realty income international expansion-sale leaseback with ... · sainsbury’s seasoned management...

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


Oregon

The UK, by GDP, is


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



Parking Spaces: 250


Avg. Vacancy(2): 1.6%




~ 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



Argos

Sainsbury's Cafe


Retail Submarket Characteristics

42

BradfordPetrol Station

Car WashSainsbury's Cafe



Argos

Region: Yorkshire

Year Built: 1983



Parking Spaces: 500


Vacancy: 2.7%




~ Strong market with dense surrounding

population

~ Limited supply growth

~ University and finance industry serve as key

market drivers






43

BridgwaterPetrol Station

Sainsbury's CafeGroceries Click & Collect

Lloyds Pharmacy


Argos

Region: South West England

Year Built: 1989

Building size (sf): 68,085


Parking Spaces: 502


~ Strong location at the intersection of the

town’s primary roads

~ Located in a complementary retail corridor

~ Industrial and manufacturing drivers in market










CardiffPetrol Station


Lloyds Pharmacy


Argos

Region: Wales

Year Built: 1983



Parking Spaces: 650

44


~ 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


Vacancy: 2.0%








GrimsbyPetrol Station

Car Wash

Sainsbury's Cafe Groceries Click & Collect

Lloyds Pharmacy


Region: Yorkshire

Year Built: 1988



Parking Spaces: 350

45


~ Port logistics, fishing industry, and food

processing industry are market drivers

~ Dense surrounding population

~ Retail and residential uses immediately

surround property










HerefordPetrol Station


Lloyds Pharmacy


Argos

Region: West Midlands

Year Built: 1988



Parking Spaces: 450

46


~ Town is a regional hub for surrounding

agriculture industry

~ Strong market with favorable growth trends

~ Retail and residential uses immediately

surround property










KempstonPetrol Station

Sainsbury's Cafe


Lloyds Pharmacy

Region: East of England

Year Built: 1975



Parking Spaces: 480

47


~ Good visibility from one of Kempston’s

primary thoroughfares

~ Limited competition in immediate vicinity

~ Dense surrounding population


Vacancy: 2.3%








Locksbottom


Lloyds Pharmacy

Argos

Region: London

Year Built: 1981



Parking Spaces: 400

48


~ 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










NorthamptonPetrol Station

Car WashGroceries Click & Collect

Lloyds Pharmacy


Argos

Region: East Midlands

Year Built: 1988



Parking Spaces: 595

49


~ 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


Vacancy: 2.7%








SheffieldPetrol Station

Specsavers

Sainsbury's Cafe


Lloyds Pharmacy


Argos

Region: Yorkshire

Year Built: 1984



Parking Spaces: 900

50


~ Favorable demographics

~ Diverse set of market drivers, including

finance, steel industry, and higher education

~ Adjacent retail uses complementary to the site










SouthamptonPetrol Station

Car Wash

Sainsbury's Cafe



Argos

Region: South East England

Year Built: 1977



Parking Spaces: 700

51


~ Limited competition nearby

~ Favorable demographics and population

density in surrounding area

~ Strong key market drivers, including a major

port, universities, and healthcare industry










International Expansion: Sale-Leaseback with Sainsbury’s

REALTY INCOME

April 2019

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