Realty Income International Expansion-Sale Leaseback With
REALTY INCOME International Expansion: Sale-Leaseback with Sainsbury’s
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 the company‘s actual future results to differ materially from expected results. These risks include, among others, general economic conditions, local and foreign real estate conditions, the completion of the transaction described herein or the anticipated future results therefrom, tenant financial health, the availability of capital to finance planned growth, continued volatility and uncertainty in the credit markets and broader financial markets, property acquisitions and the timing of these acquisitions, charges for property impairments, and the outcome of any legal proceedings to which the company is a party, as described in the company's filings with the Securities and Exchange Commission. Consequently, forward-looking statements should be regarded solely as reflections of the company's current operating plans and estimates. Actual operating results may differ materially from what is expressed or forecast in this investor presentation. The company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date 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 any jurisdiction in which such offer, solicitation, or sale would be unlawful.
2 Contents 4 : Overview 5 : Addressable Market Realty Income Announces International Expansion 7 : Well-Positioned Domestic Business £429 Million Sale-Leaseback 8 : Transaction Highlights with Sainsbury’s(1) 9 : Investment Rationale
10 : Sainsbury’s Overview: A Natural Fit
12 : Portfolio At A Glance
13 : Investment Returns and Hedging Strategy
21 : UK Macroeconomic Analysis
24 : UK Grocery Industry Overview
28 : Additional Background on Sainsbury’s
35 : Summary and Next Steps
37 : Appendix and Property Profiles (1) Expected to close on or around 5/22/19 3 Overview Realty Income will expand to international markets starting with strategic sale-leaseback with Sainsbury’s
~ 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- Strategic leaseback capital on reasonable terms Rationale ~ 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 Our Intent will relocate from our US office; in the near term we will outsource routine services and like tax and regulatory filings Approach ~ Our European platform will leverage the US business where it makes sense to do so for functions such as Finance, Legal, IT and HR
4 Europe Presents Compelling Market Opportunity Realty Income’s portable business model, cost of capital and scalability represent core competitive advantages
~ 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
US vs. Europe Comparison: Estimated Commercial Real Estate Market Value
CRE owned by Real Estate All Other Commercial Total Investable Commercial Companies(1) Real Estate(2) Real Estate US $4 Trillion $4 Trillion $8 Trillion Europe $3 Trillion $8 Trillion $11 Trillion US + Europe $7 Trillion $12 Trillion $19 Trillion
Median EBITDA Multiple Comparisons • Similar to the U.S., public companies in Europe can unlock trapped RE value through sale-leaseback
16.7x 14.6x 11.1x • We expect market-ascribed valuation differentials 6.4x 6.3x between real estate and operating businesses to benefit us
Illustrative SLB Europe Ex-UK UK-Domiciled UK-Domiciled Europe Ex-UK Multiple Real Estate Real Estate Operating Companies • We estimate annualized single-tenant real estate (at 6% cap Companies Companies Companies (~3,700) transaction volume in Europe to be between $30 and rate) (~700) (~90) (~1,500) $35 billion in our target verticals
(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 5 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
Estimated UK Commercial Real Estate Annual Investment Volume(1) USD in billions(2) Post-Brexit 94.6 Referendum Investment volumes Global 85.9 have held steady post- 82.9 80.7 Financial 81.3 Brexit referendum 76.6 Crisis 72.7 71.6 despite political and 67.9 Average = 64.7 economic uncertainty 56.1 47.1 44.7 43.8 Of the $81 billion of 31.8 33.0 CRE transaction volume in 2018, we estimate $6 - $8 billion of single- tenant volume in our core verticals
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
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
(1) Property types include office, shopping centers, retail, industrial, leisure and alternative / mixed (2) Assuming GBP/USD spot rate as of 4/19/19 Source: Savills, CBRE, MSCI, Realty Income estimates 6 International Growth Augments Well-Positioned Domestic Business Realty Income is expanding its total addressable market from a position of strength
$31 $1.6 $3 A3/A- 93% billion billion billion
Average Annual Domestic Average Annual Domestic Unsecured Revolving Credit Ratings by Moody’s Adjusted EBITDAre Transactions Sourced Since Investment Volume Since Credit Facility Provides and S&P Support Lowest Margin (Highly Scalable 2013 2013 Ample Liquidity and Cost of Capital in Net Platform and Profitability Flexibility Lease Sector Flow Through)
Domestic Transactions Sourced and Investment Volume(1) (USD in billions)
Realty Income will continue to remain highly 4% 6% selective in the US and internationally 4% 5% 7% 6%
7% 8% 39 32 32 28 30 12% 24 17 13 1.5 6 0.7 1.0 1.2 1.4 1.3 1.9 1.5 1.8
2010 2011 2012 2013 2014 2015 2016 2017 2018 Investment Volume Transactions Sourced Selectivity (1) 2013 Sourcing and Investment Volume Excludes $3.2 Billion Acquisition of ARCT 7 All data current as of 12/31/2018 Sainsbury’s Sale-Leaseback Highlights Accretive transaction establishes international growth platform with leading UK grocer
£429 5.3% 5.8% >200 bps GBP 1st-year cash USD-equivalent Effective 1st-year million cap rate 1st-year cap spread to Transaction size(1) rate(2) leverage-neutral nominal WACC
12 15 years $0.04 per 6.6% Assets acquired Weighted-average share Base-case lease term Annualized unlevered USD leverage-neutral IRR 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 8 Sainsbury’s Sale-Leaseback: Investment Rationale Realty Income’s first international acquisition represents natural evolution and execution of strategy
Realty Income’s sector-leading cost of capital, size and scale are competitive advantages portable to the UK
~ Limited retail real estate supply per capita, healthy market fundamentals UK is an attractive market with sizable ~ Void of large-scale, pure-play net lease institutional competition opportunity for ~ Significant demand for expansion capital from UK operators strategic growth ~ Estimated >$1 trillion potential sale-leaseback market opportunity
~ Tenant operates in defensive, non-discretionary industry
Congruent with ~ “Blue Chip” grocery operator with seasoned and highly-regarded management team existing investment criteria ~ 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 Accretive returns, ~ Base-case 15-year unlevered USD IRR of 6.6% is attractive given tenant, asset quality minimal FX risk ~ ~85% of FX risk on GBP cash flows to be hedged for 15 years through currency swap
9 £5.5 Billion Enterprise Value £788 Million Free Cash Flow 150-year History Implied Investment Grade(1) Over 185,000 Employees
606 817 £28.9 £542 Top 3 supermarket c-store billion LTM sales per UK grocery locations(2) locations(2) retail sales(3) gross SF(3) operator(4)
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. Scott to confirm 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.
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 10 (4) Source: IGD estimates Sainsbury’s Transaction a Natural Fit for Realty Income Transaction is complementary to defensive portfolio characteristics and additive to core industry
Realty Income Realty Income Investment Criteria 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 business20.0% model ✓ Omni-channel platform18.0% 20.0% ✓ 16.0% 18.0%
16.0% 14.0% 81.7% 82.2% 14.0% Pro Forma Portfolio 12.0% Representing 2.2% of revenue,12.0% Sainsbury's 10.0% Metrics: Before and th becomes Realty Income’s10.0% 12 largest tenant After Transaction(1) 8.0% 8.0% 7.1% 6.0% 6.0% 4.9% Benefits of size: Transaction does not 4.0% 4.0% materially impact tenant, geography, industry 2.2% 2.0% 2.0% or property type diversification 0.0% 0.0% 0.0% / UK Grocery Retail
(1) Based on rental revenue as of 12/31/2018 11 Portfolio at a Glance Real estate portfolio consists of 12 established locations throughout the UK Banbury 1 Banbury – South East England United 2 Bodmin – South West England Kingdom 3 Bradford – Yorkshire 4 Bridgwater – South West England 5 Cardiff – Wales 6 Grimsby – Yorkshire 7 Hereford – West Midlands 8 Kempston – East of England 9 Locksbottom – London 10 Northampton – East Midlands
11 Sheffield – Yorkshire 12 Southampton – South East England
Portfolio Characteristics
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 CFC above Realty Income portfolio and US grocery industry averages Sales PSF (on a gross sf basis)(4): ~£550 Sales PSF is approximately 14% higher than UK grocery average
(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 12 (4) Data based on Realty Income estimates Investment Returns and Hedging Strategy Investment Returns and Hedging Strategy Summary Transaction expected to be immediately accretive to earnings with minimal FX risk
Structure projected to generate predictable cash flow and healthy investment spreads
~ Current weakness in GBP currency affords Realty Income the ability to invest at reasonable USD cost Current FX and ~ Historically wide interest rate spreads between the UK and US provides meaningful interest rate dynamics FX “carry” over long lease term are favorable ~ 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
~ Estimated 1st-year nominal investment spreads of ~210 bps exceeds Realty Income’s historical average by ~60 bps Investment spreads ~ Lower borrowing cost of GBP-denominated debt (driven by lower benchmark yields are accretive on a and Realty Income’s A-/A3 credit ratings) supports lower WACC for UK acquisitions leverage-neutral basis ~ 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 FX risk is largely asset value and creates pound-denominated interest expense mitigated through ~ ~£130 million equity contribution is sourced through GBP/USD cross currency swap financing and hedging strategy ~ Realty Income expects to hedge ~85% of GBP cash flow via cross-currency swap, fixing USD cash flow for entirety of 15-year term
14 Historically Low Pound Creates Compelling Investment Opportunity Weakness in pound allows Realty Income to buy “low” while locking in steep FX forward curve
2.8 Dollar purchasing power has rarely been stronger: 2.6 Current FX rate ~20% below historical median and 2.4 GBP / USD FX Rate in bottom 5th percentile of historical FX rates 2.2 Median FX rate since 1971 2.0 1.8 1.65 1.6 1.4 1.30 1.2 1.0
200 136 Historically wide 150 interest rate gap 100 converts GBP cash 50 flow into increasing 0 flow of USD: (50) (100) (20) Current steepness of FX forward curve is a (150) US vs. UK: 10y Gov't Yield Spread function of interest (200) rate differentials (250) Median spread since 1992 between the pound (300) and dollar that
accrues to Realty
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1992 Income’s benefit
Source: Bloomberg FX curve and interest rate data as of 4/19/19 15 Favorable USD Investment Spreads Initial projected returns on Sainsbury's transaction meet key Realty Income return hurdles
Projected Short-Term WACC (Actual Leverage and Leverage-Neutral) Wtd Capital Component Cost Weight(1) Weight Wtd Cost Assumptions / Commentary Cost 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 Actual Lev Short-Term WACC is lower than US WACC given lower Short-Term WACC: 3.04% 3.71% Lev Neutral 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
st Projected Nominal 1 -Year Investment Spreads GBP USD Investment spread ~60 bps Actual Leverage 227 bps 277 bps above Realty Income’s historical average 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. 16 Expected USD IRR Exceeds Long-Term WACC Hurdle Realty 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
Upward sloping FX curve drives outsized USD-equivalent $800 unlevered IRR $603 6.6% USD cash flows amplified $600 USD over time given steepness IRR of today’s forward FX $400 curve. USD IRR materially $200 outperforms hurdle rate $0 ($200) ($400)
(USD in millions) in (USD Key Assumptions ($600) ($564) ($800) • Contractual annual fixed rent increases 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 • Residual value = 100% of purchase price Year • GBP/USD FX curve as of 4/19/19
Cumulative CF (USD)
(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. 17 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
“Natural Hedge”: Debt financing in GBP aligns with lease term and £300 million currency of purchase price, UK entity cash flows 15-year Debt Issuance ~ Allows Realty Income to access lower-cost financing given lower benchmark rates in UK
Equity investment and cash flow repatriation hedge: Currency swap fixes £130 million the USD value of equity investment for entirety of 15-year lease term
15-year Cross Currency Swap ~ Interim cash flow exchanges fix the USD cash flow Realty Income receives in exchange for GBP each period for 15 years
Initial Exchange at Inception 15-Year CF Exchanges Final Exchange (EOY 15)
Mechanics of Cross Fixed GBP ~£130 ~$169 ~$169 ~£130 Currency Swap USD cash million million million million coupon flow(1)
Bank Counterparties Bank Counterparties Bank Counterparties
(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 18 Upward Sloping FX Curve Provides USD Upside Fixed USD cash flow compensates Realty Income for GBP forward points over 15 years
GBP increases in value by >1% on an annual basis based on current forward curve Current FX forward 1.55 1.53 curve (GBP/USD) 1.51 1.49 delivers increasing 1.47 1.46 1.44 USD revenue over 1.43 1.41 duration of lease 1.40 1.38 1.37 agreement 1.35 1.34 1.32 1.30
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Year
50 8.5% GBP (Left Axis) 45 USD (Left Axis) 8.0% Forward curve 40 Yield on Cost (Right Axis) 7.9% 7.5% supports faster rate 35 7.7% 30 7.5% of growth in USD 7.3% 7.0% 25 7.1% over time (average 6.9% 6.5% 20 6.7% yield on cost of 6.5% 15 6.3%
6.0% CostonYield 6.2% 6.6%) 10 6.0%
Revenue in GBP/USD in Revenue 5.8% 5.5% 5 5.7% 5.5% 0 5.4% 5.0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Year Source: Bloomberg Based on average FX rates implied by forward curve as of 4/19/19 19 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
Anticipated 9.7% fixed USD equity yield on ~85% of total AFFO (Cross-Currency Swap)
10.2%
9.7% 9.7%
GBP Cash on Cash Returns -- Unhedged Repatriated Earnings (8.6% Average Yield) USD Cash on Cash Returns -- Hedged Repatriated Earnings (9.7% Average Yield)
7.1%
Jun-21 Jun-22 Jun-23 Jun-24 Jun-25 Jun-26 Jun-27 Jun-28 Jun-29 Jun-30 Jun-31 Jun-32 Jun-33 Jun-34
Sep-20 Sep-21 Sep-22 Sep-23 Sep-24 Sep-25 Sep-26 Sep-27 Sep-28 Sep-29 Sep-30 Sep-31 Sep-32 Sep-33
Dec-20 Dec-21 Dec-22 Dec-23 Dec-24 Dec-25 Dec-26 Dec-27 Dec-28 Dec-29 Dec-30 Dec-31 Dec-32 Dec-33
Mar-21 Mar-22 Mar-23 Mar-24 Mar-25 Mar-26 Mar-27 Mar-28 Mar-29 Mar-30 Mar-31 Mar-32 Mar-33 Mar-34
Anticipated 11.0% - 11.9% USD equity yield on total AFFO(1) with minimal volatility
12.0% 11.9% 11.0%
GBP Cash on Cash Returns -- Total (10.1% Average) 8.4%
USD Cash on Cash Returns -- Total (11.4% Average)
Jun-21 Jun-22 Jun-23 Jun-24 Jun-25 Jun-26 Jun-27 Jun-28 Jun-29 Jun-30 Jun-31 Jun-32 Jun-33 Jun-34
Sep-20 Sep-21 Sep-22 Sep-23 Sep-24 Sep-25 Sep-26 Sep-27 Sep-28 Sep-29 Sep-30 Sep-31 Sep-32 Sep-33
Dec-20 Dec-21 Dec-22 Dec-23 Dec-24 Dec-25 Dec-26 Dec-27 Dec-28 Dec-29 Dec-30 Dec-31 Dec-32 Dec-33
Mar-21 Mar-22 Mar-23 Mar-24 Mar-25 Mar-26 Mar-27 Mar-28 Mar-29 Mar-30 Mar-31 Mar-32 Mar-33 Mar-34
(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 20 UK Macroeconomic Analysis UK Density Supports Long-Term Real Estate Stability Limited retail supply and supply growth also supports long-term viability of stable cash flow generation
UK Population and Projections(1) (in millions) The UK, by population, is 66.5M 80 73 Current approximately the size of 66.5M Population(1) California and Texas 57 combined 60
40
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 93,628 The UK, by land area, is 1991 Square approximately the size of Population Projected Population Miles Oregon Retail Square Footage Per Capita(2)
UK 5 $2.8 The UK, by GDP, is Trillion approximately the size of GDP(3) California US 24
Population density and growth, combined with limited retail supply and supply growth, creates compelling opportunity for long-term real estate investors
(1) Source: UK Office for National Statistics (2) Source: ICSC; Springboard 22 (3) Source: OECD National Accounts Data files; Bureau of Economic Analysis UK Economic Data is Less Volatile Than EU Economic data points tend to more closely mirror those of the US UK EU UK retail sales have a compound Annual Retail Sales Growth(1) 8% US average annual growth rate of 2.5% since 2000, comparing favorably to 4% the EU at 1.2% while demonstrating less volatility. Grocery accounts for 0% approximately 50% of UK retail sales. -4%
-8% UK GDP growth has demonstrated '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 superior stability versus the EU since 2010. Annual GDP Growth Rate Since 2010(1) 4% 3% Coefficient of Variation for GDP 2% Growth Since 2010 1% UK EU US 0% 0.29 0.64 0.30 -1% 2010 2011 2012 2013 2014 2015 2016 2017 2018 Household disposable income in the UK (2) continues to rise, with a compound Unemployment Rate Since 2010 average annual growth rate of 2.6% 12% since 2000(1). 9%
Current unemployment of ~4% is the 6% lowest in over 40 years.
3% 2010 2011 2012 2013 2014 2015 2016 2017 2018 (1) Source: OECD National Accounts data files (2) Source: Bureau of Labor Statistics; UK Office for National Statistics; Eurostat 23 UK Grocery Industry Overview UK Grocery Industry Has Proven to be Stable Grocery sales in the UK have been resilient during the global financial crisis and Brexit uncertainty Historical UK Grocery Sales(1) Brexit Vote & £200 60% CAGR = 2.5% Uncertainty Global Financial £166 £170 58% £161 £164 £164 £163 Crisis £156 £160 £152 £140 £144 56% £135 £130 £124 £126 £121 54% £120
52%
£80 50%
48%
£40
Grocery Retailer Sales (GBP billion) (GBP Sales Grocery Retailer Grocery Retailer Sales as % of Total of % as Sales Grocery Retailer 46%
£0 44% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Grocery Retailers Sales (Left Axis) Grocery Retailers Sales as % of Total Retail Sales (Right Axis)
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 only Source: Passport Euromonitor International 25 UK Grocery Industry is Highly Concentrated Sainsbury’s is one of the “Big 4” grocers that together comprise 64% of the UK grocery sales
UK Grocery Market Share(1)(2) (3) 64%
Quality product, excellent locations and differentiated assortment are hallmarks of the 19% Sainsbury's brand
8% 7% 1%
Big 4 Discounters Premium Convenience "Pure play" online
(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) 26 UK Grocery Industry Has Been Stable Post-Brexit Referendum UK grocery sales growth have improved since 2Q16
UK Retail and Grocery Sales Y/Y Growth(1)
Brexit referendum 6/23/16 5.8%
4.9% 4.8% 4.8% 4.6% 4.8% 4.3% 4.0% 4.0% 4.0% 3.6% 3.0% 3.4% 3.6% 3.7% 3.2% 3.5% 2.8% 3.1% 2.6% 3.6% 2.8% 1.9% 2.4% 1.8% 2.0% 3.8% 1.5% 1.6% 1.0% 1.0% 0.8% 1.0% 0.5% 0.5% 0.4% -0.3% Avg. retail sales Y/Y growth: 2.5% -0.3% -0.4% Avg. grocery sales Y/Y growth: 3.5% -1.5%
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18
Retail Sales (ex. fuel) Grocery Sales
(1) Source: UK Office for National Statistics 27 Additional Background on Sainsbury's Realty Income Investment Thesis on Sainsbury’s Leading operator, healthy balance sheet, high quality real estate and very defensive business model
1 Blue Chip UK Grocery Operator 3 Resilient to Economic Downturns
~ One of the top three largest UK grocery ~ Grocery is non-discretionary (1) store operators (by sales) ~ UK food costs are amongst the lowest in ~ 7.5% EBITDAR margin is ahead of other the EU(4) grocers, reflecting differentiated product ~ Same-store sales growth increased 4+% (2) offering and excellent locations during Great Recession while EBITDAR margins and leverage improved(5)
2 Healthy Balance Sheet 4 High-Quality Acquired Portfolio
~ While not currently rated by agencies ~ Above average stores based on sales and given lack of public debt, Sainsbury’s has profitability (3) an implied investment grade rating ~ Average 15-minute drive time population ~ Sainsbury’s has ample liquidity to sustain of ~116,000 any Brexit related supply chain issues ~ Average household income of local population above average for the UK (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 29 (5) Source: Sainsbury’s public filings and Bloomberg Sainsbury’s Consistent With Current Grocery Exposure Sainsbury’s is a natural fit in Realty Income’s grocery exposure with high-quality operators
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
Representing 7.1% of revenue, the grocery industry will become Realty Income’s 5th largest industry
(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 30 Sainsbury's: Solid Fundamentals, Improving Margins As a “blue chip” grocer, Sainsbury's has a proven operating track record with improving trends
Stable growth… …improving profits… …strong cash flow generation… …and conservative leverage… 8 of last 9 Quarters with positive 21% £662M same-store sales Increase in Average free cash 1.1x (“SSS”) growth EBITDA since Decline in lease flow during last two (ex. fuel) 2016(1) adjusted leverage fiscal years since 2016(3)
Historical SSS growth EBITDA, £m(1) Free Cash Flow, £m Total Debt/EBITDAR(3)
1,271 4.3x 2.3% 804 788 4.0x +21% 3.6x 1.1% 1,050 3.2x 1.0% 0.9% 1.0% 0.6% 519 0.3% 0.2%
-1.1%
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 (2) (2) FY17 FY18 FY19 FY16 FY18 FY17 FY18 LTM FY16 FY17 FY18 LTM
(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 operations 31 Source: Sainsbury’s public filings Business Model Highly Resistant to Economic Downturns Sainsbury's sales growth, profitability, and leverage metrics remained strong during Great Recession
Y/Y Growth during Great Recession(1)
5.9% 4.5% 3.9% 4.3% ~ Grocery is non-discretionary 2.5%2.8% 1.7% ~ Sainsbury's SSS growth 0.5% 0.3% 0.2% outpaced broader UK -0.3% economic growth during Great Recession
-4.2% 2007 2008 2009 2010 UK GDP UK Retail Sales (ex. fuel) Sainsbury's SSS
Sainsbury's EBIT Margin(2) Sainsbury's Total Debt/EBITDAR(3)
3.4% 4.5x 3.1% 4.1x 4.2x 4.0x 2.5% 2.7%
2007 2008 2009 2010 2007 2008 2009 2010
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 32 Source: Sainsbury’s public filings, Bloomberg Sainsbury's Has Protected Market Share During Industry Evolution Relatively well-positioned against the threat of discount stores
UK Grocery Market Share Change During 2011-2018(1) During era of aggressive +6.7% growth of discounters (e.g., Aldi & Lidl), Sainsbury’s has maintained its market share better than its Big 4 -1.0% competitors
-6.4%
Big 4 Grocers Same-Store Sales Growth(2)
2.3% 2.1% 2.3% 1.8% 1.3% 0.8% 0.9% 0.8% 1.0% 0.2%
-0.9% -0.6% -1.7% -1.9% When discounters grew aggressively during 2011 -2.8% through 2015, Sainsbury’s average SSS growth of ~1% outpaced peers’ by 200 bps -4.8% 2011 2012 2013 2014 2015 2016 2017 2018 Sainsbury's Average of Tesco, Asda & Morrisons (1) Source: IGD estimates (2) Source: Public filings of Sainsbury’s, Tesco, Asda and Morrisons 33 Big 4 includes Tesco, Sainsbury's, Asda and Morrisons Sainsbury’s Margins Remain Attractive Relative To Its Peers Savvy pricing and operational efficiency tactics have protected Sainsbury's margins
Underlying EBIT Margin(1) Sainsbury's Sainsbury’s has maintained margins have Aldi Sainsbury's Tesco healthy EBIT margins even after proven more 6% discounting price to better stable than compete with Aldi & Lidl. Aldi's as 5% discounters have had to 3% 2.6% Coefficient of variation: 2.4% sacrifice more Tesco: 0.78 2% margin to Aldi: 0.39 1.9% remain Sainsbury's: 0.18 0% competitive 2010 2011 2012 2013 2014 2015 2016 2017 2018
Sainsbury’s Sales per Full-Time Grocery Y/Y Transaction (1) Recent cost Employee, £ ‘000 Growth(2) cutting 250 29% 4.5% initiatives and pricing 210 3.1% initiatives have 170 2.4% driven greater efficiency and 130 foot traffic to 1.1% 90 Sainsbury's FY FY FY FY 17 18 17 18 stores 50 2010 2011 2012 2013 2014 2015 2016 2017 2018 Grocery Industry
(1) Source: Realty Income’s estimates based on companies’ public filings and IGD estimates (2) Source: Nielsen Panel 34 Summary and Next Steps Summary and Next Steps Realty Income intends to scale its international platform to drive long-term value creation for shareholders
International growth supplements continued Incubate “boots on the strength in domestic investment pipeline ground” operational platform internationally and develop long-term relationships with industry-leading operators Sainsbury’s transaction is consistent with proven domestic investment strategy
Grow high-quality real estate The UK economy and grocery industry portfolio across multiple remains healthy despite Brexit uncertainty tenants, industries and property types
Transaction generates immediate earnings accretion and healthy IRR Pursue additional financing vehicles to diversify access to Financing and hedging strategy has capital mitigated currency risk
36 Appendix: E-Commerce Threat is Limited for UK Grocery Property Profiles E-Commerce Threat Is Limited for UK Grocery Traditional grocery retailers remain the core distribution channel and dominate online sales
2018 UK Grocery Sales by Channel(1)
Traditional grocery retail formats Traditional 100 £89 (supermarkets & hypermarkets) grocery retail 80 account for ~55% of sales and an estimated 80%+ of profits of formats remain 60 £40 UK grocery store market(2) the core channel £bn 40 £23 in the UK £16 20 £11 £10 grocery market 0 Supermarkets(3) Convenience Discounters Hypermarkets Online Other More Profitable More Profitable Less Profitable Lower Margins Unprofitable Less Profitable
Online UK Grocery 2018 Online UK Grocery Market Share(1) Sales by Player(1) 72% Sainsbury's is Tesco, Online grocery 7.9% one of the Sainsbury's and currently major online Asda dominate 6.0% accounts for just grocery online grocery 6% of the market distributors and is expected sales in the UK to plateau at with 72% around 8%(2) 18% 10% market share
2018 2023E Tesco, Sainsbury's & Asda Ocado & Amazon Other(4) (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 38 (4) Other includes Morrisons and Waitrose Property Profiles Banbury Investment Highlights: ~ Limited competition in immediate vicinity Petrol Station Lloyds Pharmacy ~ Strong real estate fundamentals in market Argos Sainsbury's Bank ~ Healthcare industry is a key traffic driver Travel Money Sainsbury's Cafe Car Wash Groceries Click & Collect
Property Characteristics
Region: South East England Year Built: 1994 Building Size (sf): 105,191 Lot Size (acres): 6.9 Parking Spaces: 405
Retail Market Characteristics
Population(1): 61,874 Vacancy: 2.1% Supply Growth(2): 1.1% Net Absorption(2): 0.9%
(1) Within a 15 minute drive of subject property (2) Trailing 5-year average for retail market 40 All data current as of 12/31/18 unless otherwise noted Source: CoStar; Oxford Retail Consultants Bodmin Investment Highlights: ~ Limited competition in immediate vicinity and only large grocer in center of town Argos ~ Consistently low vacancy rate in submarket ~ Walkability of location Sainsbury's Cafe
Property Characteristics
Region: South West England Year Built: 2006 Building Size (sf): 35,953 Lot Size (acres): 2.3 Parking Spaces: 250
Retail Submarket Characteristics
Population(1): 29,922 Avg. Vacancy(2): 1.6% Supply Growth(2): 1.2% Net Absorption(2): 1.3%
(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 41 Source: CoStar; Oxford Retail Consultants Investment Highlights: Bradford ~ Strong market with dense surrounding Petrol Station Groceries Click & Collect population ~ Limited supply growth Sainsbury's Bank Argos Travel Money ~ University and finance industry serve as key market drivers Sainsbury's Cafe Car Wash
Property Characteristics
Region: Yorkshire Year Built: 1983 Building Size (sf): 97,448 Lot Size (acres): 6.5 Parking Spaces: 500
Retail Market Characteristics
Population(1): 168,323 Vacancy: 2.7% Supply Growth(2): 0.7% Net Absorption(2): 1.0%
(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 42 Source: CoStar; Oxford Retail Consultants Bridgwater Investment Highlights: ~ Strong location at the intersection of the Petrol Station Lloyds Pharmacy town’s primary roads ~ Located in a complementary retail corridor Argos Sainsbury's Bank Travel Money ~ Industrial and manufacturing drivers in market Groceries Click & Collect Sainsbury's Cafe
Property Characteristics
Region: South West England Year Built: 1989 Building size (sf): 68,085 Lot Size (acres): 5.7 Parking Spaces: 502
Retail Submarket Characteristics
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 43 Source: CoStar; Oxford Retail Consultants Cardiff Investment Highlights: ~ Located in the capital city of Wales Petrol Station Lloyds Pharmacy ~ Strong market with favorable demographics and growth trends Argos Sainsbury's Bank Travel Money ~ Located in retail corridor with significant
Groceries Click & Collect Sainsbury's Cafe population density in surrounding area
Property Characteristics
Region: Wales Year Built: 1983 Building Size (sf): 130,055 Lot Size (acres): 9.7 Parking Spaces: 650
Retail Market Characteristics
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 44 Source: CoStar; Oxford Retail Consultants Investment Highlights: Grimsby ~ Port logistics, fishing industry, and food processing industry are market drivers Petrol Station Lloyds Pharmacy ~ Dense surrounding population
Car Wash Sainsbury's Bank ~ Retail and residential uses immediately Travel Money surround property Sainsbury's Cafe Groceries Click & Collect
Property Characteristics
Region: Yorkshire Year Built: 1988 Building Size (sf): 73,443 Lot Size (acres): 5.8 Parking Spaces: 350
Retail Market Characteristics
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 45 Source: CoStar; Oxford Retail Consultants Investment Highlights: Hereford ~ Town is a regional hub for surrounding
Petrol Station Lloyds Pharmacy agriculture industry ~ Strong market with favorable growth trends Argos Sainsbury's Bank Travel Money ~ Retail and residential uses immediately surround property Groceries Click & Collect Sainsbury's Cafe
Property Characteristics
Region: West Midlands Year Built: 1988 Building Size (sf): 81,247 Lot Size (acres): 6.6 Parking Spaces: 450
Retail Submarket Characteristics
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 46 Source: CoStar; Oxford Retail Consultants Kempston Investment Highlights: ~ Good visibility from one of Kempston’s Petrol Station Lloyds Pharmacy primary thoroughfares ~ Limited competition in immediate vicinity Sainsbury's Cafe ~ Dense surrounding population
Groceries Click & Collect
Property Characteristics
Region: East of England Year Built: 1975 Building Size (sf): 99,885 Lot Size (acres): 5.1 Parking Spaces: 480
Retail Market Characteristics
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 47 Source: CoStar; Oxford Retail Consultants Locksbottom Investment Highlights: ~ Strong market with favorable population density Lloyds Pharmacy ~ Stable key traffic drivers, largely due to proximity to London and nearby hospital Argos ~ Property is located in a heavily trafficked intersection of two major thoroughfares Groceries Click & Collect
Property Characteristics
Region: London Year Built: 1981 Building Size (sf): 86,221 Lot Size (acres): 7.1 Parking Spaces: 400
Retail Market Characteristics
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 48 Source: CoStar; Oxford Retail Consultants Northampton Investment Highlights: ~ Strong market with favorable demographics Petrol Station Lloyds Pharmacy and growth trends ~ Good visibility from major thoroughfare Argos Sainsbury's Bank Travel Money ~ Situated in the middle of a retail cluster with several schools located nearby Groceries Click & Collect Car Wash
Property Characteristics
Region: East Midlands Year Built: 1988 Building Size (sf): 126,538 Lot Size (acres): 6.1 Parking Spaces: 595
Retail Market Characteristics
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 49 Source: CoStar; Oxford Retail Consultants Sheffield Investment Highlights: ~ Favorable demographics Petrol Station Lloyds Pharmacy ~ Diverse set of market drivers, including Argos Sainsbury's Bank finance, steel industry, and higher education Travel Money Sainsbury's Cafe ~ Adjacent retail uses complementary to the site Specsavers Groceries Click & Collect
Property Characteristics
Region: Yorkshire Year Built: 1984 Building Size (sf): 101,593 Lot Size (acres): 6.2 Parking Spaces: 900
Retail Market Characteristics
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 50 Source: CoStar; Oxford Retail Consultants Southampton Investment Highlights: ~ Limited competition nearby Petrol Station Sainsbury's Cafe ~ Favorable demographics and population density in surrounding area Argos Sainsbury's Bank Travel Money ~ Strong key market drivers, including a major Groceries Click & Collect port, universities, and healthcare industry Car Wash
Property Characteristics
Region: South East England Year Built: 1977 Building Size (sf): 116,590 Lot Size (acres): 7.9 Parking Spaces: 700
Retail Submarket Characteristics
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 51 Source: CoStar; Oxford Retail Consultants REALTY INCOME International Expansion: Sale-Leaseback with Sainsbury’s
April 2019