Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Realty Income Corp (O, Financial) reported a robust 6% growth in AFFO per share, reaching $1.06.
- The company achieved a total operational return of over 11%, combining AFFO growth and a dividend yield exceeding 5%.
- Realty Income Corp (O) invested $805.8 million in high-quality opportunities across the US and Europe, with a blended initial cash yield of 7.9%.
- Occupancy rose to 98.8%, a 20 basis point increase from the prior quarter.
- The company maintained strong balance sheet metrics with leverage at 5.3 times and A3/A- credit ratings from Moody's and S&P.
Negative Points
- Exposure to potential lost rent from clients like Rite Aid, Red Lobster, Walgreens, and Dollar Tree, which could impact AFFO per share by approximately $0.02.
- The company recognized approximately $6.2 million in AR reserves from a client in the convenience store industry, impacting same-store rent growth.
- Investment grade tenants represented only 10% of acquisitions, the lowest since Q3 2017.
- The transaction market remains volatile, with potential competition from private equity if interest rates decline.
- Realty Income Corp (O) faces challenges in maintaining investment spreads due to potential cap rate compression.
Q & A Highlights
Q: The largest component of your investment volume this quarter was the investment in the Asda notes. How should we think about this different investment buckets that you have when it comes to expectations for the back half of the year?
A: We did have a $377 million investment in the Asda loan, which was very opportunistic. For the remaining half of the year, we are probably going to have the majority of our investments, if not 100%, in our more traditional investment asset level portfolio level real estate, direct investment.
Q: Can you talk a little bit about the opportunities you're seeing in the US versus European markets outside the loan?
A: During the first quarter, we saw some green shoots in the US where sellers were starting to realize the higher cap rate environment was here to stay. We expect that to continue into the remainder of the year. The markets in Europe have been fairly stable, and we feel confident that trend will continue for the remainder of the year.
Q: How do you think about the duration risk when taking equity stakes and doing real estate loans? Is there a limit on exposure you want to have for lending?
A: Credit investment is an addendum to what we offer our clients. We believe it makes sense to continue being a partner to our clients. For instance, the $377 million investment in the Asda loan at an 8.1% six-year paper was opportunistic. We are comfortable with the credit and see it as a natural hedge to the interest rate risk on our balance sheet.
Q: Are there any other verticals you're looking at for higher internal growth rates?
A: The areas that give us higher internal growth are data centers, gaming, and the international market. Industrial also tends to have higher internal growth. We are comfortable continuing to play in these specified verticals and see plenty of opportunities there.
Q: The amount of investment-grade tenants as a percentage of acquisitions was 10%, which is lower since the third quarter of 2017. How should we think about that and your appetite to move down the risk curve to generate yields?
A: We don't target investment grade as a criterion for investment. We look for generating the right yield for the credit risk and real estate risk we are taking. The actual ratings of the client are a byproduct of our underwriting for an appropriate risk-adjusted return profile.
Q: Can you talk about your bad debt outlook and if there's upside to your guide here?
A: We recognized around $9 million in bad debt expense year-to-date, which is around 70 basis points of revenue. Historically, we've been around 35 basis points. We do not expect the magnitude of bad debt to carry forward into the back half of the year, but there is still some conservatism in our outlook.
Q: Are there any purchase options or agreements attached to the Asda loans? Should we not anticipate more loan deals in the second half of the year?
A: There are no purchase options attached to the Asda loans. We are not anticipating doing any credit investments in the second half. However, credit investments will continue to be used opportunistically going forward.
Q: Are you seeing more opportunities to fit your buyback given your improved cost of capital? Are there any new competitors or private equity reentering the landscape?
A: We are seeing some institutional capital becoming more aggressive, but it's not prevalent yet. If interest rates start to come down, private equity should start to come back in. We want to remain disciplined and pursue transactions that make sense for our portfolio.
Q: How are you identifying assets for disposition?
A: We use predictive analytic tools to monitor our 15,000 assets. The analysis includes factors like location risk, fungibility, and credit. We compare the economic outcome of selling today versus holding the asset to determine the disposition list.
Q: How should we think about your view on investment spread with the improved cost of capital versus what you're seeing in the market?
A: We don't see cap rates moving out from these levels and expect them to start coming in. We are hopeful of maintaining the spreads we've achieved thus far, despite a potentially lower cap rate environment.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
