Realty Income Corp (O) June 3, 2026 Conference Transcript

Thank you all for coming. Before we begin here, I just wanted to read our forward-looking statement. So, as a reminder, we may make statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in any forward-looking statements. We will disclose in greater detail the factors that may cause such differences in the company's filings with the SEC. And lastly, information provided herein does not constitute an offer to sell securities. So, with that, Yana, please go.

Thank you, Alex. Good morning, everyone. My name is Yana Gallen, and I'm the net lease REIT analyst at Bank of America. I'm honored to host the Realty Income presentation and thrilled to introduce Realty Income's president and CEO, Sumit Roy. He's also your 2026 NAE REIT executive chair, and Sumit has served as OCEO since 2018 and been president since 2015. Prior to that, he served as Realty Income's Chief Operating Officer from 2014 to 2018. So 2026 has definitely been a very busy year for Realty Income in terms of new partnerships, announcements, and solid first quarter results. I'd love to ask Sumit if he could provide some high-level commentary on the year thus far.

Sure. So the first quarter was very good. We had a 6.5% increase in our earnings. We updated our earnings guidance, increased it by 60 basis points at the midpoint, and we had recapture rates north of 103%, and we invested about $2.8 billion across both the U.S. and international markets. It's 50-50. So the, you know, from an operations perspective, earnings perspective, things are looking great. What I would also say is there were certain other announcements, more strategic in nature, that we made during the first quarter, which was something that we had been sort of talking to the market about, And that was centered around creating these alternative sources of equity capital that we wanted to lean into. And I'm very happy to report that the cornerstone round for our open-ended Perpetual Life Core Plus Fund closed. We raised $1.7 billion, and it wouldn't surprise you, if you've been following us, We realized that almost all of that will be deployed by the end of this month, beginning of July, and so that was one of our key accomplishments and a key strategic objective that we had to create an alternative to relying on just a single source of equity, which has been the public markets for, since we went public, 1994. Along with that, we also announced a couple of other very strategic partnerships. One was with Apollo, where we raised, it's a $2 billion JV. It's 49, 51%. They invested $1 billion in our business of equity, and this is a play on, you know, the aging population. The Athene business is an insurance company that raises a lot of annuities, and they wanted to find investments that would match up with the liabilities that they have, and they believed that the net lease model, and more specifically us, were partners that they wanted to pursue that strategy with. And so we closed on that as well, and it's going to be programmatic. We will continue to grow that particular channel going forward. And third, but certainly not the least, was a partnership that we announced with GIC. This is a $1.5 billion built-to-suit partnership on the industrial side. And with them, we did our first investment in Mexico and added Mexico to our countries of choice in the international market. So I'll stop there.

Thank you. Definitely a very busy start to the year. Maybe starting very big picture, Realty Income has historically branded itself as the monthly dividend company, and as a result, you've garnered a very strong retail investor following. I was hoping you could maybe expand upon this big push into private capital and joint ventures and how your team decided on this path.

Yeah, the strategic rationale for doing what we did was what we noticed happening over the last three to four years. You know, the fundamentals of the business were very strong, but it wasn't necessarily being reflected in the stock price. And so having this single point of failure to help finance two-thirds of our investments was something that we wanted to strategically address. And creating these alternative channels of equity capital would allow us to effectively monetize the platform that we've built that is geared towards doing $10 to $15 billion of investments a year. And this is a win-win. This less reliance on the public markets and partnering with sources of capital that want the investment channels that we have in place today would allow for us to continue to create earnings growth for our public investors through fee businesses and or through, you know, the strategy that we have with Apollo, Where they basically sort of curtail their upside to a particular number, and anything above that, above and beyond that, accrues to the public shareholders. So if you think through every one of these strategies, it was largely to address this single point of failure that we noticed. And, you know, it's not just a story for us. It was REITs at large. And finally, this year, despite what's happened to the interest rate going from four to four and a half, you know, REITs are starting to rally. I mean, they have year-to-date performed at 14%, and there's finally a recognition that, you know, this is not just an interest rate play. These are businesses that have operations that continue to perform. And so we are a little bit ahead of the curve, but I don't think we'll be the only ones. And I just believe that that's going to make our entire industry much more healthier. I'm creating these alternative channels.

Thank you. And, you know, your business focuses a lot on external growth. Can you maybe comment on how your buy box has expanded because of this access to other forms of equity capital?

Sure. So, you know, we came out of the year at right around $8 billion, and today we increased that guidance to $9.5 billion for the year. Look, we are an investment shop. That is the model of the net lease business. The preponderance of the growth comes from external investments. And so, you know, creating a mousetrap that effectively scales the ability to source more transactions and to put that to work and in an accretive fashion is really what net lease investing is all about. And relationships, they matter. And, you know, 94% of the $2.8 billion that we invested in were relationship-driven. And that's where the size and scale comes into form. In order for us to maximize the growth profile, we've created these other channels, and, you know, I sort of mentioned how the Apollo, you know, relationship works because they're basically saying that, you know, anything, any investment we make, we are going to, we're going to need a 6.875% return, levered return. Anything above that goes to us. So clearly we make investments. These are lower growth, lower yielding investments. It meets the Apollo's requirement, but we create alpha beyond the 6.875, which accrues to our public shareholders, for which they're not having to finance that growth. It's a similar story on the open-ended perpetual life fund. There are certain transactions that we were having to pass on, not because they didn't meet our long-term investment horizon or investment returns. It was just that the day one spread was not sufficient to be accretive enough for what our public shareholders need. But if you think about the capital that we've attracted, the LPs, they're not necessarily focused on day one spread. What they want is a total return profile that more than meets their objectives of a 9% to 11% level return net. And so we were able to pursue transactions that had a lower... Yield going in, but a much higher growth rate. So again, different from the Apollo box, meets the LP's requirement, and we get a fee stream to manage the fund for them and the investments and everything else. And that fee is not something that the public market needs to finance. So that too accrues to the growth in our earnings on a permanent basis through this channel. The one with GIC is an interesting one. It's an investment that we make initially structured as a debt, where we are able to recognize our earnings on that piece of debt with the idea to own upon completion and stabilization. Which wasn't the case. We wouldn't be able to do that without GIC being the equity. And so I think if you sort of look at each one of these alternatives that we've created, it's with the singular goal of going back to our 5% growth rate that we have traditionally been able to achieve at Realty Income.

Thank you. And going back to the investment guidance you've set for the year of $9.5 billion, you mentioned on the first quarter you sourced and evaluated $31 billion of opportunities. Can you maybe talk to us a little bit about the pipeline? Where do you see the most attractive investment yields today?

Yeah, it's, you know, it's by geography. We can't make a general statement that, you know, right now, if you look at industrial, for instance, cap rates are quite steep for us. But with the right capital, if you look at certain markets in southern Europe, they still pencil. You look at markets in Poland, they still pencil. But if you look at the markets in Germany, you know, that's not an area where we can pursue industrial assets. Obviously, a big portion of spread investing is what is the cost of capital. So when we are investing in Europe, the fact that we can issue 10-year paper in the high threes is a massive advantage for us, and that is a testament to the A minus A3 credit rating that we have. What I would say is the momentum today is equivalent across both U.S. and the international markets. That was not the case last year. For the first three quarters, two-thirds of everything we did was in Europe. And again, it goes back to the points I made about Europe, that it's highly fragmented, less institutionalized, and less competition, to be very honest. And it's in the earliest stages of the sale-leaseback product. And for us to be able to go there and consolidate that industry and today be the largest net lease, even though we are private in Europe, if we were to list, we would be the largest net lease business in Europe, and actually the fourth largest REIT, for that matter. So, you know, the momentum is there across the board. I think, you know, we are the first call, especially in Europe, and I see... The product being well-spread across data centers, industrial, because we have access to this low cost of capital now and retail.

Thank you. And maybe just kind of your different competition in the market for data centers, industrial, and retail.

Yeah. So here in the U.S., we have a lot of, you know... Net lease businesses and the public markets. There has also been a drive on the private side to incubate net lease strategies. Apollo, rather than trying to do it on their own, they chose to work with us as a platform. But if you look at across the board, you know, Carlisle has set something up. Brookfield's been in and out of the net lease business for a while. Aries has a net lease strategy as well. And it's a testament to the product. I think the secrets are out. That, look, this is a perfect type of investment where you get yield. And growth. And so oftentimes I've described our business as we have debt-like cash flows and equity-like growth. It's a very difficult combination to strike a balance on. But I think that's what this business is, you know. So competition is from a, you know, number of competitors. It's a lot more steep here in the U.S. than it is in Europe. But having said that, if you look at the product that we pursue, Iana, that's where our size and scale comes into play. A lot of them are much large transactions, which would create concentration issues for some of our public competitors. And given where the interest rates are, debt is not something that a lot of the private buyers can lean on to help facilitate a net lease strategy. So we sit at the, you know, at the cross-section of, you know, doing very structured transactions. We are happy investing higher up on the balance sheet with the hope of, you know, it's a loan-to-own strategy that we are sort of incubating. And so we compete, and that's the reason why we had about 50% of our investments here in the U.S. and 50% in Europe. And a lot of the data center investments today are all here in the U.S., and that is going to continue to be a bigger and bigger part of our strategy going forward.

Thank you. And, you know, as you said, net lease comes down to spread investing. How much of the investment pipeline, the $9.5 billion you've targeted, has been pre-funded, and how are you thinking about the options for financing the remainder?

Yeah, great question. So we have about $3.9 billion of liquidity today. Our balance sheet leverage rate is very, very low. We obviously have talked a lot about these alternative channels that we've created for equity, which allows us to play across the cap rates spectrum, which we were not able to do with just public equity. And so that, too, is something that we've lent into. But we've done the same thing on the fixed income side as well. We did a prepay muni trade where we were able to get, you know, five to ten basis points, I would say, of better all-in cost than what unsecured bonds would have given us in the U.S. markets. So we are trying to be super creative. You're using our A-A3 balance sheet. In the process, we're doing a little bit of good, helping a local San Diego power company. You know, raise capital and have an outlet such as ours, a counterparty such as ours, to, you know, fund their forward electricity purchases. I feel very good about access to capital, where our liquidity situation is, and, you know, the two-thirds, one-third mantra that we have of equity and debt will continue to be how we finance the rest of our business. And the only other piece that some of you who've known us for a very long time may not be as acutely aware is we are using capital recycling in a much bigger way than we have traditionally used. So anywhere between 600 to 800 million will come through capital recycling. We are 900 to 950 million of free cash flow, and the rest of it is two-thirds equity and one-third debt. But even there, the management fee is something that will continue to accrue to us for which we do not need to raise capital.

Great. Maybe turning to the in-place portfolio, how are you, you know, thinking about and assessing tenant health and credit quality in the current macro environment?

Yeah, so, you know, again, it goes back to how did we construct the portfolio? Look, we are acutely aware that we are the monthly dividend company. We need to have a cash flow stream that is highly, highly dependable and highly diversified. I think if you look at our portfolio today, we have 15,600 discrete assets across the globe. If you look at the concentration of clients slash tenants, you know, there is no client more than 4% of rent today, so there's a tremendous amount of diversification. If you look at the subsectors that we are involved in, it's north of 90 subsectors. If you look at the asset types, you know, today we are at 78% retail, we are at 15% to 16% industrial, we are at right around 2% gaming, and a growing data center business. So even across asset types, we are very diversified. And that was why, despite the volatility in the macroeconomic environment, and I'm not going to sort of sweep that under the carpet, There is a lot of stress in the economy, and if inflation continues to be as sticky as some economists are predicting, that is going to translate to the consumer's ability to continue to spend. But if you've sort of created a portfolio that is largely based on necessity-based retail, it's much easier to absorb that. That'll be the last element that gets cut, and if you look at, you know, the largest industry concentration that we have, it is grocery stores. It is convenience stores. These are necessity-based retail that, you know, people will need first and foremost. That's what gave us the confidence to ultimately reduce our bad debt expense forecast for this year. So despite what is happening in the macroeconomic environment, largely led by geopolitical risk and inflation, etc., we feel very good about how we are positioned to navigate this year and beyond.

Thank you. I had to ask an AI question. I know we've been talking for many years about realty income's predictive analytics, but if you could share some insight into how your team uses data, AI, predictive analytics.

Sure, Jana. So this is a great question because, again, it goes back to our size and scale. The fact that we are, you know, churning through 400 to 500 million dollars of rent every year, you gain so much insight, you know, and so through clean data. We've had our machine learning tools learn what the ability is to forecast the rent continuation at a particular location. We define risk as our ability to continue to capture the existing rent on a prolonged basis. If that gets disrupted, that's the risk. Whether it's driven by location risk, whether it's driven by the business, whether it's the fungibility of that particular asset, All of those elements, you know, these tools that we've invested in that we call predictive analytics since 2019 is basically geared towards answering. We use this tool across every element of our business process of our workflow, starting from underwriting deals that we source. And to asset management, to making disposition decisions, to also determining what is the highest and best use for a given location. And this is part and parcel of how decisions are made on the front end, where we are making a decision to buy an asset, and all the way to the end of the cycle, where we are making a decision to sell an asset. And so we are very proud of the tools that we've invested, and obviously we have a DNA that leans very heavily into technology, but there is a much bigger strategy at play that we are working on very diligently, and the first step in that strategy is to make sure that every piece of data that our company uses in every decision that they make, it's a single point, a single source of truth. So we are trying to create the data lake where all structured and unstructured, and that second piece is not very easy, data is going to reside in this one data lake. We will be done with that exercise on the structured side by the end of this year, and the unstructured data will be done by the end of first quarter next year. At that point, the ability to scale our business even more. is going to, you know, increase exponentially. We can run agentic models for every element of our business at that point on clean data, data that we have made sure that curated and made sure that any new information is going through the filter that we've devised that keeps it clean is going to be a critical, critical advantage to how we run our business. Today, we are the most scaled business. We are at 95% EBITDA margin. I'm not going to tell you what it's going to look like two years from now, but it's going to be a lot better.

Thank you. And realty income is targeting annual mid-single-digit AFFO growth, and compounded with the dividend kind of 8% to 10% total return. What are the levers to get there?

Yeah. So look, even today, at the midpoint of the guidance that we've come out with, we are right at 3.4% earnings growth. Our dividend yield is 5.5%. So you're already at 9%. But the idea is to grow that three and a half to five. And I think despite the fact that we have some headwinds with regards to refinancing, we have 2% debt that's maturing next year. So 27, 28, there will be some of that headwinds. The strategies that I've talked about, along with our ability to continue to source and lean on our relationship-driven sourcing channels, is how we're going to get to that 5%, and we are convinced of that, and with a 5% growth rate and a 5% dividend yield, which can flex, you know, that 5% can be 7% earnings growth, etc., and we have done that. In the not-so-distant past, we will get back to that 8% to 11% on a consistent basis of growth that people associate with realty income.

I have one more from you before I'll open it up to the room for questions, but I'm curious how the board thinks about the dividend, and how do they balance returning capital to shareholders versus the investment opportunities that you see?

So that's a DNA question again, Yana. Look, we were founded in 1969. Our founders were developers at heart, and this story is important, and so I'll get to you answering your question. You know, they were approached by Graham Bell. I don't know how many of you know this story. He's the founder of Taco Bell, and he couldn't get bank financing to build a taco stand where he could sell tacos. And so he approached, you know, our founders were in Southern California, just like Graham Bell. He approached our founders, and they said, okay, we're going to build it, but we don't want to be responsible for this. And they themselves, our founders, didn't have enough capital to do this. So they... Borrowed from friends and family, and they built the first Taco Bell stand, and they said, we're going to charge you 11%, but you're on the hook for everything else. And that was how, you know, the concept of a net lease came about for us. And, you know, Bill, our founder, along with Joan, said, you know, we borrowed from our friends and families. Well, not borrowed. They're equity holders of this asset. We collect rent on a monthly basis. We're going to distribute it out on a monthly basis. And that's how the monthly dividend company got stood up. And they said, you know, they have expenses on a monthly basis. They've invested in us. We should return, you know, their share of the rent on a monthly basis. So the monthly dividend company is absolutely part and parcel of who we are. It institutes a tremendous amount of discipline. And I've heard this, you know, from several sources that, oh, institutional investors don't really care about that. But we are very much focused on this total return concept. Thank you. You know, I would argue with our shareholders that, look, we are returning capital on a monthly basis to you, which is circa 5% of your investment, you know, and we are then also growing our business at, you know, this year in the mid 0.3 and a half percent. So, I think it's a fantastic model which... With the aging population, et cetera, will only resonate more. People are looking for steady income that grows over time, that has incredible amount of diversification and scale. So our board, I can tell you categorically, is very much a believer in the monthly dividend concept. And we will continue to lean into it. And with, you know, the population set continuing to be, you know, getting to the point where income streams become much more important, I think our model will continue to resonate.

Any questions in the audience? Yes?

Yeah, great question. So the question, for those that may not have heard, was, you know, where do we see the opportunities? Is it companies that are trading at a discount or large transactions in the private side? Look, we see everything. For us, I'll answer the question that perhaps people have in their mind. Doing M&A in the public markets, it's a big lift. It's a very high hurdle rate. We've done it multiple times. We did two very large M&A deals in the last five years. We did the first M&A deal in 2013, then we did 2022 varied, and then we did Spirit in 2024. So doing M&A deals is not an issue for us. But there is a lot of volatility that's associated with doing a public-to-public. And right now, we are so confident in our sourcing channels on the private side that we don't have a need or feel like there's a need to go down the path on the public side. Plus, anytime you're buying another company, you're effectively... Borrowing their underwriting. And what we find is, you know, oftentimes 20 to 30, sometimes even more, percentage of what you're getting with a public company is not really core to your long-term strategy. And so that becomes very disruptive in the process of cleaning up that portfolio. Whereas when you're going after a private situation, and bigger is better for us, because that's where we differentiate, I do believe that... There are more opportunities for us on the private side. There's less noise, and we buy exactly what we want rather than, you know, in a public company situation. So I'm not saying we will never do M&A again. I'm just saying it's a very, very high hurdle, and we have plenty of opportunities on the private side that is keeping us busy.

Unfortunately, we're out of time, but thank you so much, Sumit. This was a great intro to Realty Income.

Thank you.