In the second quarter earnings conference call for Realty Income, the operator introduces the speakers, Steve Bakke and Sumit Roy. During the call, they will discuss the company's results and make forward-looking statements. The company has delivered strong results and a 6% growth in AFFO per share. Their global sourcing and acquisition platform has allowed them to deploy capital in the U.S. and provide shareholders with a total operational return of over 11%.

In the second quarter, the company invested $805.8 million in high-quality real estate opportunities in the U.S. and Europe, with a focus on retail, industrial, and data center properties as well as real estate-backed credit opportunities. Approximately $262 million was invested in the U.S. and $544 million in Europe, including a significant investment in a secured note issued by a leading U.K. grocery operator. The company also believes that credit investments are a profitable way to participate in the current rate environment and serve as a hedge against interest rate risk. In the quarter, 79 transactions were executed with 55 clients, including two new ones. The company also saw an increase in available opportunities at favorable pricing, leading to a 50% increase in investment guidance for the year.

The company's higher closed volume and consistent investment spreads indicate that the transaction market may be returning to normal. The second quarter's investment activity was largely funded by adjusted free cash flow, which has contributed to the company's growth. They believe they can deliver a 7% to 8% annual return to shareholders without relying on public equity issuance. The company's internal rent growth and expansion into new markets have also contributed to their growth. With the use of excess free cash flow, the second quarter's investment spread was 293 basis points, well above their historical average of 150 basis points. The disclosed investment spreads use the company's short-term nominal cost of capital, which is different from their long-term cost of capital that accounts for the long-term return requirements for investors.

In the second quarter, Realty Income utilized external capital opportunistically to augment their growth rate, while also selling 75 properties for a total of $106 million. They expect to sell between $400 and $500 million of assets for the year. They are actively optimizing their portfolio and utilizing organically generated capital for growth. Their balance sheet is strong with low leverage and access to global capital. In the second quarter, they were able to fund most of their investment activity without issuing new equity. Their portfolio continues to perform well with a 98.8% occupancy rate and a rent recapture rate of 105.7% across 199 leases.

The company's global real estate portfolio has consistently performed well and has not had a negative operational return in 30 years. The company's credit research and asset management teams have helped them optimize value in situations such as store closures. The company is currently managing through store closures for clients like Rite Aid and Red Lobster, but the overall financial impact is not expected to significantly affect their ability to generate consistent returns. The company has increased their earnings guidance, taking all credit considerations into account. Rite Aid is expected to emerge from bankruptcy in the third quarter, with a potential loss of 12 basis points of rent. Red Lobster is also going through the bankruptcy process, with a target to emerge in the third quarter of 2024. The company believes their visibility into rent coverage and master lease structure mitigates potential risks.

The company expects their recapture rate for client bankruptcy restructurings to be in line with their historical average. Walgreens may close some stores, but the company has leases representing only a small portion of their total portfolio that will expire in the next two and a half years. Dollar Tree's potential split from Family Dollar may result in store closings, but their leases only make up a small portion of the company's total portfolio. The company's historical recapture results for the dollar store industry have been favorable. The risks for the company's tier 1.5% exposure have decreased in the past year due to debt reductions and improved financial positions for Cineworld and AMC.

The paragraph highlights the minimal impact of potential store closures on the company's financials, as they only represent a small percentage of their total portfolio rent. The company's strong net lease business model, with diversification across various properties and clients, helps to counterbalance any potential impact. Additionally, the company's leverage remains consistent and within their target range, reflecting their commitment to maintaining a strong credit rating.

The company generated $200 million in adjusted free cash flow during the second quarter and has $185 million of forward unsettled equity to finance their equity needs for the remainder of 2024. Their balance sheet is healthy with a well-staggered debt maturity schedule and a low exposure to variable rate debt. They have access to $3.8 billion in capital and are comfortable with their liability side of the balance sheet. They view their credit investments as a hedge against interest rate risk and have invested in a £300 million loan with an 8.1% yield to secure their sterling debt maturing in 2030.

The company is reiterating their full year investments and AFFO per share guidance for 2024, which includes a 4.5% annual per share growth. They recently increased their guidance and expect to collect $16 million in lease termination fees, but also recognized $6.2 million in AR reserves from a client in the convenience store industry. This impacted their second quarter same-store rent growth by approximately 60 basis points. They expect their full-year same-store rental revenue growth to recover to close to 1%. The company is confident in their ability to deliver attractive returns to shareholders due to their solidly performing client base and strong balance sheet. They are also finding more opportunities to deploy capital into high-quality investments.

During the Q&A portion of the conference call, an analyst from UBS asked about the company's investment strategy for the rest of the year, specifically regarding the Asda notes which made up a large portion of their investment volume in the second quarter. The company's CEO, Sumit Roy, responded that they will likely focus on traditional real estate direct investments for the remainder of the year. The analyst also asked about the differences between opportunities in the U.S. and European markets, to which Roy replied that they are seeing more opportunities in the U.S. due to sellers realizing the higher cap rate environment is here to stay. This was reflected in the increase in investment volume in the second quarter and is expected to continue for the rest of the year.

The speaker believes that there will be more transactions in the upcoming months due to stable markets in Europe and expectations of interest rate cuts. They also mention a recent investment of $377 million in a 6-year paper with an 8.1% return, which they see as an opportunity to partner with clients like Asda. They also mention that this investment helps balance out maturing debt of £600 million coming due around the same time.

The company's decision to pursue sale leasebacks on Asda real estate was based on the attractive spread and long-term partnership opportunities it offered. This also serves as a hedge against the negative impact of a higher interest rate environment on the company's balance sheet. The company does not expect to continue this strategy in a low interest rate environment. The company is also expanding into data centers and gaming.

Sumit Roy discusses how the company's focus on specific verticals, such as international markets and industrial, has resulted in a higher internal growth rate of 1.5%. He also mentions that the company does not plan on entering any new verticals and is comfortable with their current market. In response to a question about investment grade tenants, Roy clarifies that they do not target investment grade specifically, but rather focus on generating the right yield for the credit and real estate risk.

The company's client ratings are a result of their risk-adjusted return profile, not something they specifically target. Many of their top clients are non-rated, but would be investment-grade if they were rated. The company's bad debt expense has been around 70 basis points this year, higher than their historical average of 35 basis points, but this is largely due to a $6 million reserve for one client and is not expected to continue in the second half of the year.

The speaker discusses the company's conservative approach to credit investments and mentions an upcoming loan deal with Asda, a company they are comfortable with and have a strong relationship with. They confirm that there will be no more credit investments in the second half of the year, but they will continue to use them opportunistically in the future. The loan deal is secured by unencumbered real estate owned by the company.

The company is trying to secure first priority in sales leaseback discussions with potential clients. They are seeing more opportunities to buy back stock due to their improved cost of capital, but they are not currently facing competition from private equity. However, if interest rates continue to decrease, private equity may reenter the market. The company remains disciplined in their approach.

The speaker believes that there will be more transactions in the future, but they do not need to actively pursue them to meet their earnings guidance. They will take advantage of any opportunistic transactions that make sense for their portfolio. The improvement in their cost of capital is not the driving force behind their transaction activity. They have several large transactions in their pipeline and are confident in the improving investment market. The majority of their pipeline consists of smaller, organic acquisitions, with no major $1 billion portfolio deals.

The company is considering larger portfolios for future projects and has received termination fees from one particular tenant. They are identifying assets for disposition through a deep analysis by the asset management team, using predictive analytic tools to monitor their 15,000 assets and considering factors such as location risk and credit.

The asset management team is analyzing the economic outcome of assets that may not have a long-term future in the portfolio. They are comparing the potential return with selling the assets today to determine the best outcome. The team expects cap rates to come in due to better cost of capital and increased competition, but they are hopeful of maintaining their spreads. They will be selective in their acquisitions and are not increasing their acquisition guidance at this time due to the current volatility.

Sumit Roy, the speaker, discusses the current state of the company and its plans for the future. He mentions the volatility in the geopolitical landscape and states that the company will try to maintain its current spreads. He then addresses a question about the company's disposition strategy, explaining that they plan to sell both occupied and vacant assets, with a shift towards more occupied asset sales in the future. This is partly due to recent M&A deals and the company's desire to be more proactive in disposing of assets that are not a long-term strategic hold. The speaker emphasizes that this will be a significant source of capital for the company, and that it helps explain their statement about not needing to raise equity in the market.

The speaker discussed the company's strategic shifts towards being more proactive on the disposition side. They also mentioned that the transaction market is moving towards normalization, with sellers starting to re-enter the market after waiting on the sidelines for a period of time. The recent changes in interest rates have also made it more feasible for REITs to transact on assets. The speaker expects this to lead to more transactions in the second half of the year. A question was then asked about the company's achievement of 1% same-store revenue growth this year.

Next year, the company's portfolio stabilized internal growth rate is expected to be around 1.5%, with some moving pieces due to difficult year-over-year comps. The company has been consistently around this level on a contractual rent basis and expects this to continue. The bad debt outlook for 2025 is uncertain, but the company has been beating expectations in previous years and there is potential for upside this year.

The speaker discusses the historical bad debt expense of Realty Income, which has been around 23% and 37 basis points inclusive of the pandemic year. They are not able to predict future years but are confident in their ability to find alternative clients for the C-store space. They are currently in litigation and expect to resolve it this year. They do not have any replacements for the assets yet. The question is then directed to Jonathan about future debt issuances and the preferred currency, with the speaker estimating a low 5s indicative rate for U.S. dollar and sterling and a low 4s indicative rate for the Eurozone.

The speaker discusses the company's approach to currency trading and their flexibility in the market. They mention that they have been leaning towards the dollar side in recent years, but are also actively involved in the sterling market. They also mention the bid-ask spreads in the transaction market, which have been largest in the US. The speaker expresses confidence in the US market and mentions that higher interest expenses did not have a significant impact on FFO growth this year. They also briefly touch on the company's maturities in 2025.

The speaker discusses a recent debt offering and its impact on earnings. They also mention future growth opportunities in data centers and gaming, and express satisfaction with the performance of current investments in these areas.

The speaker states that the lease was fair for both the operator and the company. They are excited about working with existing and new partners in the data center space. They are still building their pipeline and will share lessons learned in the future. They are focused on underwriting rents that can be supported in the long term and making sure investments are not obsolete. They stay close to the real estate in the data center space. The speaker also mentions that the 84% recapture rate can vary from year to year.

The speaker, Sumit Roy, explains that the recapture rate for clients going through Chapter 11 bankruptcy is 84%. This is the historical average, but there is variance within that number. He also mentions that they have collected anywhere from 65% to 100% of rent in different situations. The call concludes with Sumit Roy thanking the participants and looking forward to future conferences.

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