The paragraph is an introduction to the Realty Income Fourth Quarter 2024 Earnings Conference Call. Kelsey Mueller, Vice President of Investor Relations, introduces the call and mentions key speakers: President and CEO Sumit Roy, and CFO Jonathan Pong. They discuss Realty Income's 2024 performance, highlighting a 4.8% growth in AFFO per share, contributing to a 10.2% total operational return for the year. The company's historical average annual return is approximately 11%, with no negative returns. The call focuses on three main themes: Realty Income's proven track record, confidence in growth, and commitment to steady returns for shareholders.

The paragraph discusses the company's successful financial performance and investment strategy in 2024. It highlights their ability to deliver consistent growth in AFFO per share, with a disciplined capital allocation strategy resulting in a significant investment spread. In the fourth quarter, the company achieved 4% growth in AFFO per share, investing $1.7 billion in high-quality opportunities, primarily from investment-grade clients. They completed 73 transactions, with a significant portion involving large deals. Investments were made in the US and Europe, demonstrating their strong sourcing and acquisition capabilities.

The company completed investments with a 155 basis point spread over their short-term weighted average cost of capital, backed by $230 million in adjusted funds from operations post-dividend. They manage a diversified portfolio of over 15,600 resilient properties, achieving 98.7% occupancy and enhanced returns through predictive analytics. They have a strong lease renewal history with a 107.4% entry capture rate and a historical recapture rate of 103%. Their capital recycling strategy involves strategic dispositions to optimize portfolio quality and growth, with $138 million in net proceeds from selling 80 properties in the fourth quarter and $589 million from 294 properties for the year. This strategy is set to continue in 2025.

The company is optimistic about sustaining growth in its core business by 2025, with expectations of $4 billion in investment volume due to a strong pipeline of opportunities across various property types and industries. The forecast for AFFO per share is between $4.22 and $4.28, accounting for potential losses from tenant turnover and M&A-acquired properties. This poses a short-term negative impact on AFFO but opens opportunities to transition to stronger clients. The firm doesn't expect to repeat the $21 million nonrecurring lease termination fees from 2024 in their current 2025 forecast. They aim to recapture rents consistent with historical performance and have reinforced their status as a key real estate partner for major clients like 7-Eleven, Morrisons, and Carrefour.

In the fourth quarter, Realty Income completed a $770 million sale-leaseback transaction with 7-Eleven, which is now their top client, contributing 3.5% to their annualized rent. This transaction demonstrates Realty Income's capability to handle large deals efficiently. They have a long-standing relationship with 7-Eleven, having completed six sale-leaseback transactions with them over a decade. Additionally, Realty Income is expanding its investment opportunities through a new private capital initiative. Financially, the company is strong, with solid execution in 2024 and a robust balance sheet, featuring $3.7 billion in liquidity and modest leverage. Their exposure to variable rate debt is minimal.

The paragraph highlights Realty Income's strong cash flow and balance sheet stability, which have supported its track record of increasing monthly dividends for 30 consecutive years, making it part of the S&P 500 Dividend Aristocrats Index. The company has announced its 129th dividend increase, marking 656 consecutive monthly dividends since 1994, with a recent 1.5% increase effective in March. It credits its diversified cash flow and investment strategies for lower earnings volatility. Realty Income also acknowledges its nearly 500 global professionals' contributions and mentions a $2 billion stock repurchase program funded by asset sales or free cash flow, aimed at maintaining leverage while pursuing quality investment opportunities.

In the paragraph, Sumit Roy concludes the prepared remarks by highlighting the company's strong performance in 2024, emphasizing the stability of its portfolio, the expertise of its team, and a strong balance sheet. He expresses the company's aspiration to be a premier real estate partner and notes the existing valuable relationships. Roy is optimistic about the active pipeline and partnership opportunities with top-tier operators, demonstrating the company's value. Following this, the call is opened for questions. The first question from Fereal Grenad of BOA concerns cap rates and their trend relative to the cost of capital. Roy responds that current cap rates align with 2024 averages. Grenad also inquires about capital recycling and its role in funding future acquisitions. Roy notes it's too early for specific guidance but provides enough for modeling purposes. The session continues with the next question from John Kilichowski of Wells Fargo.

The paragraph is a dialogue between John Kilichowski and Sumit Roy discussing a company's share repurchase program and portfolio health. John inquires about the criteria for prioritizing share repurchases over other capital uses and whether repurchases are included in the guidance. Sumit explains that repurchases are considered a strategic tool to be used if market volatility continues, prioritizing the use of free cash flow and disposition proceeds on a leverage-neutral basis. They aim not to rely on buybacks unless it's the best economic decision. John also mentions a rise in non-reimbursable expenses and an increase in the company's provision for bad debt, comparing current figures to those of the previous year.

In the paragraph, Jonathan Pong addresses a question about whether the company's cautious financial outlook is due to conservatism or market conditions affecting tenants. He explains that the guidance for unreimbursed property expenses is set between 1.4% and 1.7%, with assumptions regarding costs from vacant properties, and hopes to outperform these numbers. Regarding bad debt expenses for 2024, they are projected to slightly increase to seventy-five basis points, primarily due to issues with specific tenants acquired through previous M&A transactions. Despite some short-term disruptions, Pong suggests there is no major concern. Sumit Roy discusses the company's focus on transaction markets, noting that last year's opportunities were mainly found in Europe and the UK.

The paragraph discusses the company's shift in transaction focus due to changes in the cost of capital and market conditions, resulting in more sellers entering the market and improving the company's cost of capital. By the end of the year, their transactions were equally divided between international and US markets, a trend they expect to continue through 2025. The company attributes this success to their unique business model and robust pipeline, which supports their $4 billion acquisition goal. Credit investments will remain consistent with previous years. Additionally, the company is exploring further investments in Continental Europe, bolstered by team expansions in London and Amsterdam, with growing interest in the opportunities there.

The paragraph discusses the company's strategy of expanding its team in the UK and Amsterdam to support scaling efforts. It mentions that there are no new geographies entered besides those already disclosed, such as Poland. Investments in the fourth quarter primarily focused on existing markets like the UK and Spain. Decathlon facilitated expansion in markets including Germany and Portugal, with a continued focus on countries like France, Italy, Spain, the UK, Ireland, and Poland. In response to a question from Brian Caijolo regarding competition in the real estate investment trust (REIT) space as others expand into private funds, Sumit Roy suggests that their company's strategy is validated. The company emphasizes transparency with its investors, sharing plans before executing them.

The paragraph discusses a business's strategic shift towards tapping into private sources of capital, emphasizing its strong position in the core plus arena. The firm has launched its marketing process and is optimistic about this new venture, noting affirmation from other successful operators entering the space. The business aims to diversify its equity capital sources without sacrificing its strategic goals. Sumit Roy confirms that their current pipeline does not include any large transactions, which they define as those over $500 million. Ronald Kamdem from Morgan Stanley asks about specific industry activities in data centers and gaming, to which Sumit responds that the pipeline lacks such large deals.

The paragraph discusses the company's approach to opportunities in gaming and data centers. In gaming, they acknowledge its episodic nature but are engaged in ongoing discussions, particularly in high-interest areas like Ron's region. Data centers are seen as exciting yet requiring careful partner selection, emphasizing long-term relationships with competent and proven operators. Citing examples like Microsoft's withdrawal from certain developments, the company stresses diligence in choosing partners and projects. Their decision-making factors include partners' track records, project locations, target clients, and lease specifics, which vary significantly in the data center sector.

The paragraph discusses the outlook for data centers, emphasizing the importance of being selective in investments due to ongoing demand driven by cloud services and AI. Ronald Kamdem inquires about bad debt guidance, noting a fourth-quarter write-down of straight-line rents impacting three tenants by about $8 million. Jonathan Pong confirms the write-down and explains that the potential reserves are concentrated in these tenants, causing a broad range of outcomes. As more information becomes available, the company hopes to narrow its conservatism. The conversation then shifts to address a question from Maddie Fargis regarding the company's debt, specifically noting that nearly $2 billion is set to mature in 2025.

Jonathan Pong discusses the company's strategy for managing its securities and upcoming debt maturities. The maturities have been intentionally staggered to manage risk effectively. He notes that $1.9 billion in debt is due this year at an interest rate of about 4.2%. If refinanced now, rates would be higher (around 5.3% for US dollars, 5.6% for Sterling, and 3.8% for euros). The currency choice for refinancing will impact costs, potentially leading to a minor dilution effect in 2025. The company has experienced various interest rate environments and uses a staggered maturity schedule to remain flexible, with the option to finance in multiple currencies. Additionally, a $4.25 billion revolver provides liquidity, reducing pressure to make deals under unfavorable conditions. Maddie Fargis asks about the guidance range for income tax expense, which is expected to be higher for the full year 2024, requesting insight into the factors contributing to this increase.

In the paragraph, Jonathan Pong discusses the company's tax situation in the UK, highlighting that they have managed to minimize the statutory tax rate to around 10-11% of net operating income (NOI). As their European platform grows and they acquire more UK properties, they anticipate an increase in income taxes, expecting a run rate of $80 to $90 million in 2024, compared to $66 million currently. Pong emphasizes the importance of considering income tax impact in investment decisions, both short- and long-term. The conversation then shifts to Brad Heffern's question about a recent sale-leaseback involving 7-Eleven's low cap rate, with Sumit Roy explaining that they cannot specify the cap rate but mention that a US transaction, which included the sale-leaseback, was done at a 6.4 cap rate. Roy also notes that they acquired the portfolio at a favorable discount.

The paragraph discusses a successful sixth sale-leaseback deal with 7-Eleven, highlighting the favorable cap rates for 7-Eleven assets with long lease terms. The speaker expresses satisfaction with the current portfolio but mentions that this transaction could also have been well-suited for their fund business. They note that in 2024, the company sourced $43 billion in transactions, investing $3.9 billion, and acknowledge that having an active fund business could have allowed them to engage in additional transactions. The fund business is seen as complementary to their public operations, enhancing their ability to capitalize on opportunities.

The paragraph includes a discussion about the impact of an office portfolio asset on earnings, noting it wasn't entirely responsible for a mentioned $0.04 impact but rather contributed about one and a half cents for 2025, with no surprise due to prior tracking. Jonathan Pong mentions that most office assets were obtained through mergers and acquisitions, and there's no anticipated material change. Then, Catherine Graves (speaking for Michael Goldsmith) asks about changes in the portfolio, specifically the increase in industrial exposure. Sumit Roy explains that the focus on industrials will continue, though acquisition opportunities are limited due to high trading levels. Instead, they are increasing exposure through development and partnerships for leasing industrial assets.

The paragraph discusses the company's strategy of investing in industrial assets while addressing concerns about elevated bankruptcies in the U.S. retail sector. Sumit Roy highlights the challenges faced by retailers with weak balance sheets due to an unfavorable macroeconomic environment and uncertainties around tariffs. The impact of tariffs varies by business type, with particular concern for retailers dealing in consumer goods like electronics, which are heavily imported from China. These retailers may struggle if they can't pass increased costs onto consumers and lack financial resilience.

The paragraph describes a discussion about global exports, particularly in consumer electronics and apparel, highlighting China's significant role in these markets. The speaker notes the uncertainty in sectors heavily reliant on these exports, which has led to a more cautious and conservative approach in their strategy. Following this, there's a shift to a dialogue between Catherine Graves, Sumit Roy, and Jay Kornreich, where Jay asks about updates on a private capital fund. Sumit Roy responds that it's too early to provide details as they have only just opened the data room and had initial meetings.

The paragraph discusses the funding strategies of a company for the year, focusing on their acquisition plans and equity considerations. With $92 million in unsettled forward equity, $45 million in cash, and around $850 million in annual free cash flow, the company feels well-positioned to cover nearly the first $2 billion of their planned $4 billion acquisitions. They also employ a disposition program to recycle capital, generating $591 million last year, which complements their funding strategy. The $4 billion acquisition target was set based on achievable cap rates or yields that enable accretive deals. Jay Kornreich acknowledges the insights, and then Ravi Baidu asks about tenant credit concerns, seeking information on tenants or categories on their watch list and embedded reserves.

The paragraph discusses the financial reserves and credit watch list of a company. Sumit Roy addresses a question about a seventy-five basis point reserve, explaining it includes general and conservative estimates due to macroeconomic volatility and policy uncertainty. The company's credit watch list is currently at 4.8%, slightly higher than the previous quarter, reflecting ongoing uncertainties. The list is monitored and adjusted as needed. Although some names have been removed from the list, others are added based on potential impacts, such as tariffs. The paragraph ends with the introduction of a question from Upal Rana regarding cap rate changes in the fourth quarter.

Sumit Roy explains that the compression in cap rates was driven by factors such as the Fed reducing interest rates, which made capital costs higher and encouraged sellers to enter the market, resulting in completed transactions and a slight decrease in cap rates by twenty basis points. He notes increased competition from large private asset managers recognizing the benefits of net lease investing, which he views positively as it validates the business model's stability and growth prospects. Roy emphasizes strong relationships with repeat clients, which account for eighty percent of their business, positioning them well despite the competitive landscape. In response to a question from Upal Rana, he acknowledges the challenges impacting AFFO per share in 2025, but does not specify what is needed to achieve the high end of their guidance.

Jonathan Pong and Sumit Roy discuss the importance of stability in the financial market for their business. Jonathan emphasizes the impact of reserve levels and ten-year yields on their stock, highlighting the significance of a stable rate market to manage costs and improve property expense margins. He also mentions the goal of eliminating vacant properties to reduce costs. Sumit adds that a stable financial backdrop is crucial for generating and sourcing transactions, irrespective of specific interest rate levels, as evidenced by their previous performance. Overall, they stress that stability is key to driving growth and improving their transaction pipeline.

In the paragraph, Jason Wang from Barclays asks about the factors influencing the decrease in development spending and increase in development yields year over year in 2024. Sumit Roy explains that the rise in investment yields on developments is due to the vintage of when these were originated, reflecting current market conditions. It's noted that development activities in 2024 are expected to be similar to the previous year, mainly involving established clients who value stability amid market volatility. Roy believes he addressed Wang's questions satisfactorily, and then Alec Feygin from Baird is invited to ask the next question.

In the provided paragraph, the conversation is focused on a real estate company's handling of tenant spaces and credit evaluations. The company successfully regained space from a convenience store tenant and is negotiating with other established operators to fill it. When asked about the tenant watch list and credit, particularly in Europe, Sumit Roy explains that due to the company's deliberate strategy, Europe contributes minimally to the watch list. They specifically pursued assets with clients like Corporate Ride and Homebase, intending to regain those spaces and negotiate with other interested parties. This strategy has been effective, allowing them to secure rents higher than the previous ones.

In the concluding paragraph of the conference call, there is a brief Q&A session followed by Sumit Roy thanking participants for joining and expressing anticipation for future meetings at upcoming conferences. The operator then closes the conference, wishing everyone a great day and prompting participants to disconnect.

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