The paragraph provides an overview of the Realty Income Third Quarter 2024 Earnings Conference Call. The call is hosted by Kelsey Mueller, Vice President of Investor Relations, with presentations by CEO Sumit Roy and CFO Jonathan Pong. It includes a briefing on the company's financial performance and strategic approach. Realty Income has maintained a strong performance with a defensive and diversified real estate portfolio aimed at ensuring stable cash flow. The company has consistently delivered positive operational returns over its 30-year history, adapting to various economic conditions. The call also includes a Q&A session with a two-question limit per participant.

The company is experiencing a favorable transaction landscape due to an improving external environment and a recent U.S. rate cut, leading them to increase their 2024 investment volume guidance to $3.5 billion. It has also raised its AFFO per share guidance for the year to $4.17-$4.21. Despite external volatility, the company is confident in its growth strategy across various verticals such as retail, industrial, data centers, and gaming, and is also working towards establishing a private capital fund. In the third quarter, the company achieved a 2.9% growth in AFFO per share and invested $740 million in high-quality opportunities in the U.S. and Europe with meaningful improvements observed in both regions. A total of 70 transactions were completed, with significant contributions from larger deals, reflecting the diverse growth avenues and expanding international market activity.

In the third quarter, the company increased its investment volume to $594 million, more than double the previous quarter, leading to an upward revision of the annual investment guidance to $3.5 billion. They anticipate further growth in the fourth quarter with $1.3 billion in investments, fully funded, focusing on high-quality opportunities. The third quarter investments achieved a spread of 243 basis points, higher than the historical average, supported by $165 million in adjusted free cash flow after dividends. This spread considers the short-term cost of capital, while investment decisions are driven by a long-term cost of capital. The third quarter saw an improvement in external capital costs by 65 basis points, despite a 50 basis points decline in initial cash yield. The company's diverse portfolio includes over 15,400 properties with resilient, high-quality clients ensuring stable returns.

The paragraph discusses the company's performance and financial strategy in the recent quarter. They achieved a 98.7% occupancy rate, a slight decrease from the previous quarter. Through renewing 170 leases, they garnered approximately $38 million in new annualized cash rent. The company also engaged in asset dispositions, selling 92 properties for net proceeds of $249 million, with $87 million from vacant properties. Year-to-date, asset sales totaled $451 million, with expectations between $550 million to $600 million for the year. Financially, they maintain a strong balance sheet, reflected by A3/A- credit ratings, a 5.4x leverage ratio, and a 4.6x fixed charge coverage ratio. They issued two bond offerings totaling $500 million to support future funding.

The paragraph discusses the company's diverse debt offerings, including a dollar bond with a 5.49% semiannual yield and a sterling bond raising £700 million with a 5.4% annual yield. The company highlights its capital diversification strategy and notes its recent 30-year issuance and its expansion in foreign-denominated debt, now exceeding $8 billion. The company emphasizes its strong liquidity position of $5.2 billion and low variable-rate debt. It stresses the importance of access to capital for growth and mentions its efforts to build a private capital infrastructure to broaden its capital allocation opportunities globally. Sumit Roy is then invited to provide further insights.

The paragraph outlines a company's strategic plan to expand into private capital markets for equity, highlighting several advantages. These include access to a larger equity pool compared to public markets, with the U.S. private real estate market being significantly larger than public REITs. This strategic move is expected to enhance the company's capitalization options, reduce pricing volatility, and support shareholder value. Additionally, managing third-party capital is anticipated to generate recurring revenue through management fees, with a premium valuation from investors. The company aims to leverage its existing resources and talent to implement this initiative with minimal additional investment.

The company, with a strong history in real estate since 1969, is developing an open-end fund focused on institutional investors like pension funds and sovereign wealth funds. They aim to leverage extensive property data and predictive analytics to enhance decision-making and capitalize on market opportunities. This fund will differ from traditional closed-end funds and non-traded REITs, avoiding high net worth or retail investors. It will follow Realty Income's balance sheet and leverage principles, with the company co-investing alongside earning management and incentive fees. This strategy aims to align incentives, enhance returns, and ensure transparency.

The company believes its new private capital platform will complement and enhance its existing business, aiming to strategically allocate investment opportunities to maximize returns for both public shareholders and private investors. The initiative is expected to boost earnings growth, expand the investment market, and reduce dependency on public equity. The company's performance so far has surpassed expectations, driven by strong investments and portfolio stability, with optimism for future growth opportunities. The CEO invites questions from the audience, and John Kilichowski from Wells Fargo inquires about recent acquisition numbers, the acquisition guidance for the fourth quarter, and the potential impact of a significant 7-Eleven transaction on the company's long-term capital costs.

Sumit Roy explains that the company executed $740 million in transactions in the third quarter at a 7.4% cap rate, which was lower than the second quarter's 7.9% rate. Despite this, the improved cost of capital by 65 basis points made these transactions more favorable. He emphasizes the importance of considering both cap rate and cost of capital together to understand the investment spread. Roy also mentions a strong pipeline anticipating $1.3 billion in deals for the fourth quarter, supported by recent forward funding in public markets, despite recent volatility in the cost of capital.

The paragraph discusses the company's investment strategy, emphasizing the importance of considering cost of capital volatility and ensuring a sufficient margin of safety in transactions. The company actively participates in the one-off market, contrasting it with larger portfolio deals, which they undertake at a discount to market rates. They highlight their success in securing four large portfolio deals in the third quarter, noting a $740 million investment where rents are 6% below market and 26% below replacement costs. This approach is believed to add long-term value for investors. The paragraph concludes with a transition to a question from Greg McGinniss of Scotiabank.

In the conversation, Greg McGinniss asks Sumit Roy about the impact of capital raising on acquisition volumes and potential cost differences in equity for fund businesses. Roy explains that private markets prioritize long-term internal rate of return (IRR) rather than just initial spreads, unlike public markets, which focus on immediate spreads and cash yield. This focus often prevents them from pursuing investments with lower initial returns but potentially higher overall returns due to inherent growth. By accessing private capital with long-term expectations, they can explore higher growth opportunities while maintaining a complementary relationship with their public operations.

In the conversation, Greg McGinniss asks for examples of investment opportunities missed due to the current capital structure, which Sumit Roy explains by citing industrial properties and data centers as areas they can't currently pursue due to cost of capital constraints, despite their potential for long-term returns. Brad Heffern then inquires about the target for the fund and any potential overlap between investment profiles of the current structure and the new fund. Sumit Roy responds that there will indeed be overlaps, as they will be substantial equity holders in the new fund, aligning interests, and exploring opportunities that are beneficial in the long term but may not be feasible for the standalone public entity in the short term due to capital raising dynamics.

The article discusses a strategy to enhance a financial platform by creating a perpetual vehicle that allows for large co-investments, fully consolidated with financial statements for visibility. This approach is a way to monetize the platform and utilize its scale and advantages, with minimal incremental costs, despite not being fully valued by public markets at times. The discussion then shifts to a question from Smedes Rose of Citigroup about a $63 million charge in the quarter related to a convenience store client, questioning if it's connected to smaller charges earlier in the year and seeking more details on the situation, though the client's identity cannot be disclosed.

The paragraph discusses financial expectations and challenges faced by a company. Jonathan Pong addresses a $64 million noncash accounting charge related to impairment from sale leasebacks classified as a financing receivable. He explains that the impact of lost rent for 2024 has been accounted for in their guidance. Sumit Roy adds that they are working to regain control over assets in Texas from a non-paying client and are confident in replacing the lost rent quickly. Additionally, he mentions the situation with Red Lobster, which has emerged from bankruptcy, hired new executives, and had 216 assets before the bankruptcy.

The paragraph discusses the status and performance of lease renewals for various retail companies like Rite Aid, Walgreens, CVS, Family Dollar, Dollar Tree, and Dollar General, emphasizing high recapture and renewal rates despite broader market concerns. The speaker notes the inconsistency between media headlines and the actual situation within their portfolio, highlighting selectivity and strong data support. Afterward, Smedes Rose asks about the scope of a fund they mentioned previously, inquiring whether it would start at $1 billion or several billion.

The paragraph features a discussion about the current and future growth opportunities for a fund, with a particular focus on European markets. Sumit Roy mentions that although it's too early to predict the fund's ultimate size, they are confident it will benefit public shareholders. He highlights that 56% of the year's activities have been in Europe due to favorable opportunities, and he anticipates this momentum will continue. Roy states they are open to exploring new European territories if the right opportunities arise. Additionally, he notes that while there is expected growth in Europe, there's also significant momentum in U.S. activities, with a projected $1.3 billion for the fourth quarter.

In the paragraph, Haendel St. Juste asks Sumit Roy about the potential long-term benefits of a fund, specifically regarding its ability to generate mid-single-digit AFFO growth without relying heavily on annual equity raises. Sumit Roy explains that the fund is meant to broaden their investment opportunities and meet return expectations. He notes that relying solely on public markets could lead to capacity issues in the future due to their growth rate. The fund serves as a complementary equity capital source to sustain their long-term growth momentum, consistent with the company's historical performance.

The paragraph discusses the operation and future plans for a new fund that will resemble Realty Income's portfolio. It emphasizes transparency in their strategy to attract capital and start their business. New transactions will either be alongside them or on the public entity's balance sheet. When asked about cap rates for Q4 and future volume, Sumit Roy refrains from specifics but assures healthy spreads higher than historical ones. They have prefunded their $1.3 billion need for Q4, reducing reliance on public markets. In response to a question about the private fund, there's a focus on how underwriting deals and opportunities will be managed, mentioning economies of scale and the potential impact on headcount or investment processes during the fund's early stages.

Sumit Roy discusses the advantages of the company's scale in mitigating costs that would otherwise be prohibitive for a startup. With 465 employees, well-staffed investment arms in the U.S., U.K., and Amsterdam, and a strong asset management team, the company can manage its assets efficiently without needing additional personnel. Legal and transaction expertise is handled in-house, further reducing costs. The primary areas requiring new resources will be in fund management, reporting, and investor relations for a specific private investor base, but overall, incremental costs will be minimal.

In the paragraph, Sumit Roy discusses the competitive landscape in the transaction market in the U.S. and Europe, noting that private capital is increasingly becoming a significant player. While the U.S. market is crowded with competition, primarily from newly public companies in the net lease space, the international market still offers an advantage with less intense competition, though it has increased compared to a year or two ago. The conversation shifts as Upal Rana from KeyBanc Capital Markets asks about the impact of recent rate cuts on buyers and sellers. Sumit explains that market volatility, particularly regarding interest rates, influences transactions, with the biggest uncertainty stemming from current economic conditions and how they affect the interest rate curve.

The paragraph discusses the impact of inflation expectations on the cost of capital, especially for a net lease business. It mentions that policies affecting inflation expectations can lead to volatility in the market, which impacts the long-term financing costs. Clarity on these policy impacts is needed for business stability. Upal Rana asks about the timing of launching a private capital fund in the current economic environment, considering potential future capacity issues. Sumit Roy responds that there are no significant credit concerns, noting an improvement in their credit watch list, which decreased by 10 basis points to 4.2% from the previous quarter.

The paragraph discusses the long-term strategy of building a mature business, emphasizing that the timing should be right and the process should be undertaken slowly and thoughtfully. The speaker compares their approach to Prologis's successful 20-year journey in the open-ended fund business. The intention is to start building the business now, before there's a critical need for additional capital, to avoid potential constraints in the future. The paragraph ends with a transition to Linda Tsai from Jefferies asking for an update on the 2024 bad debt situation, followed by Jonathan Pong's response that $6 million in bad debt expense has been incurred, equating to about 40 basis points of rental revenue.

The paragraph discusses the credit loss situation and financial health of a certain portfolio, noting that excluding unusual events, credit loss is around 18 basis points, indicating a healthy portfolio. Sumit Roy mentions a specific credit loss of 4.2% and that they are monitoring potential risks, but feel secure with their visibility into cash flows. Linda Tsai inquires about the impact of a C-store operator's write-down on earnings, to which Jonathan Pong responds that it's about $1 million a month and included in their financial guidance. He suggests there's potential interest in these assets and historically, they have been able to recapture 84-85% of impacted rent. Lastly, Ronald Kamdem from Morgan Stanley asks about investments in the fund that public equity might not pursue.

The paragraph features a conversation between Sumit Roy and Ronald Kamdem about investment strategies and demand in the real estate sector. Sumit Roy explains that the potential investor base for investing in real estate through a fund structure is larger than those investing in public securities. While some funds may invest in both public securities and private investments, the majority are likely investors unable to invest in public securities. The goal is for their platform to serve those investors by being a significant co-investor. Additionally, when asked about data center initiatives, Sumit Roy acknowledges growing demand in the sector but does not provide specific details about their pipeline.

The paragraph discusses a company's approach to collaborating with multiple operators to develop a compelling value proposition in a promising business opportunity. They aim to meet demand and capital needs in a unique market situation, focusing on long-term capital allocation with major clients. The conversation transitions to questions from R.J. Milligan of Raymond James about the company's investment fund strategy. Milligan inquires whether the fund's investments will include properties without triple net leases or those with higher growth potential. In response, Sumit Roy clarifies that their investment approach will maintain a similar rental income flow structure to their core business and will not pursue ventures with low NOI margins.

The paragraph discusses a strategy regarding data centers, emphasizing that the company will focus on long-term investments similar to triple net assets rather than colocation sites. Sumit Roy explains that the company's cost of equity and return hurdles are aligned with long-term goals but face challenges meeting immediate accretion required in public markets. Due to this, they are passing on quality assets that don’t meet short-term metrics. However, through a fund structure, they hope to capitalize on their platform to benefit shareholders. Realty Income will contribute a seed portfolio to engage investors, and future investments will be new.

In the paragraph, Sumit Roy discusses the potential for pursuing new transactions outside of an initial seed portfolio, specifically in the context of utilizing a fund structure to overcome certain accounting limitations associated with development projects. He explains that while lease accounting can restrict recognizing the full cash impact of investments in development, using a fund structure could enable more flexibility in pursuing such projects, as long as they meet required return hurdles. The alternative capital source would allow for a broader range of transactions beyond what is possible as a public entity due to reporting constraints. Greg McGinniss inquires about potential investors for this initiative, to which Sumit Roy responds that there are currently no specific investors in mind.

The paragraph is a conversation among financial professionals discussing various aspects of expense leakage and development pipelines. Jonathan Pong attributes a slight increase in expense leakage to a combination of deferred expenses brought forward, carry costs from vacant assets, and a larger Spirit portfolio with more leakage. Sumit Roy addresses a question from Wes Golladay about non-retail development, stating that they hold back spending until leasing becomes clear, and the non-retail component is a small part of the overall development. Roy expresses confidence about the leasing outlook.

The paragraph discusses a partnership with developer Panattoni, expressing confidence in leasing properties soon. They will only make significant investments if potential clients are likely to take over leases. Sumit Roy confirms an expectation of higher yields, as sometimes actual lease rates exceed expectations, boosting confidence in their underwriting capabilities. The paragraph concludes the discussion with closing remarks from Sumit Roy, thanking participants and anticipating future engagement.

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