has a target of $2 billion and is focused on creating the right tools and efficiencies to make their business more scalable. They are also prioritizing assets that are not core to their portfolio for potential disposition. They have seen an increase in their ability to put in more growth opportunities into their leases, up 50 basis points from five years ago. The quality or credit of the client may vary based on their ability to push through higher escalators.

The speaker explains that higher quality or higher credit clients have more bargaining power to resist changes in their leases. However, the company has been able to increase its growth by expanding into other asset types such as industrial, data centers, and gaming, as well as through its international business. The speaker also mentions a specific transaction with a UK grocer that had a higher growth profile than what is typically seen in the US.

The speaker discusses how their company has been able to grow their internal growth by 50 basis points through a combination of different asset types and international investments. They also mention their plan to recycle capital and focus on minimizing reliance on external acquisitions. The speaker then talks about their credit lending platform and how they aim to be a one-stop shop for clients, targeting those who have done traditional sale-leaseback business and have a need to grow their real estate portfolio. They mention the potential for higher yields in this market and how it benefits both the company and their clients.

The speaker discusses the importance of building relationships with clients and offering a variety of products to drive the credit side of their business. They mention specific investments they have made in the gaming and grocery industries. The speaker also mentions their expected free cash flow for 2024 and how it includes income from holding cash in a money market account. They provide a low and high end for their AFFO per share guidance, with the low end being a worst-case scenario.

The credit loss perspective includes a conservative number for bad debt and accounts for costs like leasing commissions and property expenses. The high end of the scenario assumes an improved macro environment and higher investment volume with spreads staying at 150 basis points or higher. It also assumes a lower mix of short-term rates, with more exposure in Europe. The pipeline currently consists of both domestic and international investments.

Sumit Roy discusses the $1.2 billion in unidentified non-development funds and mentions that 35% of the company's activities were in international markets last year. Alec Feygin asks about the large increase in income taxes and Jonathan Pong explains that it is due to the growing international business, particularly in the UK, and the company's efforts to lower taxable income. This growth is factored into their underwriting and investment decisions.

The speaker discusses the impact of a known cost on their long-term investment decision, which is factored into their business model. The operator then concludes the call and the speaker thanks the attendees and mentions upcoming investor conferences in Spain.

This summary was generated with AI and may contain some inaccuracies.