Post on 15-Mar-2020
transcript
International Expansion: Sale-Leaseback with Sainsbury’s
REALTY INCOME
April 2019
Safe Harbor For Forward-Looking Statements
Statements in this investor presentation that are not strictly historical are "forward-looking"statements. Forward-looking statements involve known and unknown risks, which may cause thecompany‘s actual future results to differ materially from expected results. These risks include,among others, general economic conditions, local and foreign real estate conditions, thecompletion of the transaction described herein or the anticipated future results therefrom, tenantfinancial health, the availability of capital to finance planned growth, continued volatility anduncertainty in the credit markets and broader financial markets, property acquisitions and thetiming of these acquisitions, charges for property impairments, and the outcome of any legalproceedings to which the company is a party, as described in the company's filings with theSecurities and Exchange Commission. Consequently, forward-looking statements should beregarded solely as reflections of the company's current operating plans and estimates. Actualoperating results may differ materially from what is expressed or forecast in this investorpresentation. The company undertakes no obligation to publicly release the results of any revisionsto these forward-looking statements that may be made to reflect events or circumstances after thedate these statements were made. This investor presentation is for informational purposes only,does not constitute an offer to sell or the solicitation of an offer to buy any security of the company,and shall not constitute an offer, solicitation, or sale of any securities of the company in anyjurisdiction in which such offer, solicitation, or sale would be unlawful.
2
Contents5 : Addressable Market
4 : Overview
7 : Well-Positioned Domestic Business
8 : Transaction Highlights
9 : Investment Rationale
10 : Sainsbury’s Overview: A Natural Fit
24 : UK Grocery Industry Overview
12 : Portfolio At A Glance
13 : Investment Returns and Hedging Strategy
21 : UK Macroeconomic Analysis
28 : Additional Background on Sainsbury’s
3
Realty Income Announces International Expansion
£429 Million Sale-Leaseback with Sainsbury’s(1)
35 : Summary and Next Steps
37 : Appendix and Property Profiles(1) Expected to close on or around 5/22/19
4
OverviewRealty Income will expand to international markets starting with strategic sale-leaseback with Sainsbury’s
Strategic Rationale
Our Intent and
Approach
~ We estimate the size of the commercial real estate market in Europe to be approximately $11 trillion, with $30 - $35 billion of annual single-tenant transaction volume in our core verticals
~ We believe there is significant demand from high quality tenants in Europe for sale-leaseback capital on reasonable terms
~ The Sainsbury’s transaction is consistent with Realty Income’s approach of relationship-based transactions in partnership with industry leaders with strong management teams; geography is the only “difference” in this transaction
~ As this transaction demonstrates, Realty Income is uniquely positioned to build such relationships leveraging its industry-leading scale, size and cost of capital
~ Expanding to Europe is therefore a natural extension of Realty Income’s business model, with a focus on long-term triple net leases with annual growth
~ We intend to establish an office in London, and to judiciously grow our portfolio in Europe over time as we have done in the US
~ We expect our team in Europe to be staffed with our own employees, some of whom will relocate from our US office; in the near term we will outsource routine services like tax and regulatory filings
~ Our European platform will leverage the US business where it makes sense to do so for functions such as Finance, Legal, IT and HR
5
Europe Presents Compelling Market OpportunityRealty Income’s portable business model, cost of capital and scalability represent core competitive advantages
(1) Property owned for the primary purpose of benefitting from investment returns, as distinct from owner-occupied and non-investment leased real estate (2) Includes owner-occupied and non-investment leased real estate
Sources: CBRE, MSCI, Bloomberg, Realty Income estimates
US vs. Europe Comparison: Estimated Commercial Real Estate Market Value
CRE owned by Real Estate
Companies(1)
All Other Commercial
Real Estate(2)
Total Investable Commercial
Real Estate
US $4 Trillion $4 Trillion $8 Trillion
Europe $3 Trillion $8 Trillion $11 Trillion
US + Europe $7 Trillion $12 Trillion $19 Trillion
~ Ripe for sale-leaseback consolidation: We estimate $11 trillion of commercial real estate stock in the European market, only $3 trillion of which is owned by professional real estate firms
~ Additive to Realty Income’s addressable market: We estimate that corporate-owned commercial real estate stock is 2x greater in Europe than in U.S., representing a void for a well-capitalized, sizable and scalable institutional investor like Realty Income to fill
Median EBITDA Multiple Comparisons • Similar to the U.S., public companies in Europe can unlock trapped RE value through sale-leaseback
• We expect market-ascribed valuation differentials between real estate and operating businesses to benefit us
• We estimate annualized single-tenant real estate transaction volume in Europe to be between $30 and $35 billion in our target verticals
16.7x14.6x
11.1x6.4x 6.3x
Illustrative SLB
Multiple
(at 6% cap
rate)
Europe Ex-UK
Real Estate
Companies
(~700)
UK-Domiciled
Real Estate
Companies
(~90)
UK-Domiciled
Operating
Companies
(~1,500)
Europe Ex-UK
Companies
(~3,700)
56.1
76.6 80.7
72.7
31.8 33.0
47.1 44.7 43.8
71.6
82.9
94.6
67.9
85.9 81.3
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Estimated UK Commercial Real Estate Annual Investment Volume(1)
USD in billions(2)
Average = 64.7
UK is a Highly Liquid And Logical CRE Market For Our Initial Entry to Europe
Historically, ~$65 billion of CRE has traded on an annual basis in the United Kingdom
6
Global
Financial
Crisis
Post-Brexit
Referendum
(1) Property types include office, shopping centers, retail, industrial, leisure and alternative / mixed(2) Assuming GBP/USD spot rate as of 4/19/19Source: Savills, CBRE, MSCI, Realty Income estimates
Investment volumes
have held steady post-
Brexit referendum
despite political and
economic uncertainty
Incumbent competition is modest:
Enterprise value of the public REIT market in the UK estimated to be approximately $115 billion -- roughly the size of the publicly traded net lease REIT universe in the US
Of the $81 billion of
CRE transaction volume
in 2018, we estimate
$6 - $8 billion of single-
tenant volume in our
core verticals
6
1317
39
24
32 28 30 32
2010 2011 2012 2013 2014 2015 2016 2017 2018
Domestic Transactions Sourced and Investment Volume(1)
(USD in billions)
Investment Volume Transactions Sourced Selectivity
International Growth Augments Well-Positioned Domestic BusinessRealty Income is expanding its total addressable market from a position of strength
7(1) 2013 Sourcing and Investment Volume Excludes $3.2 Billion Acquisition of ARCT
All data current as of 12/31/2018
12%
8%
7%
4%
6%
4%7%
5%6%
Realty Income will continue to remain highly
selective in the US and internationally
0.7 1.0 1.2 1.5 1.4 1.3 1.9 1.5 1.8
Average Annual Domestic
Transactions Sourced Since
2013
$31 billion
Average Annual Domestic
Investment Volume Since
2013
$1.6 billion
Credit Ratings by Moody’s
and S&P Support Lowest
Cost of Capital in Net
Lease Sector
A3/A-
Unsecured Revolving
Credit Facility Provides
Ample Liquidity and
Flexibility
$3 billion
93%
Adjusted EBITDAre
Margin (Highly Scalable
Platform and Profitability
Flow Through)
8
Sainsbury’s Sale-Leaseback HighlightsAccretive transaction establishes international growth platform with leading UK grocer
£429
million Transaction size(1)
5.3%GBP 1st-year cash
cap rate
5.8%USD-equivalent
1st-year cap
rate(2)
>200 bpsEffective 1st-year
spread to
leverage-neutral
nominal WACC
12Assets acquired
6.6%Base-case
unlevered USD
IRR
15 yearsWeighted-average
lease term
$0.04 per
shareAnnualized
leverage-neutral
AFFO accretion
(1) Excluding acquisition transaction costs of approximately £4.2 million / transaction expected to close on or around 5/22/19(2) Reflects effective 1st-year USD cap rate net of annual cash flow FX hedge
9
Sainsbury’s Sale-Leaseback: Investment Rationale Realty Income’s first international acquisition represents natural evolution and execution of strategy
Congruent with
existing investment
criteria
Accretive returns,
minimal FX risk
UK is an attractive
market with sizable
opportunity for
strategic growth
~ Tenant operates in defensive, non-discretionary industry
~ “Blue Chip” grocery operator with seasoned and highly-regarded management team
~ Proven strength through multiple economic cycles
~ 15-year triple-net leases, attractive rent growth
~ Annualized AFFO accretion of ~$0.04/sh from Sainsbury’s transaction
~ Base-case 15-year unlevered USD IRR of 6.6% is attractive given tenant, asset quality
~ ~85% of FX risk on GBP cash flows to be hedged for 15 years through currency swap
~ Limited retail real estate supply per capita, healthy market fundamentals
~ Void of large-scale, pure-play net lease institutional competition
~ Significant demand for expansion capital from UK operators
~ Estimated >$1 trillion potential sale-leaseback market opportunity
Realty Income’s sector-leading cost of capital, size and scale are competitive advantages portable to the UK
10
All data is as of the most recent reported period (9/22/2018) and derived from Sainsbury’s public filings or Bloomberg, unless otherwise noted(1) Sainsbury’s is not currently rated; Implied investment grade rating is based on Realty Income analysis based on S&P credit methodology(2) Total 1,423 locations, consisting of 606 supermarkets and 817 convenience stores(3) Includes Sainsbury's supermarkets, c-stores, Argos & Habitats(4) Source: IGD estimates
Founded in 1869, Sainsbury's is one of the leading grocers in the UK operating over 1,400 grocery and convenience stores across the UK and Ireland. The company’s other businesses include Argos (catalog and online retailer), Habitat Stores (furnishing retailer), and Sainsbury's Bank.
Sainsbury’s seasoned management team has significant experience in the UK retail market and is led by Mike Coupe, CEO since 2014, who has held senior management positions at both Asda and Iceland (discount grocer).
Sainsbury’s same-store sales grew at an average annual rate of 4.7% during 2007 – 2010, significantly outperforming UK retail and GDP growth during the Great Recession.
Scott to confirm
606supermarket locations(2)
£28.9billion LTM
retail sales(3)
£542 sales per
gross SF(3)
Top 3UK grocery operator(4)
817 c-store
locations(2)
£5.5 Billion Enterprise Value
£788 Million Free Cash Flow
150-year History
Implied Investment Grade(1)
Over 185,000 Employees
4.9%
7.1%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Grocery
0.0%
2.2%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Realty Income Investment Criteria
Non-discretionary retail business ✓
Proven resilience through economic downturn ✓
Attractively-priced, high-quality real estate ✓
Long-term lease ✓
Annual rent increases ✓
Off-market sale-leaseback / relationship-driven ✓
Realty Income Investment Criteria – Grocery
Leading operator ✓
Strong balance sheet ✓
High-performing locations ✓
Differentiated business model ✓
Omni-channel platform ✓
Sainsbury’s Transaction a Natural Fit for Realty IncomeTransaction is complementary to defensive portfolio characteristics and additive to core industry
/ UK
Realty Income
Investment Criteria
Pro Forma Portfolio
Metrics: Before and
After Transaction(1)
Representing 2.2% of revenue, Sainsbury's
becomes Realty Income’s 12th largest tenant
81.7% 82.2%
Retail11
Benefits of size: Transaction does not
materially impact tenant, geography, industry
or property type diversification
(1) Based on rental revenue as of 12/31/2018
Banbury
Banbury – South East England
Bodmin – South West England
Bradford – Yorkshire
Bridgwater – South West England
Cardiff – Wales
Grimsby – Yorkshire
Hereford – West Midlands
Kempston – East of England
Locksbottom – London
Northampton – East Midlands
Sheffield – Yorkshire
Southampton – South East England
Portfolio at a GlanceReal estate portfolio consists of 12 established locations throughout the UK
12
Total Square Footage: 1.1 million
Average Population(1)(2): ~116k
Household Income Premium(1)(3): 7.9%
Current Market Vacancy(1): 2.6%
Estimated EBITDAR/Rent Ratio(4): >3x
Sales PSF (on a gross sf basis)(4): ~£550
Portfolio Characteristics
(1) Portfolio weighted average based on rent(2) Within a 15 minute drive of portfolio locations(3) Measured as premium (discount) to UK average household income; market data based on company estimates(4) Data based on Realty Income estimates
8
12
1
5
10
7
6
4
11
9
3
2
CFC above Realty Income portfolio and US grocery industry averages
Sales PSF is approximately 14% higher than UK grocery average
United Kingdom
Investment Returns
and Hedging Strategy
14
Investment Returns and Hedging Strategy SummaryTransaction expected to be immediately accretive to earnings with minimal FX risk
Investment spreads
are accretive on a
leverage-neutral basis
FX risk is largely
mitigated through
financing and hedging
strategy
Current FX and
interest rate dynamics
are favorable
~ Estimated 1st-year nominal investment spreads of ~210 bps exceeds Realty Income’s historical average by ~60 bps
~ Lower borrowing cost of GBP-denominated debt (driven by lower benchmark yields and Realty Income’s A-/A3 credit ratings) supports lower WACC for UK acquisitions
~ Favorable FX curve, high-quality acquired assets and reasonable rent levels support 6.6% unlevered USD IRR (significantly above long-term UK and US WACC)
~ Realty Income expects to issue £300 million in 15-year debt, which hedges 70% of
asset value and creates pound-denominated interest expense
~ ~£130 million equity contribution is sourced through GBP/USD cross currency swap
~ Realty Income expects to hedge ~85% of GBP cash flow via cross-currency swap,
fixing USD cash flow for entirety of 15-year term
~ Current weakness in GBP currency affords Realty Income the ability to invest at
reasonable USD cost
~ Historically wide interest rate spreads between the UK and US provides meaningful
FX “carry” over long lease term
~ Cross currency swap on hedged GBP cash flow converts ~£12 million in average
annual AFFO (hedged and unhedged) to estimated ~$18 million w/ minimal volatility
Structure projected to generate predictable cash flow and healthy investment spreads
15
Historically Low Pound Creates Compelling Investment OpportunityWeakness in pound allows Realty Income to buy “low” while locking in steep FX forward curve
1.30
1.65
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
GBP / USD FX Rate
Median FX rate since 1971
Dollar purchasing power has rarely been stronger:
Current FX rate ~20% below historical median and
in bottom 5th percentile of historical FX rates
136
(20)
(300)
(250)
(200)
(150)
(100)
(50)
0
50
100
150
200
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
US vs. UK: 10y Gov't Yield Spread
Median spread since 1992
Historically wide interest rate gap
converts GBP cash flow into increasing
flow of USD:
Current steepness of FX forward curve is a function of interest
rate differentials between the pound
and dollar that accrues to Realty Income’s benefit
Source: Bloomberg
FX curve and interest rate data as of 4/19/19
16
Favorable USD Investment SpreadsInitial projected returns on Sainsbury's transaction meet key Realty Income return hurdles
Projected Short-Term WACC (Actual Leverage and Leverage-Neutral)
Capital Component Cost Weight(1)Wtd
CostWeight Wtd Cost Assumptions / Commentary
Debt (15-yr GBP)(2) 2.8% 70% 1.96% 35% 0.98% Based on midpoint of indicative pricing range
Equity (Stock) 4.7% 23% 1.08% 58% 2.73% Nominal cost of equity (2019 AFFO yield at $68.53/sh)
Equity (FCF) 0% 8% 0% 8% 0% Annual FCF contribution to acquisitions funding
Short-Term WACC:Actual
Lev3.04%
Lev
Neutral3.71%
Short-Term WACC is lower than US WACC given lower
cost of borrow in GBP denominated notes issuance
Projected Year 1 Cash Cap Rate (GBP and USD-Equivalent)
Component GBP USD Assumptions / Commentary
Purchase Price (mm) £429 $558 Based of FX rate as of 4/19/2019
1st-Year NOI (mm) £23 $30 USD NOI represents GBP NOI converted at average NTM FX rate
Straight-Line Cash FX Accretion - $2 Incremental CF on USD leg of cross-currency swap
Year 1 Cash Cap Rate 5.31% 5.81% Currency swap provides ratable coupon recognition of forward FX points
Projected Nominal 1st-Year Investment Spreads GBP USD
Actual Leverage 227 bps 277 bps
Leverage Neutral 158 bps 208 bps
(1) May not sum to 100% due to rounding(2) Based on midpoint of estimated indicative rates of 2.7% - 2.9% given current market conditions as of 4/19/2019. Actual rate may differ.
Investment spread ~60 bps
above Realty Income’s
historical average
17
Expected USD IRR Exceeds Long-Term WACC HurdleRealty Income expects 6.6% USD IRR over the initial lease term using our standard assumptions
Expected Long-Term WACC (utilizing lower cost of debt in GBP currency)
Capital Component Cost Weight Wtd Cost Assumptions / Commentary
Debt (15-yr GBP)(1) 2.8% 35.0% 0.98% Based on midpoint of indicative pricing range
Equity (CAPM) 5.8% 32.5% 1.89% Historical monthly beta (0.4), 4% 10-yr UST, 4.7% equity mkt premium
Equity (Yield+Growth) 8.6% 32.5% 2.80% Current dividend yield + LT dividend CAGR (4.6%)
Long-Term WACC: 5.67% Represents LT hurdle rate for UK investment IRR
($564)
$603
($800)
($600)
($400)
($200)
$0
$200
$400
$600
$800
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
(US
D in
millio
ns)
Year
Upward sloping FX curve drives outsized USD-equivalent
unlevered IRR
Cumulative CF (USD)
6.6% USDIRR
USD cash flows amplified
over time given steepness
of today’s forward FX
curve. USD IRR materially
outperforms hurdle rate
• Contractual annual fixed rent increases
• Residual value = 100% of purchase price
• GBP/USD FX curve as of 4/19/19
Key Assumptions
(1) Based on midpoint of estimated indicative rates of 2.7% - 2.9% given current market conditions as of 4/19/2019. Actual rate may differ.
18
Currency Risk Hedged with GBP-Denominated Debt and Cross Currency Swap
Realty Income is not taking material cash flow risk associated with fluctuations in FX rate
£300 million
15-year Debt Issuance
“Natural Hedge”: Debt financing in GBP aligns with lease term and
currency of purchase price, UK entity cash flows
~ Allows Realty Income to access lower-cost financing given
lower benchmark rates in UK
£130 million
15-year Cross Currency Swap
Equity investment and cash flow repatriation hedge: Currency swap fixes
the USD value of equity investment for entirety of 15-year lease term
~ Interim cash flow exchanges fix the USD cash flow Realty Income
receives in exchange for GBP each period for 15 years
Mechanics of Cross
Currency Swap
(1) GBP cash flows include projected expenses and increase over time to reflect annual rent growth
Based on GBP / USD FX rate as of 4/19/19
Final Exchange (EOY 15)
Bank Counterparties
~£130
million
~$169 million
15-Year CF Exchanges
Bank Counterparties
GBP
cash
flow(1)
Fixed
USD
coupon
Initial Exchange at Inception
Bank Counterparties
~$169
million
~£130 million
19
Upward Sloping FX Curve Provides USD Upside Fixed USD cash flow compensates Realty Income for GBP forward points over 15 years
1.301.32
1.341.35
1.371.38
1.401.41
1.431.44
1.461.47
1.491.51
1.531.55
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Year
Current FX forward
curve (GBP/USD)
delivers increasing
USD revenue over
duration of lease
agreement
5.4%5.5%
5.7%5.8%
6.0%6.2%
6.3%6.5%
6.7%6.9%
7.1%7.3%
7.5%
7.7%
7.9%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
0
5
10
15
20
25
30
35
40
45
50
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Yie
ld o
n C
ost
Re
ven
ue
in
GB
P/U
SD
Year
GBP (Left Axis)
USD (Left Axis)
Yield on Cost (Right Axis)Forward curve
supports faster rate
of growth in USD
over time (average
yield on cost of
6.6%)
Source: BloombergBased on average FX rates implied by forward curve as of 4/19/19
GBP increases in value by >1% on an annual basis based on current forward curve
7.1%
10.2%
9.7% 9.7%
Se
p-2
0
De
c-2
0
Ma
r-2
1
Jun
-21
Se
p-2
1
De
c-2
1
Ma
r-2
2
Jun
-22
Se
p-2
2
De
c-2
2
Ma
r-2
3
Jun
-23
Se
p-2
3
De
c-2
3
Ma
r-2
4
Jun
-24
Se
p-2
4
De
c-2
4
Ma
r-2
5
Jun
-25
Se
p-2
5
De
c-2
5
Ma
r-2
6
Jun
-26
Se
p-2
6
De
c-2
6
Ma
r-2
7
Jun
-27
Se
p-2
7
De
c-2
7
Ma
r-2
8
Jun
-28
Se
p-2
8
De
c-2
8
Ma
r-2
9
Jun
-29
Se
p-2
9
De
c-2
9
Ma
r-3
0
Jun
-30
Se
p-3
0
De
c-3
0
Ma
r-3
1
Jun
-31
Se
p-3
1
De
c-3
1
Ma
r-3
2
Jun
-32
Se
p-3
2
De
c-3
2
Ma
r-3
3
Jun
-33
Se
p-3
3
De
c-3
3
Ma
r-3
4
Jun
-34
GBP Cash on Cash Returns -- Unhedged Repatriated Earnings (8.6% Average Yield)
USD Cash on Cash Returns -- Hedged Repatriated Earnings (9.7% Average Yield)
8.4%
12.0%
11.0%11.9%
Se
p-2
0
De
c-2
0
Ma
r-2
1
Jun
-21
Se
p-2
1
De
c-2
1
Ma
r-2
2
Jun
-22
Se
p-2
2
De
c-2
2
Ma
r-2
3
Jun
-23
Se
p-2
3
De
c-2
3
Ma
r-2
4
Jun
-24
Se
p-2
4
De
c-2
4
Ma
r-2
5
Jun
-25
Se
p-2
5
De
c-2
5
Ma
r-2
6
Jun
-26
Se
p-2
6
De
c-2
6
Ma
r-2
7
Jun
-27
Se
p-2
7
De
c-2
7
Ma
r-2
8
Jun
-28
Se
p-2
8
De
c-2
8
Ma
r-2
9
Jun
-29
Se
p-2
9
De
c-2
9
Ma
r-3
0
Jun
-30
Se
p-3
0
De
c-3
0
Ma
r-3
1
Jun
-31
Se
p-3
1
De
c-3
1
Ma
r-3
2
Jun
-32
Se
p-3
2
De
c-3
2
Ma
r-3
3
Jun
-33
Se
p-3
3
De
c-3
3
Ma
r-3
4
Jun
-34
GBP Cash on Cash Returns -- Total (10.1% Average)
USD Cash on Cash Returns -- Total (11.4% Average)
20
Cross Currency Swap Generates Favorable Returns and Reduces CF Volatility
Swap converts hedged GBP cash flows to fixed USD cash flow for duration of 15 year lease term
(1) Assuming FX conversion for unhedged earnings at FX rates implied by current forward curve
“Total” refers to earnings that are not expected to be repatriated to the US parent in addition to earnings that Realty Income expects to repatriate to the
US parent
Analysis begins after year 1 of investment to account for uneven GBP cash flows due to one-time non-recurring cash outflows that result in artificially
low GBP yields
Anticipated 9.7% fixed USD equity yield on ~85% of total AFFO (Cross-Currency Swap)
Anticipated 11.0% - 11.9% USD equity yield on total AFFO(1) with minimal volatility
UK Macroeconomic
Analysis
57
73
40
60
80
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
20
17
20
19
20
21
20
23
20
25
20
27
20
29
20
31
20
33
20
35
20
37
20
39
20
41
Population Projected Population
24
5
US
UK
UK Density Supports Long-Term Real Estate StabilityLimited retail supply and supply growth also supports long-term viability of stable cash flow generation
22
66.5MCurrent
Population(1)
93,628Square
Miles
The UK, by population, is
approximately the size of
California and Texas
combined
(1) Source: UK Office for National Statistics(2) Source: ICSC; Springboard
The UK, by land area, is
approximately the size of
Oregon
The UK, by GDP, is
approximately the size of
California
$2.8 Trillion
GDP(3)
Population density and growth, combined with limited retail supply and supply
growth, creates compelling opportunity for long-term real estate investors
UK Population and Projections(1)
(in millions)
Retail Square Footage Per Capita(2)
66.5M
(3) Source: OECD National Accounts Data files; Bureau of Economic Analysis
-8%
-4%
0%
4%
8%
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
UK Economic Data is Less Volatile Than EUEconomic data points tend to more closely mirror those of the US
23
UK GDP growth has demonstrated
superior stability versus the EU
since 2010.
Current unemployment of ~4% is the
lowest in over 40 years.
-1%
0%
1%
2%
3%
4%
2010 2011 2012 2013 2014 2015 2016 2017 2018
3%
6%
9%
12%
2010 2011 2012 2013 2014 2015 2016 2017 2018
Annual GDP Growth Rate Since 2010(1)
Unemployment Rate Since 2010(2)
Coefficient of Variation for GDP
Growth Since 2010
Household disposable income in the UK
continues to rise, with a compound
average annual growth rate of 2.6%
since 2000(1).
EU
UK
USAnnual Retail Sales Growth(1)
(1) Source: OECD National Accounts data files(2) Source: Bureau of Labor Statistics; UK Office for National Statistics; Eurostat
UK retail sales have a compound
average annual growth rate of 2.5%
since 2000, comparing favorably to
the EU at 1.2% while demonstrating
less volatility. Grocery accounts for
approximately 50% of UK retail sales.
UK EU US
0.29 0.64 0.30
UK Grocery Industry
Overview
£121 £124 £126 £130£135
£140£144
£152£156
£161 £164 £164 £163 £166 £170
44%
46%
48%
50%
52%
54%
56%
58%
60%
£0
£40
£80
£120
£160
£200
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Gro
ce
ry R
eta
ile
r S
ale
s a
s %
of
Tota
l
Gro
ce
ry R
eta
ile
r S
ale
s (
GB
P b
illio
n)
Historical UK Grocery Sales(1)
Grocery Retailers Sales (Left Axis) Grocery Retailers Sales as % of Total Retail Sales (Right Axis)
Global
Financial
Crisis
UK Grocery Industry Has Proven to be StableGrocery sales in the UK have been resilient during the global financial crisis and Brexit uncertainty
25
Brexit Vote &
Uncertainty
UK grocery sales have been growing consistently over the past 15
years in both nominal terms and as a percentage of retail market
(1) Grocery sales represent store-based sales onlySource: Passport Euromonitor International
CAGR = 2.5%
64%
19%
8% 7%
1%
UK Grocery Market Share(1)(2)
Big 4 Discounters Premium Convenience "Pure play" online
UK Grocery Industry is Highly Concentrated Sainsbury’s is one of the “Big 4” grocers that together comprise 64% of the UK grocery sales
26
(1) Source: IGD estimates(2) May not sum to 100% due to rounding (3) Big 4 market share includes all formats (supermarkets, hypermarkets, c-stores and online)
(3)
Quality product, excellent
locations and differentiated
assortment are hallmarks of the
Sainsbury's brand
3.2%
4.3%
3.0%
4.6%
4.0% 4.0% 4.0%
2.4%
3.6%
3.5%
4.9%
5.8%
3.4%
2.6%
1.8%
1.0%
1.6%
2.8%
3.7%
3.1%
0.4%
3.8%
0.5%
0.8%
1.9%
-1.5%
-0.3% -0.4%-0.3%
0.5%
1.0% 1.0%
1.5%
4.8%
3.6%
4.8% 4.8%
2.8%
3.6%
2.0%
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18
UK Retail and Grocery Sales Y/Y Growth(1)
Retail Sales (ex. fuel) Grocery Sales
UK Grocery Industry Has Been Stable Post-Brexit ReferendumUK grocery sales growth have improved since 2Q16
27
Avg. retail sales Y/Y growth: 2.5%
Avg. grocery sales Y/Y growth: 3.5%
(1) Source: UK Office for National Statistics
Brexit referendum 6/23/16
Additional Background on
Sainsbury's
Realty Income Investment Thesis on Sainsbury’sLeading operator, healthy balance sheet, high quality real estate and very defensive business model
Healthy Balance Sheet2
~ While not currently rated by agencies
given lack of public debt, Sainsbury’s has
an implied investment grade rating(3)
~ Sainsbury’s has ample liquidity to sustain
any Brexit related supply chain issues
(1) Source: IGD estimates(2) Source: Realty Income’s analysis based on Sainsbury’s public filings(3) Implied investment grade rating is based on Realty Income analysis based on S&P credit methodology(4) Source: Eurostat(5) Source: Sainsbury’s public filings and Bloomberg
29
~ Above average stores based on sales and
profitability
~ Average 15-minute drive time population
of ~116,000
~ Average household income of local
population above average for the UK
High-Quality Acquired Portfolio4
~ Grocery is non-discretionary
~ UK food costs are amongst the lowest in
the EU(4)
~ Same-store sales growth increased 4+%
during Great Recession while EBITDAR
margins and leverage improved(5)
Resilient to Economic Downturns3
~ One of the top three largest UK grocery
store operators (by sales)(1)
~ 7.5% EBITDAR margin is ahead of other
grocers, reflecting differentiated product
offering and excellent locations(2)
Blue Chip UK Grocery Operator1
Realty Income Exposure
% of Rent(1) 2.2% 1.3%(2) 1.4%
Summary Financials (Most Recent FYE)
Total Revenue(3) $36,993 $500,343 $122,662
Gross Margin 23.3% 25.4% 22.0%
EBITDAR(3) $2,761 $33,866 $5,545
Fixed Charge Coverage Ratio 1.4x 3.8x 1.3x
Sainsbury’s Consistent With Current Grocery ExposureSainsbury’s is a natural fit in Realty Income’s grocery exposure with high-quality operators
30
(1) Based on annualized rent as of 12/31/18, including, on a pro forma basis, the subject transaction(2) Represents only Walmart Neighborhood Market’s grocery stores, not entire Walmart exposure(3) USD in millions | Sainsbury’s financials are converted assuming 1.31 USD/GBP exchange rate
Source: Public filings of Sainsbury’s, Walmart and Kroger; company public filings
Representing 7.1% of revenue, the grocery industry will become Realty Income’s 5th largest industry
Sainsbury's: Solid Fundamentals, Improving MarginsAs a “blue chip” grocer, Sainsbury's has a proven operating track record with improving trends
31
(1) Retail EBITDA adjusted for gains on disposal of properties(2) For the twelve months ended 9/22/2018(3) (Net debt + Preferred + Capital & Operating lease obligations) / EBITDAR as of 9/22/2018. Sainsbury's Retail only, excludes Bank operationsSource: Sainsbury’s public filings
4.3x4.0x
3.6x3.2x
FY16 FY17 FY18 LTM
Total Debt/EBITDAR(3)
1,050
1,271
FY16 FY18
EBITDA, £m(1)
…and conservative leverage…
Stable growth… …improving profits… …strong cash flow
generation…
8 of last 9Quarters with positive
same-store sales
(“SSS”) growth
(ex. fuel)
21% Increase in
EBITDA since
2016(1)
£662M Average free cash
flow during last two
fiscal years
1.1xDecline in lease
adjusted leverage
since 2016(3)
+21%
519
804 788
FY17 FY18 LTM
Free Cash Flow, £m
1.0%
0.3%
2.3%
0.6%
1.1%0.9%
0.2%
1.0%
-1.1%
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
Historical SSS growth
FY17 FY18 FY19(2) (2)
Business Model Highly Resistant to Economic DownturnsSainsbury's sales growth, profitability, and leverage metrics remained strong during Great Recession
32
4.5x
4.1x 4.2x4.0x
2007 2008 2009 2010
Sainsbury's Total Debt/EBITDAR(3)
2.5% 2.7%3.1%
3.4%
2007 2008 2009 2010
Sainsbury's EBIT Margin(2)
2.5%
-0.3%
-4.2%
1.7%
2.8%
0.5% 0.3% 0.2%
5.9%
3.9%4.5% 4.3%
2007 2008 2009 2010
Y/Y Growth during Great Recession(1)
UK GDP UK Retail Sales (ex. fuel) Sainsbury's SSS
~ Grocery is non-discretionary
~ Sainsbury's SSS growth
outpaced broader UK
economic growth during
Great Recession
Sainsbury's EBIT margins and leverage improved during Great Recession
(1) Source: UK Office for National Statistics, Sainsbury’s public filings(2) Source: Sainsbury’s public filings, Bloomberg(3) (Net debt + Preferred + Capital & Operating lease obligations) / EBITDAR as of 9/22/2018. Sainsbury's Retail only, excludes Bank operations
Source: Sainsbury’s public filings, Bloomberg
UK Grocery Market Share Change
During 2011-2018(1)
2.3% 2.1%1.8%
0.2%
-1.9%
-0.9% -0.6%
1.3%0.8% 0.9% 0.8%
-1.7%
-4.8%
-2.8%
1.0%
2.3%
2011 2012 2013 2014 2015 2016 2017 2018
Big 4 Grocers Same-Store Sales Growth(2)
Sainsbury's Average of Tesco, Asda & Morrisons
Sainsbury's Has Protected Market Share During Industry EvolutionRelatively well-positioned against the threat of discount stores
33
When discounters grew aggressively during 2011
through 2015, Sainsbury’s average SSS growth of
~1% outpaced peers’ by 200 bps
During era of aggressive
growth of discounters
(e.g., Aldi & Lidl),
Sainsbury’s has
maintained its market
share better than its Big 4
competitors
(1) Source: IGD estimates(2) Source: Public filings of Sainsbury’s, Tesco, Asda and Morrisons
Big 4 includes Tesco, Sainsbury's, Asda and Morrisons
-6.4%
-1.0%
+6.7%
2.6%
2.4%
1.9%
0%
2%
3%
5%
6%
2010 2011 2012 2013 2014 2015 2016 2017 2018
Underlying EBIT Margin(1)
Aldi Sainsbury's Tesco
Coefficient of variation:
Tesco: 0.78
Aldi: 0.39
Sainsbury's: 0.18
Sainsbury’s Margins Remain Attractive Relative To Its PeersSavvy pricing and operational efficiency tactics have protected Sainsbury's margins
34
Sainsbury's margins have proven more stable than
Aldi's as discounters have had to
sacrifice more margin to
remain competitive
Recent cost
cutting
initiatives and
pricing
initiatives have
driven greater
efficiency and
foot traffic to
Sainsbury's
stores 50
90
130
170
210
250
2010 2011 2012 2013 2014 2015 2016 2017 2018
Sainsbury’s Sales per Full-Time
Employee, £ ‘000(1)
29%
(1) Source: Realty Income’s estimates based on companies’ public filings and IGD estimates(2) Source: Nielsen Panel
3.1%
4.5%
1.1%
2.4%
Grocery Industry
Grocery Y/Y Transaction
Growth(2)
FY17
FY18
FY18
FY17
Sainsbury’s has maintained
healthy EBIT margins even after
discounting price to better
compete with Aldi & Lidl.
Summary and Next Steps
Summary and Next StepsRealty Income intends to scale its international platform to drive long-term value creation for shareholders
36
International growth supplements continued strength in domestic investment pipeline
Sainsbury’s transaction is consistent with proven domestic investment strategy
Transaction generates immediate earnings accretion and healthy IRR
The UK economy and grocery industry remains healthy despite Brexit uncertainty
Financing and hedging strategy has mitigated currency risk
Incubate “boots on the
ground” operational platform
internationally and develop
long-term relationships with
industry-leading operators
Grow high-quality real estate
portfolio across multiple
tenants, industries and
property types
Pursue additional financing
vehicles to diversify access to
capital
Appendix:
E-Commerce Threat is Limited
for UK Grocery
Property Profiles
72%
18%10%
2018 Online UK Grocery
Sales by Player(1)
Tesco, Sainsbury's & Asda Ocado & Amazon Other
E-Commerce Threat Is Limited for UK GroceryTraditional grocery retailers remain the core distribution channel and dominate online sales
38
Tesco,
Sainsbury's and
Asda dominate
online grocery
sales in the UK
with 72%
market share
Traditional
grocery retail
formats remain
the core channel
in the UK
grocery market
£89
£40
£23£16 £11 £10
0
20
40
60
80
100
Supermarkets Convenience Discounters Hypermarkets Online Other
£b
n
2018 UK Grocery Sales by Channel(1)
More Profitable Less Profitable Less ProfitableUnprofitableLower MarginsMore Profitable
(1) Source: IGD estimates(2) Source: IGD estimates, Knight Frank 2018(3) Big 4’s supermarket sales only are included in the “supermarkets” category. Big 4’s c-store sales are included in the “convenience” category(4) Other includes Morrisons and Waitrose
6.0%
7.9%
Online UK Grocery
Market Share(1)
2018 2023E
Online grocery currently
accounts for just 6% of the market and is expected
to plateau at around 8%(2)
Sainsbury's is one of the
major online grocery
distributors
(4)
(3)
Traditional grocery retail formats
(supermarkets & hypermarkets)
account for ~55% of sales and
an estimated 80%+ of profits of
UK grocery store market(2)
Property Profiles
Banbury
40
Region: South East England
Year Built: 1994
Building Size (sf): 105,191
Lot Size (acres): 6.9
Parking Spaces: 405
Population(1): 61,874
Vacancy: 2.1%
Supply Growth(2): 1.1%
Net Absorption(2): 0.9%
Petrol Station
Car WashSainsbury's Cafe
Groceries Click & Collect
Lloyds Pharmacy
Sainsbury's Bank Travel Money
Argos
Property Characteristics
Investment Highlights:
~ Limited competition in immediate vicinity
~ Strong real estate fundamentals in market
~ Healthcare industry is a key traffic driver
(1) Within a 15 minute drive of subject property(2) Trailing 5-year average for retail market
All data current as of 12/31/18 unless otherwise noted
Source: CoStar; Oxford Retail Consultants
Retail Market Characteristics
41
Bodmin
Region: South West England
Year Built: 2006
Building Size (sf): 35,953
Lot Size (acres): 2.3
Parking Spaces: 250
Population(1): 29,922
Avg. Vacancy(2): 1.6%
Supply Growth(2): 1.2%
Net Absorption(2): 1.3%
Investment Highlights:
~ Limited competition in immediate vicinity and
only large grocer in center of town
~ Consistently low vacancy rate in submarket
~ Walkability of location
(1) Within a 15 minute drive of subject property(2) Trailing 5-year average for retail submarket
All data current as of 12/31/18 unless otherwise noted
Source: CoStar; Oxford Retail Consultants
Argos
Sainsbury's Cafe
Property Characteristics
Retail Submarket Characteristics
42
BradfordPetrol Station
Car WashSainsbury's Cafe
Groceries Click & Collect
Sainsbury's Bank Travel Money
Argos
Region: Yorkshire
Year Built: 1983
Building Size (sf): 97,448
Lot Size (acres): 6.5
Parking Spaces: 500
Population(1): 168,323
Vacancy: 2.7%
Supply Growth(2): 0.7%
Net Absorption(2): 1.0%
Investment Highlights:
~ Strong market with dense surrounding
population
~ Limited supply growth
~ University and finance industry serve as key
market drivers
(1) Within a 15 minute drive of subject property(2) Trailing 5-year average for retail market
All data current as of 12/31/18 unless otherwise noted
Source: CoStar; Oxford Retail Consultants
Property Characteristics
Retail Market Characteristics
43
BridgwaterPetrol Station
Sainsbury's CafeGroceries Click & Collect
Lloyds Pharmacy
Sainsbury's Bank Travel Money
Argos
Region: South West England
Year Built: 1989
Building size (sf): 68,085
Lot Size (acres): 5.7
Parking Spaces: 502
Investment Highlights:
~ Strong location at the intersection of the
town’s primary roads
~ Located in a complementary retail corridor
~ Industrial and manufacturing drivers in market
Population(1): 60,665
Avg. Vacancy(2): 1.9%
Supply Growth(2): 0.1%
Net Absorption(2): 0.6%
(1) Within a 15 minute drive of subject property(2) Trailing 5-year average for retail submarket
All data current as of 12/31/18 unless otherwise noted
Source: CoStar; Oxford Retail Consultants
Property Characteristics
Retail Submarket Characteristics
CardiffPetrol Station
Sainsbury's CafeGroceries Click & Collect
Lloyds Pharmacy
Sainsbury's Bank Travel Money
Argos
Region: Wales
Year Built: 1983
Building Size (sf): 130,055
Lot Size (acres): 9.7
Parking Spaces: 650
44
Investment Highlights:
~ Located in the capital city of Wales
~ Strong market with favorable demographics
and growth trends
~ Located in retail corridor with significant
population density in surrounding area
Population(1): 174,303
Vacancy: 2.0%
Supply Growth(2): 0.5%
Net Absorption(2): 0.8%
(1) Within a 15 minute drive of subject property(2) Trailing 5-year average for retail market
All data current as of 12/31/18 unless otherwise noted
Source: CoStar; Oxford Retail Consultants
Property Characteristics
Retail Market Characteristics
GrimsbyPetrol Station
Car Wash
Sainsbury's Cafe Groceries Click & Collect
Lloyds Pharmacy
Sainsbury's Bank Travel Money
Region: Yorkshire
Year Built: 1988
Building Size (sf): 73,443
Lot Size (acres): 5.8
Parking Spaces: 350
45
Investment Highlights:
~ Port logistics, fishing industry, and food
processing industry are market drivers
~ Dense surrounding population
~ Retail and residential uses immediately
surround property
Population(1): 94,820
Avg. Vacancy(2): 4.8%
Supply Growth(2): 0.7%
Net Absorption(2): 0.8%
(1) Within a 15 minute drive of subject property(2) Trailing 5-year average for retail market
All data current as of 12/31/18 unless otherwise noted
Source: CoStar; Oxford Retail Consultants
Property Characteristics
Retail Market Characteristics
HerefordPetrol Station
Sainsbury's CafeGroceries Click & Collect
Lloyds Pharmacy
Sainsbury's Bank Travel Money
Argos
Region: West Midlands
Year Built: 1988
Building Size (sf): 81,247
Lot Size (acres): 6.6
Parking Spaces: 450
46
Investment Highlights:
~ Town is a regional hub for surrounding
agriculture industry
~ Strong market with favorable growth trends
~ Retail and residential uses immediately
surround property
Population(1): 66,036
Avg. Vacancy(2): 2.0%
Supply Growth(2): 2.5%
Net Absorption(2): 2.5%
(1) Within a 15 minute drive of subject property(2) Trailing 5-year average for retail submarket
All data current as of 12/31/18 unless otherwise noted
Source: CoStar; Oxford Retail Consultants
Property Characteristics
Retail Submarket Characteristics
KempstonPetrol Station
Sainsbury's Cafe
Groceries Click & Collect
Lloyds Pharmacy
Region: East of England
Year Built: 1975
Building Size (sf): 99,885
Lot Size (acres): 5.1
Parking Spaces: 480
47
Investment Highlights:
~ Good visibility from one of Kempston’s
primary thoroughfares
~ Limited competition in immediate vicinity
~ Dense surrounding population
Population(1): 100,173
Vacancy: 2.3%
Supply Growth(2): 0.4%
Net Absorption(2): 0.5%
(1) Within a 15 minute drive of subject property(2) Trailing 5-year average for retail market
All data current as of 12/31/18 unless otherwise noted
Source: CoStar; Oxford Retail Consultants
Property Characteristics
Retail Market Characteristics
Locksbottom
Groceries Click & Collect
Lloyds Pharmacy
Argos
Region: London
Year Built: 1981
Building Size (sf): 86,221
Lot Size (acres): 7.1
Parking Spaces: 400
48
Investment Highlights:
~ Strong market with favorable population density
~ Stable key traffic drivers, largely due to
proximity to London and nearby hospital
~ Property is located in a heavily trafficked
intersection of two major thoroughfares
Population(1): 140,727
Avg. Vacancy(2): 1.4%
Supply Growth(2): 0.5%
Net Absorption(2): 0.5%
(1) Within a 15 minute drive of subject property(2) Trailing 5-year average for retail market
All data current as of 12/31/18 unless otherwise noted
Source: CoStar; Oxford Retail Consultants
Property Characteristics
Retail Market Characteristics
NorthamptonPetrol Station
Car WashGroceries Click & Collect
Lloyds Pharmacy
Sainsbury's Bank Travel Money
Argos
Region: East Midlands
Year Built: 1988
Building Size (sf): 126,538
Lot Size (acres): 6.1
Parking Spaces: 595
49
Investment Highlights:
~ Strong market with favorable demographics
and growth trends
~ Good visibility from major thoroughfare
~ Situated in the middle of a retail cluster with
several schools located nearby
Population(1): 148,081
Vacancy: 2.7%
Supply Growth(2): 0.6%
Net Absorption(2): 0.9%
(1) Within a 15 minute drive of subject property(2) Trailing 5-year average for retail market
All data current as of 12/31/18 unless otherwise noted
Source: CoStar; Oxford Retail Consultants
Property Characteristics
Retail Market Characteristics
SheffieldPetrol Station
Specsavers
Sainsbury's Cafe
Groceries Click & Collect
Lloyds Pharmacy
Sainsbury's Bank Travel Money
Argos
Region: Yorkshire
Year Built: 1984
Building Size (sf): 101,593
Lot Size (acres): 6.2
Parking Spaces: 900
50
Investment Highlights:
~ Favorable demographics
~ Diverse set of market drivers, including
finance, steel industry, and higher education
~ Adjacent retail uses complementary to the site
Population(1): 148,505
Avg. Vacancy(2): 2.7%
Supply Growth(2): 0.5%
Net Absorption(2): 0.8%
(1) Within a 15 minute drive of subject property(2) Trailing 5-year average for retail market
All data current as of 12/31/18 unless otherwise noted
Source: CoStar; Oxford Retail Consultants
Property Characteristics
Retail Market Characteristics
SouthamptonPetrol Station
Car Wash
Sainsbury's Cafe
Groceries Click & Collect
Sainsbury's Bank Travel Money
Argos
Region: South East England
Year Built: 1977
Building Size (sf): 116,590
Lot Size (acres): 7.9
Parking Spaces: 700
51
Investment Highlights:
~ Limited competition nearby
~ Favorable demographics and population
density in surrounding area
~ Strong key market drivers, including a major
port, universities, and healthcare industry
Population(1): 128,341
Avg. Vacancy(2): 2.2%
Supply Growth(2): 1.1%
Net Absorption(2): 1.2%
(1) Within a 15 minute drive of subject property(2) Trailing 5-year average for retail submarket
All data current as of 12/31/18 unless otherwise noted
Source: CoStar; Oxford Retail Consultants
Property Characteristics
Retail Submarket Characteristics
International Expansion: Sale-Leaseback with Sainsbury’s
REALTY INCOME
April 2019