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Good day, and welcome to the Realty Income second quarter 2026 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key. After today's presentation, there will be an opportunity to ask questions. To withdraw your question, please press star, then 2. Please note today's event is being recorded. I would now like to turn the conference over to Alexander John Waters, Vice President, Investor Relations. Please go ahead.
Thank you for joining Realty Income's second quarter 2026 results conference call. Joining us on the conference call today are Sumit Roy, President and Chief Executive Officer; Jonathan Pong, Chief Financial Officer and Treasurer; Neil Abraham, Chief Strategy Officer and President, Realty Income International; and Mark E. Hagan, Chief Investment Officer. During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in any forward-looking statements. We will disclose in greater detail the factors that may cause such differences in our Form 10-Q filed with the SEC. We will observe a one-question and one-follow-up limit during the Q&A portion of the call to ensure that everyone has an opportunity to participate. With that, I would now like to turn the call over to our CEO, Sumit Roy.
Thank you, Alexander, and welcome everyone. Realty Income delivered another strong quarter in Q2, reflecting the benefits of our diversified investment strategy and our position as a trusted capital partner to many of the world's leading companies. Our investment activity highlighted the breadth of our opportunity set, demonstrating our ability to invest across the capital stack, geographies, and property types to support accretive growth. Against that backdrop, AFFO per share grew 3.8% to $1.09 during the quarter. Year to date, AFFO per share was $2.22, representing 5.2% growth and a meaningful acceleration from the same period in 2025. This momentum supports a $0.02 increase in our full-year AFFO per share guidance midpoint to a new range of $4.44 to $4.45, representing growth of approximately 4% at the midpoint. We are also increasing 2026 investment volume guidance from $9.5 billion to $10 billion as our pipeline remains robust. I will cover key investment highlights during the quarter before detailing market dynamics in each of Realty Income's strategic areas. Global investments totaled approximately $2.6 billion, or $2.1 billion at our pro rata share, at an initial weighted average cash yield of 7.3%. Second-quarter activity was weighted more heavily toward the United States with approximately $1.7 billion in pro rata investments at a weighted average cash yield of 7.4%, including roughly $800 million in industrial assets, representing approximately 75% of U.S. real estate investments. Also embedded within this U.S. activity was continued deployment through our U.S. Core Plus fund, which acquired approximately $73 million of assets on a global basis with industrial representing more than half of that volume and retail accounting for the balance. In Europe, we closed on approximately $400 million at a weighted average yield of 7%. Finally, on June 30, we announced a $6 billion programmatic hyperscale data center joint venture with Cloud Capital in which Realty Income expects to invest up to $1.4 billion over time for its 45% equity interest. Turning to additional investment details, let's start with industrial, which represented approximately 65% of our global real estate investments. We continue to find attractive risk-adjusted opportunities supported by improving fundamentals and contractual rent escalators that generally range from 2% to 3.5% annually. Just under half of industrial acquisitions NOI this quarter came from investment-grade clients with investments concentrated in high-quality primary and infill markets. Notably, U.S. industrial fundamentals strengthened during the quarter as net absorption accelerated sharply, vacancy declined, and development activity began to improve alongside market conditions. That positive industrial momentum also carried through to our U.S. Core Plus fund, which continues to demonstrate the value of pairing our scale and sourcing with long-term private capital. During the quarter, we fully deployed the fund's remaining cornerstone commitments and increased total gross asset value to approximately $3 billion. Assets acquired into the fund in Q2 generated a 6% weighted average cash yield. While these investments carry lower initial yields, they consist of high-quality assets in attractive markets leased to strong-credit customers and supported by contractual rent escalators well above average. A dynamic reflected in the fund's 2.9% year-to-date same-store revenue growth. Importantly, the management fee stream from the fund enables us to pursue these lower initial-yield investments with day-one accretion to Realty Income's shareholders, thus expanding our overall buy box. In Europe, while several international clients were more cautious earlier in the year amid geopolitical uncertainty, activity has improved and a number of those clients are actively pursuing transactions today. Europe continues to offer attractive risk-adjusted investment spreads, supported by lower borrowing costs, our established presence in the region, and a landscape that remains less competitive than in the U.S. We remain constructive on Europe and continue to view it as an important contributor to our growth over time. Turning to data centers, our joint venture with Cloud Capital establishes another large-scale programmatic investment vehicle. The venture includes three Northern Virginia data center assets representing under 400 megawatts of capacity. We closed on the first stabilized asset last week, and expect to acquire our share of two development assets upon stabilization. Our partnership with Cloud Capital originated from a prior credit investment and has evolved into a long-term relationship focused on developing and owning hyperscale data centers across leading U.S. and European markets. Since announcing the venture, data center dialogue has continued to increase, expanding our access to opportunities across the sector. We believe the industry is still in the early stages of a multiyear digital infrastructure build-out driven by AI adoption, cloud computing, and broader digitization trends. As a result, demand for data center capacity continues to exceed available supply in many of the industry's most attractive markets. We remain focused on top-tier supply-constrained markets and partnering with experienced operators that value our long-term programmatic financing capabilities. Across our investment activity, our scale and sourcing platform continue to be significant advantages that are difficult to replicate through individual asset acquisitions. As an example, earlier this year, the fund acquired a combined 19-property portfolio leased to a top-performing quick service restaurant operator for more than $100 million. A subsequent third-party valuation completed in connection with our Core Plus fund verified a prevailing market cap rate for the portfolio that is more than 30 basis points below our acquisition basis, providing tangible evidence of the immediate value creation that can be achieved through portfolio transactions. While acquisitions and capital deployment are important drivers of long-term growth, we are seeing increasing opportunities to create value through active portfolio management and capital recycling. During the quarter, we completed $161 million of dispositions, reallocating capital towards areas of the portfolio where we see the strongest combination of organic growth, pricing power, and value creation. Importantly, this approach is not limited to non-core or vacant assets, but extends across the portfolio whenever we believe capital can be redeployed more strategically. This disciplined approach enhances portfolio quality, improves capital efficiency, and supports sustainable earnings growth. Looking ahead, we continue to see attractive opportunities to recycle capital into assets that are better aligned with our long-term strategic priorities. We also continued to improve portfolio quality during the quarter with investment-grade client exposure increasing to 34% of annualized rent from 32% in the first quarter. Portfolio fundamentals remain strong: occupancy of 98.8% and 482 re-leased units generating a blended rent recapture rate of 102.7%, with renewals at 104.6%. This included a large batch renewal with a single client covering nearly 150 assets, demonstrating the scale and efficiency of our platform. Industrial comprised approximately one-third of leasing activity during the quarter and generated a rent recapture rate of 105.8%, while international recapture rates reached 112.9%, reflecting the continued success of our U.K. value-add retail park strategy. Our international retail park strategy continues to benefit from limited new supply, strong retailer demand, and record-low vacancy rates, helping drive attractive leasing spreads and incremental value creation. Importantly, the growth and diversification of our investment capabilities have been matched by similar progress on the capital side of the business. Our expanding capital platform is reducing our reliance on public equity while enhancing our ability to fund growth efficiently. With that, I will turn the call over to Jonathan.
Thanks, Sumit, and good afternoon, everyone. The second quarter demonstrated our commitment to diversifying our sources of capital on a global scale while maintaining a healthy balance sheet. We continue to operate from a position of significant liquidity, conservative leverage, and broad access to multiple capital channels. We ended the quarter with approximately $3.5 billion of available liquidity on a pro rata basis. Net debt to annualized pro forma adjusted EBITDA at the end of the second quarter stood at 5.4x, or 5.2x inclusive of unsettled ATM forwards, which is well within our target range. Subsequent to quarter end, we further enhanced our liquidity profile through an expansion of both our global revolving credit facility and commercial paper program, an unsecured bond offering in Europe, and continued forward equity issuance under the ATM. Our updated credit facility now provides for borrowings of up to $5.5 billion, an increase of $1.5 billion from the prior facility with a 5 basis point reduction to our borrowing rate. Similarly, we expanded our global commercial paper program to $5.5 billion, an increase of $2.5 billion. We completed a €600 million-denominated bond offering at a yield of 3.7%. And finally, we raised an additional $90 million of forward equity, bringing our current ATM unsettled balance to approximately $1.3 billion. Pro forma for these transactions, available liquidity increased to more than $5.7 billion. With our enterprise value approaching $90 billion and a robust pipeline of external growth opportunities, access to additional capital enhances our ability to immediately finance our investment pipeline while remain patient and opportunistic in accessing longer-term and permanent capital. As a reminder, outstanding borrowings on our credit facilities and commercial paper programs represent our only exposure to variable-rate debt, and we intend to maintain the variable-rate exposure at 10% or less of our total outstanding debt. Our commitment to maintaining a strong balance sheet supported by access to multiple sources of capital was recently recognized in Fitch's initiation of coverage for Realty Income with a solid A long-term issuer default rating. This rating places us among just four U.S. REITs with a solid A or equivalent rating from one of the three major rating agencies, and we are grateful that our size, diversification, and track record of performance have elevated us to this rating. We remain active on the capital raising front. Inclusive of the aforementioned euro bond offering, we have issued $3 billion of new debt year to date at a blended effective coupon of 3.9% compared to $1.4 billion of debt that has matured to date at a blended coupon of 4%. We continue to diversify our sources of debt capital across different currencies and investor capital pools with the focus on avoiding saturation or reliance on any one market while lowering our all-in cost of borrowing and managing an appropriate maturity ladder going forward. On a year-to-date basis, we have issued four discrete debt instruments, including a convertible bond, a U.S. dollar unsecured bond swapped to euros, a municipal prepaid term loan swapped to euros, and a euro unsecured bond. Each of these debt instruments was selected with an intentional bias toward tapping into a unique investor base as well as minimizing our global and blended cost of debt. On the equity side, private capital has reduced our reliance on public equity markets to fund our growth. As a result, we have meaningfully lowered our public equity consumption as a percentage of investment volume, comprising only 18% of investment volume year to date compared to an average of 47% over the past three years. Year to date, we have settled only $825 million of forward equity to close on $4.7 billion of pro rata investment activity, all while maintaining leverage within our 5.5x target level. This reflects the benefit of our recent capital initiatives, which have diversified our sources of equity capital. Turning to our 2026 outlook, as Sumit mentioned, we are increasing our full-year AFFO per share guidance range to $4.44 to $4.45, also increasing our full-year acquisitions guidance to $10 billion, up from $9.5 billion previously. This reflects the strength of our investment pipeline and confidence in our ability to source and execute attractive opportunities. At our share, we expect to invest approximately $9 billion during 2026. We are also holding our 2026 credit loss outlook flat at around 40 basis points of rental revenue, reflecting stable operating performance across our client base. Notably, we are not raising our lease termination income guidance. We recorded approximately $1 million in the second quarter and continue to expect $45 million to $50 million for the full year. As a result, the increase in AFFO guidance reflects the underlying strength of the business in terms of investment volumes, yields, modest credit losses, the successful execution of several capital markets transactions, and our expectations for continued momentum throughout the balance of 2026. With that, I will turn the call back over to Sumit.
Thank you, Jonathan. In summary, the second quarter represented disciplined execution across the platform, highlighted by continued performance of our high-quality portfolio, disciplined capital allocation at attractive yields, and the curation of unique capital vehicles that provide Realty Income with a durable financing engine to accelerate AFFO per share growth in the years ahead. With that, I would now like to open it up for questions. Rocco?
分析師問答
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then 1 on your telephone keypad. If your question has already been addressed and you would like to remove yourself from queue, once again, that is star then 1 if you have a question. Today's first question comes from Michael Goldsmith at UBS. Please go ahead.
Good afternoon. Thanks a lot for taking my question. The acquisition cap rates during the quarter were 7.4%, which is a bit lower than you saw last quarter. Is that a reflection of mix, competition, or something else that had to play into it, also the industrial assets with the elevated lease escalators? And just how should we think about the accretion on cap rates of 7.4%?
Yes, that is a great question. The idea here is to always try to blend to a number that is getting us back to our historical spreads, Michael. And the blended cap rate or the investment yield is 7.4%. When you think about the portion north of $100 million, that was in the fund; that was where the lower-yielding cap rates went and that was by design because that is why the fund was created. Stuff that we could not accretively buy on balance sheet was going to be allocated to the fund, where the long-term return hurdles were going to be met, but that initial accretion was not. What is remaining has a profile that gets us to our historical spreads of circa 150 basis points. That is how you should think about our investments.
Thanks for that clarification. And then just as a follow-up, can you provide an update of where you are in terms of generating fee income as the amount in the quarter? Is that kind of the right run rate, or do you expect that to accelerate from here? And then also, how much is included in the underlying guide?
Hey, Michael. If you look at the supplement, I believe at page 22, we do show management fee income to Realty Income. It was about $3.2 million for the quarter. The majority of that obviously is for the U.S. Core Plus fund. We had raised $1.7 billion during our cornerstone round and, as of early July, we had drawn down all of the capital that is now fee generating. There is also a separate component attributed to the insurance JV that we announced back in March. In totality, that is where you get the $3.2 million. In terms of guidance, we have talked about this before, but we expect around $10 million or so for the fund in terms of management fees, and then perhaps $2 million to $3 million attributable to the insurance JV.
Thank you.
Our next question today comes from Brad Heffern at RBC Capital Markets. Please go ahead.
Hey, afternoon, everybody. Thanks for the questions. Obviously, rates have been bouncing around a lot, but generally going up. We have also been hearing some of your peers talk about some slight cap rate compression. First, are you seeing that as well? And then do you think higher rates will eventually flow through or are competitive dynamics preventing that from happening?
That is a great question, Brad. It is a very strange environment because the inverse correlation that exists between how net lease generally trades versus the 10-year largely holds true. But what has happened over the last two months is that inverse correlation has not held. It really is a question of what is going to happen to the tenor and what the forward outlook is, not so much where it is trading today, that will dictate what happens to cap rates. We have often talked about cap rates being a trailing variable when it comes to interest rates and the 10-year treasury. If the view is that the 10-year is going to be in the 4.6% to potentially 5% range, then what we have historically seen is cap rates do follow. But there is a lot more competition in the U.S.; there are many more new entrants on the private side along with a few on the public side, and so there is that competitive dynamic that is going to keep cap rates lower. Ultimately, in a highly elevated cost of capital environment, cap rates will need to adjust.
Got it. Thank you for that. And then you talked a bit about the positive European outlook in the prepared comments. I wanted to specifically zoom in on the U.K. — the cost of debt seems pretty unattractive over there, especially compared to euro debt. Are you seeing upward pressure on cap rates in the U.K. to reflect that, or is it just a less appealing market right now?
Neil?
Thanks, Sumit. Brad, I think we have countervailing effects. One is the macro malaise, changes in policy and the move in rates. Against that, what you have is institutional capital coming in and you see this more broadly across Europe as well. It started really with malls or shopping centers, and there is quite an aggressive bid for those kinds of assets. In the U.K., almost perversely, we are actually seeing institutional capital coming in in good size, driving down cap rates. There are also one or two larger private equity players driving consolidation across the continent. The industrial logic is that they missed that play in the U.K., but there is still opportunity across Europe, and the low level of base rates makes it quite accretive on a levered basis. I do not think we are seeing upward pressure on cap rates in the U.K. or frankly much of Europe, with the exception of Germany. If anything, the pressure on cap rates downward on retail parks in the U.K. will continue.
Thank you.
Our next question today comes from Rob Stevenson at Huntington. Please go ahead.
Good afternoon, guys. Sumit, how should we be thinking about how much of the $5 billion or so of second-half investments in the guidance is likely to be put on Realty Income's balance sheet and financed by the REIT versus going into various JVs, funds, partnerships, and anything new that you would create over the remainder of the year?
Yeah, so that $10 billion is the guidance. What we have shared with the market is $9 billion of that $10 billion is going to be on balance sheet. If you see what we have invested year to date into the fund, we have largely used up the cornerstone equity. We have completely used up all of the equity that we have raised. The only assets that are going to go into the fund will be the leverage capacity that the fund still has available to it. That is going to be the same ratio, about one third debt, two thirds equity, in effect. We have about $1.7 billion that we have raised in equity, and about one third of that amount in leverage capacity deployed. The rest will be on balance sheet.
Okay, that is helpful. And then with these various funds, JVs, partnerships, etc., that you now have in place, do you have all of the sources of capital you think you need to execute the business plan over the next couple of years? Or should we expect to see more of these types of partnerships and JVs being announced over the next six to 12 months given what your pipeline looks like?
Rob, I think in terms of the product that we are going to pursue from an investment perspective, that is largely defined. We have been talking about our desire to go into data centers and we have now formed joint ventures. Is it possible there could continue to be other JVs that we form with developers who have a very healthy pipeline that fits our box? The answer is yes, especially on the heels of our recent announcements. There are some very interesting conversations taking place. That is much more in line with what we have already shared. The other asset types are ones that we are continuing to invest in. The fact that we have created these multiple channels of geography and asset types means we are going where the best risk-adjusted returns are. On the financing side, we are still relatively new in the game. The rationale behind what we did was to leverage our platform to attract much lower cost-of-equity capital that wants to leverage and pay fees and basically be exposed to net-lease investing. The management fee stream generates earnings contribution. I would not say what we have shared with you is the end all and be all of all equity capital sources; I would characterize it as the beginning. There will be other channels. We will be focused on minimizing overlap among the various private sources of equity capital and using our platform judiciously to serve the various capital partners, making each one of them successful so the fee stream becomes permanent and growing so our shareholders can benefit in years to come.
Our next question today comes from Smedes Rose at Citi. Please go ahead.
Hi, thank you. I just wanted to follow up on your acquisitions outlook. It looks like for your portion, the back half of the year is estimated around $4.3 billion. That suggests it decelerates a little bit from what you saw in the first half. Could you speak to what you are seeing there? Is it slowdown by design? Are you being conservative? Is competition heating up? Any color around that outlook would be helpful.
Mark.
Yes, thanks for the question. With the guidance at $10 billion and the first-half total investments of $5.3 billion, I do not think there is a lot of deceleration. You said your portion would be $9 billion for the year; that is the overall global investment amount. The increase in our overall volume guidance was because of the strength and robustness of the pipeline. As we are sitting here today, we feel great about the pipeline and about at least another strong second half of the year.
Yes. Okay, and then you — yeah, go ahead. Sorry. Forecasting out and trying to back into what the delta between what we have forecasted versus what we have not.
What I can tell you from a pipeline perspective, from the health of the pipeline, from what we are seeing, we feel great.
Industrial has always been a focus of ours. We obviously cannot go into the very large 3-cap deals that have been announced, but single-tenant industrial more specifically across various geographies has always been something we have leaned into. The way we are playing that is through the development channel, partnering with best-in-class developers and generating yields with more of a built-to-suit characteristic rather than a speculative characteristic so we can meet our return hurdles. What you are seeing today is similar to what others are seeing: absorption rates trending very positive, vacancies at all-time lows. Demand is broader than e-commerce; it's industrial, manufacturing, data center equipment needing storage, and more. We feel very good about the pipeline and are able to do deals at cap rates and investment yields that make sense through a combination of credit and equity investments.
Our next question today comes from Haendel St. Juste with Mizuho. Please go ahead.
Hey guys, thanks for taking the question. Sumit, I was intrigued by your comments about capitalizing on the market to do some portfolio recycling and improving the quality of your on-balance-sheet assets. How much of the portfolio might be subject to being upgraded or recycled? Sounds like you are doing a bit more investment-grade exposure here. Is that something we should expect near term and could you provide color on the difference in cap rates or bumps on what you are buying versus selling? Thanks.
That is a great question, Haendel. In the prepared remarks you picked up on our desire to continue to recycle capital. There are certain metrics we focus on: internal growth, lease duration, and exposure to credit where we have a long-term view and feel comfortable. Capital recycling that we will continue to pursue is intended to make each of these variables accretive. It could involve leaning into data centers, leaning into industrial, and repositioning our overall portfolio to ensure our net-lease KPIs move in the right direction through capital recycling.
That is great color. Thank you.
Haendel, on the other adjustments per share question: the other category is primarily FX-related gains or losses that are noncash in nature and other CECL-related impacts. Those are noncash and nonrecurring and therefore should not impact AFFO. On the loan tenor and the investments we make: when you think about the right-hand side of our balance sheet, our mix of debt maturities provides a natural hedge — if rates go down there is reinvestment risk but also refinancing benefits, and vice versa. We manage the maturity ladder closely and forecast exposure under various rate scenarios to mitigate risk.
Our next question today comes from Omotayo Okusanya with Deutsche Bank. Please go ahead.
Yes, good afternoon. Just along Haendel's line of questioning on capital recycling: could we see that manifest as new JVs or doing more with your current JV partners? Or should we think it will be mostly outright asset sales?
The idea behind recycling is that we are continuously looking at our portfolio to identify assets that are mispriced in the market or where we do not have a long-term strategic outlook. We would prefer to sell those assets, raise capital, and redeploy it in asset types, geographies, or risk-adjusted opportunities where we have higher conviction for long-term holds. The capital recycling I described is not intended to represent additional JVs necessarily; it is meant to reposition capital more strategically.
Our next question today comes from Alexander Fagan with Baird. Please go ahead.
Hey, thanks for taking my question. On the hyperscale data center deals, after these three assets, are you diversifying the end-tenant base for your data center portfolio?
Sure, thanks for the question. Yes, we are diversifying. We announced a transaction three years ago with two data centers in Northern Virginia that had a specific tenant. The transaction we announced last month has three data centers with varied tenants that are different than the original two. We currently have five assets with different tenants. Going forward, as we continue to build out our data center portfolio, we will keep diversification in mind. We want to focus on investment-grade rated hyperscalers and enterprise users, but we will be very mindful of balancing concentration to any particular tenant.
And broadly on the tenant question, should we expect any new top-20 tenants entering the portfolio this year?
When that happens, it will be announced and I think it will be viewed very positively. These data center clients tend to be very large, and when those close, they could potentially reshuffle our top 20. But it will be viewed positively.
Our next question today comes from Ronald Kamdem with Morgan Stanley. Please go ahead.
Just staying on the data center topic: can you talk more about the economics, whether stabilized yields or price per megawatt, and your views going forward? Also, on the competition: there are big private equity players and other public capital. What is that environment like to get these deals through?
Sure. There are a lot of players in the sector both on the development side and capital side, so competition exists. However, many of the large hyperscale data centers are still in development and there may be a lack of a natural long-term home for those assets. Some developers want to keep ownership, others do not, which creates opportunity. For someone like us whose model focuses on holding long-leased assets with strong investment-grade clients and good annual bumps, there is a natural sweet spot. That may make us different from others. On cap rates, there is still overall discovery in the market as many large assets are transitioning from development to stabilized. Some recent transactions provide data points around cap rates for these assets. Those transactions are a good indication of where cap rates are today for these types of assets.
And my second question: you mentioned 40 basis points in terms of expected credit losses for this year. Can you remind us about the watch list and any changes over the last three months? Any larger tenants of concern or is it pretty granular?
Ron, the watch list remains in the high-5% area and is very granular. There are 137 individual tenants on the watch list with a median about two basis points. At the top, the usual suspects include home furnishings and casual dining, then it drops off significantly. So from a guidance perspective, 40 basis points still feels fairly conservative. Historically, our credit loss has been in the low-20-basis-point area, so we are trending back toward that but maintain a buffer in our guidance.
Our next question today comes from James Kammert at Evercore. Please go ahead.
Again, if I play devil's advocate on data centers: if you underwrite these to zero residual value given your bumps and you are using representative cap rates, what would the zero-residual-value IRRs look like today? In other words, how protective are the economics?
James, we are not going to go into detailed IRRs, but that is definitely one of the scenarios we run. There has been debate about residual values and fungibility of these assets, which is why our box takes into account where the data centers are located, throughput requirements, and whether a market like Northern Virginia will remain critical 15 or 20 years from now. We run various scenarios and that is one reason we lean toward very long-duration leases, 15 to 20 years and preferably 20, and partner with developers who can secure long-duration contracts with minimal landlord responsibilities. Those are the mitigants we build into the process to ensure we are comfortable with downside scenarios, including extreme cases where an asset might be sold for land value at the end of the lease.
That is fair. And quickly, do you have a tolerance in terms of absolute exposure to data centers as a percent of ABR or of gross investment?
We are not targeting a specific percentage of the portfolio for data centers. What we are seeing is a once-in-a-generation demand for a particular asset type with tenants we are attracted to in attractive locations. We are having multiple conversations; how many convert to transactions will be determined over time. We are focused on obsolescence and residual risk and have mitigants in place to engage only in transactions that meet our long-term return expectations.
Our next question comes from Jason Wayne of Barclays. Please go ahead.
Thanks for stepping away from data centers for a moment. On the rest of the investment pipeline, you said you were still interested in Europe. Can you give a mix of what is in the pipeline today?
Sure. The mix today is largely reflective of the things we have done in the past and continue to like: grocery, DIY (do-it-yourself/home improvement), and industrial logistics. Many of these are with marquee national or global names in their countries. Some of the industrial deals are development-driven. The majority of what we are looking at today is in markets where there is a theme — onshoring or advanced manufacturing — and the pipeline looks quite good across Europe in the back half of the year.
Got it. You mentioned public equity funding was down to 18% of your investment volume this year. Is there any long-term target there given private capital is often one-time in nature?
Look, Jason, it is going to depend on circumstances. We are not saying we will never touch the public equity markets: they have been very good to us and are a deep market. We do not want to be beholden to just one source. Whether it is 18% or 50% will depend on what partnerships we grow and how we source private capital. The private capital channels are meant to not overlap with one another and to increase the buy box. For example, the Core Plus fund allows us to acquire certain assets we would not buy on balance sheet due to lower initial yield. The initiative was intended to expand our sources of equity beyond public markets and reduce volatility in funding.
Jason, to be clear: when I said private capital can be less one-time, the open-ended fund by definition is intended to be a vehicle that will continue to raise capital into the future. That is why we constructed it as an open-ended vehicle rather than a closed-end fund. The JV with GIC is meant to be programmatic; once initial capital is utilized, the hope is they will continue to deploy more. It is similar with Apollo. We are not favoring closed-end or one-time partnerships; we designed vehicles to be durable fee streams.
Our next question today comes from Jana Galan with Bank of America. Please go ahead.
Thank you. Good afternoon and congrats on the quarter. Jonathan, I wanted to follow up on the guidance increase to better understand the driver of the $0.02 increase at the midpoint. There is no change to bad debt or to fees. Is it primarily the higher investment volumes?
A lot of what drives AFFO in the short term is timing and capital markets. Since we are in August and have taken a lot of capital markets execution risk off the table — we've executed on debt and equity transactions and have better visibility on deal timing — we have more comfort increasing guidance. It is a combination of derisking certain execution risk and better visibility on the pipeline and timing of closings, as well as attractive investment opportunities.
Our next question today comes from Anthony Paolone at JPMorgan. Please go ahead.
Yes, thanks. A question about capital allocation across the different buckets: what does a wholly owned acquisition yield need to look like for it to be interesting? It seems like loan investments in the high single digits, development in the high sevens, and fee enhancements could get you into the sevens. So what does a wholly owned deal need to look like to be competitive and attractive?
The answer differs by geography. We have hurdle rates that need to be met because we need to permanently finance deals. Historically we try to generate roughly 150 basis points of spread. Given differing cost of capital across geographies, the cap rate required for a deal to be attractive varies by market. In Europe, lower cost of debt can compress yields, while in markets like the U.K., higher cost of debt requires higher yields to meet our spread expectations. We track this closely.
Okay. And one quick one: your fee-earning AUM went up about $1.3 billion from Q1 to Q2, but investment activity suggests a $500 million difference between everything you did versus your share. How should we think about that AUM increase?
Think about the Apollo JV and other JV contributions of assets off balance sheet. Those contributions generate fee income for us and increase fee-earning AUM. That is the reason for the increase.
Our next question today comes from Greg McGinniss at Scotiabank. Please go ahead.
Hey, good afternoon. On data centers: are you open to data center investment in Europe? How do returns there compare to the U.S.? And are you avoiding development-phase investments or is that just a function of the Cloud JV where you wait until stabilization?
Yes, we are open to investing in Europe. There are very good data center markets in Europe, including FLAP cities and other attractive markets. The Cloud JV could present opportunities in both the U.S. and Europe. Returns and cap rates are country-dependent, and our cost of capital varies by region, so it is hard to give a single answer. Regarding development versus stabilization: there are ways we can play different parts of the capital stack. What led to our Cloud JV and the three seed assets was by lending during the development phase of projects. We can and do participate at different phases, including providing credit during development that can lead to ownership opportunities.
Okay, thanks. And on the loan investments, initial yields were up to 9.2% this quarter. Was anything specific driving that yield? And given a similar rate environment, do you expect to convert those into real estate or recycle that capital back into more loans?
There are multiple reasons for credit investments yielding higher returns. Part of the thesis is using credit to access real estate acting as collateral during development. We make investments secured by real estate that we would like to own, often during development when yields are higher. The credit investments help cultivate relationships and provide access to assets, which can lead to eventual fee-simple ownership. Stabilized assets yield lower initial returns, while development-phase investments yield higher returns commensurate with risk. How we deploy proceeds depends on the underlying opportunity and our strategic priorities.
Our next question today comes from Eric Borden at BMO Capital Markets. Please go ahead.
Thanks. On the guidance raise and the $0.02 at the midpoint: when you mentioned capital markets execution risk being taken off the table, does that primarily relate to debt issuance, equity funding, cross-currency financing, or overall funding visibility for the pipeline?
It is a combination of all of that, Eric. Debt financing risk has been substantially addressed — the European market and FX curve have been helpful. Much of our euro-denominated investment has a natural match to euro financing, which reduces currency mismatch. On the equity side, we have $1.3 billion of unsettled forward equity at reasonable prices, which reduces equity execution risk. Overall, better visibility on yields and deal timing removes much of the uncertainty that existed earlier in the year, which supports higher confidence in guidance.
Our next question today comes from Upal Rana at KeyBanc Capital Markets. Please go ahead.
Thank you. Sumit, on your updated investment guidance of $10 billion, is that a reasonable annual deployment run rate we should expect going forward? I know there were some larger investments this year, so just curious if that is a level we should expect.
Upal, in 2022 we did $9 billion and in prior years we have been in that neighborhood. This is the third year we are forecasting north of $9 billion. We have expanded investable channels and geographies. We are very comfortable guiding to $10 billion in 2026 and are confident in meeting it. Year-to-date, our sourcing has been north of $62 billion, in line with an all-time high we saw in 2025. As we expand channels and geographies, sourcing increases. I will not make a definitive pronouncement on a permanent run rate beyond this year, but this year we feel very confident.
That is helpful. Quick one on new client rent recapture rate: it represents about 10% of total re-leasing but was materially below the portfolio average. Any comments on what drove that? The blended 102.7% is strong but curious about the new-client split.
There were very few assets that went to a new client this quarter. For the right client, we are absolutely willing to give rent concessions and enter a longer-term contract with more growth; those decisions fluctuate quarter to quarter. What we focus on is the blended rate across renewals and new leases. Historically, that blending has been positive and consistent; the 102.7% blended recapture is in line with long-term trends. Asset management is an increasingly important driver for us and will continue to be so.
Our next question today comes from Jay Kornreich at Cantor Fitzgerald. Please go ahead.
Hey, thanks. On the private Core Plus fund: you mentioned deploying the initial $1.7 billion of cornerstone equity. Where do you go from here? Were there limits or barriers that led to the initial raise being $1.7 billion, and how should we think about the fund growing from here?
Jay, think of the cornerstone raise as the initial step to build AUM. Once the capital is in and you can deploy it accretively, you build a performance track record. Typically you need a three-year track record before a full-scale fundraising push. Our fund is open-ended and perpetual; the market environment for fundraising was challenging, but we bucked that trend and raised cornerstone capital. The focus now is performance: deploy capital on the right deals with the right underwriting and structuring, and after establishing a record, the fund can grow materially in subsequent years.
Our next question today comes from Spenser Allaway with Green Street Advisors. Please go ahead.
Yes, thank you. As Realty Income continues to find accretive ways to grow, how big could the credit platform be as a percent of overall investment volume in any one year? And do you have a dedicated team looking for credit opportunities?
We do have dedicated teams in the U.S. and Europe looking for credit opportunities. Today, credit is a relatively small portion of our balance sheet — about $3 billion of credit investments — and we use credit primarily as a channel to access real estate and cultivate developer relationships that can lead to owning assets fee simple. Credit investments allow us to generate compelling yields and access pipelines we might not otherwise see. We do not intend for credit to dominate our balance sheet; we are not a lender or bank. It is a strategic channel to support our core net-lease business.
Thanks. On capital recycling, I noticed you sold more occupied assets as a percent of dispositions this quarter. Is there any one credit or industry driving elevated asset management in Q2, or was it just a busier quarter?
We hope this trend continues. Occupied sales can result from credit reasons or mispricing in the market where private buyers value assets at lower cap rates than our on-balance-sheet basis. We know where we want to deploy capital, so if selling occupied assets provides a source of capital to reposition the portfolio accretively, we will do it. Occupied sales are not solely about reducing credit exposure; they can be strategic moves to redeploy capital into higher conviction areas.
That does conclude our question-and-answer session. I would like to turn the conference back over to Sumit Roy for any closing remarks.
Thank you so much, everyone, for joining this call, and we look forward to seeing you at upcoming conferences. Rocco, thank you for hosting us.
Yes, sir. Thank you very much. And we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful evening.