Realty Income Corporation

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 followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Alex 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, Neale Abraham, Chief Strategy Officer and President, Realty Income International, and Mark 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. and with that, I would now like to turn the call over to our CEO, Sumit Roy.

Thank you, Alex, 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 two-cent 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're also increasing 2026 investment volume guidance from $9.5 billion to $10 billion as our pipeline remains robust. I'll 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 $673 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 30th, 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, 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 US 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 multi-year 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 constraint 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 continue 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 with occupancy of 98.8% and 482 released 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 UK 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'll 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 up 5.4 times, or 5.2 times, inclusive of unsettled ATM boards, 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 facilities and commercial paper programs, an unsecured bond offering in Europe, and continued forward equity issuance under the ATM program. 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 five 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. Secondly, we completed a 600 million euro 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. Proform 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, the access to additional capital enhances our ability to immediately finance our investment pipeline while remaining patient and opportunistic in accessing longer term and permanent capital. As a reminder, outstanding borrowing 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 US 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've issued $3 billion of new debt We continue to diversify our sources of debt capital across different currencies and investor capital pools with a 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 US 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 towards tapping into unique investor bases while minimizing our global and blended cost of debt. On the equity side, and private capital has reduced our reliance on the 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 five and a half times 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 AFO per share guidance range to 444 to 445. We're also increasing our full year acquisitions guidance to $10 billion, up from nine and a half billion previously, given the strength of our investment pipeline and the 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 ASFO 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'll 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 a high-quality portfolio, disciplined capital allocation and attractive yields, and the curation of unique capital vehicles that provide realty income with durable financing engine to accelerate AFOPO share growth in the years ahead. With that, I would now like to open it up for questions. Rocco?

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'd like to remove yourself from queue, please press star then 2. Once again, that's star then 1 if you have a question. And 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 6.4%, which is a bit lower than what you saw last quarter. Is that a reflection of mixed competition or something else? Does that have to play into also the industrial assets with the elevated lease escalators? And just how should we think about the accretion on cap rates of 6.4%?

Yeah, that's a great question. Some The idea here is to always try to blend to a number that is, you know, getting us back to our historical spreads, Michael. And the blended cap rate or the investment yield is 7.4%. And when you think about, you know, the portion, you know, north of $600 million was in the fund, that was where the lower yielding cap rates went. And that was by design. because that's why the fund was created. You know, stuff that we couldn't 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, you know, that initial accretion was not. And so what's remaining is, you know, have a profile that gets us to our historical spreads of circa 150 basis points. That's 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 we are in terms of generating the 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 guidance? Thank you.

Okay, Michael. So, if you look at the supplement, I believe it's page 22, we do show Management Fee Income to Realty Income is 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 of that that is attributed to the insurance JV, that we announced back in March. And so in totality, that's where you get the 3.2. In terms of guidance, you know, we've talked about this before, but we expect around $10 million or so for the fund in terms of management fees. And then, you know, perhaps there'll be perhaps 2 to 3 million attributable to the insurance JV.

Thank you. And 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. But we've also been hearing some of your peers talk about some slight cap rate compression. I guess, 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's a great question, Brad. You know, it's a very strange environment, really, because this inverse correlation that exists between, you know, how net lease generally trade versus the tenure largely holds true. But what has happened over the last two months is that, you know, that inverse correlation hasn't held true. And so it really is a question of what is going to happen to the 10-year, what is the forward outlook, not so much where it's trading at today, that's going to dictate what's going to happen to cap rates. We've oftentimes talked about cap rates being a trailing variable when it comes to interest rate, the 10-year treasury. If the view is that the tenure is going to be in this 4.6 to potentially 5% zip code, then what we have historically seen is cap rates do follow. But you mentioned it in your question, the way you framed it, there is a lot more competition here in the U.S. There are a lot more new entrants on the private side along with a few on the public side. and so there is that competitive dynamics that's going to keep cap rates lower but ultimately in a highly elevated cost of capital environment, cap rates will need to adjust.

Okay, 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 UK. Cost of debt seems pretty unattractive over there, especially compared to Euro debt. So are you seeing upward pressure on cap rates in the UK to reflect that, or is it just a less appealing market right now? Neil?

Thanks, Sumit. Brad, in response to that question, I think we have countervailing effects. One, of course, is the sort of macro malaise change in the PN and the move-in rates. Against that, what you have is institutional capital coming in and you can see this more broadly across Europe as well. And it started really with malls or shopping centers as they're called over there. And there's quite an aggressive bid for those kinds of assets. So in the UK, almost perversely, we're actually seeing institutional capital coming in in good size and driving down cap rates. and then while we haven't bought retail parks or multi-tenant retail across the continent, there is also now one or two larger private equity players driving consolidation. I think the industrial logic is that they sort of missed that play in the UK but there's still an opportunity across Europe and the low level of base rates makes it actually quite accretive on a levered basis and so I don't think we're seeing Upward pressure on cap rates in the UK, or frankly, much of Europe with the exception of Germany. And I think, you know, if anything, the pressure on cap rates downward on retail parts in the UK will continue.

Thank you. And our next question tonight 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 500, so we've said, you know, we are going to do about $10 billion. That's the guidance. And what we have shared with the market is that $9 billion of that $10 is going to be on balance sheet. And if you see what we've invested year-to-date on the fund, we have largely used up the equity, the cornerstone equity, actually. We've completely used up all of the equity that we've raised. And so... The only assets that are going to go on the fund will be the leverage capacity that the fund has that is still available to it. And that's going to be obviously, you know, it's the same ratio, one-third, two-thirds. So we've got about, you know, $1.7 billion that we've raised in equity. We've got about, you know, one-third of that amount in leverage capacity to deploy. But the rest of it will be on balance sheets.

Okay, that's helpful. And then with these various funds, JVs, partnerships, et cetera, that you now have in place, do you have, you know, all of the sources of capital that you guys think that 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's largely defined. We've been talking about our desire to go into data centers. We have now formed joint ventures. Is it possible that 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. and especially on the heels of the conversation, on the heels of the announcement that we've made, there are some very interesting conversations that are taking place and that is much more in line with what we've already said. The other asset types are ones that we are just continuing to invest in and obviously the fact that we've created these multiple channels of geography and asset types, we are going where the best risk-adjusted returns are. On the financing side is where we are sort of still new in the game. And the rationale behind why we did what we did was to try to sort of leverage the platform that we have with a lot lower cost of capital, lot lower cost of equity capital, let me be more precise, that we could then generate earnings contribution through the fee stream. And I would say that we've That's the journey that we are on and I've heard Jonathan mention it as an ecosystem that we are trying to create where we are maximizing the utilization of a platform with trying to attract the lowest cost of equity capital that wants to leverage and wants to pay fees and basically be exposed to net lease investing. So, you know, I won't go so far as to say what we've shared with you is the end-all and be-all of all equity capital sources. I would characterize it as it's the beginning, and there'll be other channels, but what we are going to be acutely focused on is to make sure that the overlap on these various different sources of equity capital, private sources of equity capital, is very minimal. We want to make sure that we're using our platform very judiciously to serve these various different sources of capital, make each one of them very successful so that this fee stream that we are able to generate continues to be one that is a very high level of permanence and one that we can count on and our shareholders can benefit from in years to come.

Thank you. And our next question today comes from Smitty's Rose in the city. Please go ahead.

Mark Hagan,

Yes, thanks for the question. I think that with the guidance at $10 billion and the first half total investments of 5.3, I don't think there's a lot of deceleration in there.

Well, I'm just looking at your portion. You said for your portion it would be $9 billion for the year.

Yes, that's the overall global investment amount. But it's not driven by anything that we're seeing in the market conditions in terms of deceleration. In fact, it's really the opposite. We increased our overall, you know, volume guidance because of the strength and robustness of the pipeline. And so, you know, as we're sitting here today, we really – we feel great about the pipeline and about, you know, another strong second half of the year.

Yes.

Okay. And then you – yeah, go ahead. Sorry.

Okay. You know, forecasting out and trying to back into, you know, what is the delta between what we have forecasted versus what we haven't. What I can tell you from a, you know, pipeline perspective, from the health of the pipeline, from what we're seeing, we feel great.

Great. Okay. And I just on that, you know, you obviously leaned into industrial in the quarter. just wondering is that a primary focus going forward from here or are you happy with the kind of exposure that you have in that asset class at this point?

Industrial has always been a focus of ours. You know, we obviously can't go into the three cap deals that we just saw recently announced but in industrial, single tenant industrial more specifically across various geographies has always been something that we've leaned into and the way we are playing that is through the development channel. It's partnering with the best in class developers and being able to generate yields with more of a built to suit characteristic rather than a spec characteristic where we are able to meet the hurdles that we need to meet in order to generate the spread investing that you and our shareholders are used to seeing. So what you're seeing today is and I'm sure you've heard it from other industrial companies is what we expect to be a new trend where absorption rates are trending very positive, vacancies are at all-time lows and what's driving this demand is much more widespread than e-commerce which was the driver of industrial demand four, five years ago. It's much more broad-based. It's industrial. It's manufacturing. It's data center equipment that needs to be stored in warehouses, et cetera, that is also driving some of the demand. And so we feel very good about the pipeline that we've created, and we are being able to do it at cap rates and investment yields that make sense to us through a combination of investing on the credit side as well as on the equity side.

Thank you. And our next question today comes from Hando St. Josh with Mizuho. Please go ahead.

Hey, guys. Thanks for taking the question. Sumit, maybe starting with you, I guess I was intrigued by some of the comments you were making about capitalizing on the market to do some portfolio recycling, improving the quality of your on-balance sheet assets. I'm curious how much of the portfolio ballpark might be subject to being upgraded, recycled. Sounds like you're doing a bit more upgrade here. Is that something we should expect near term and maybe some color perspective on the difference in cap rates or bumps in what you're buying versus selling? Thanks.

That's a great question, Handel. I think in the prepared remarks, you picked up on our desire to continue to recycle capital. Obviously, we have talked about there are certain metrics that we are very focused on, internal growth being one of them, duration of the lease term being another, being exposed to credit. that we have, you know, a long-term view on and we feel comfortable with is another metric that we are going to be very focused on. And this capital recycling that we would like to continue to lean into is largely on a pro forma basis going to help make each one of these variables that I just mentioned accretive. And so that's the desire. And it could be, you know, obviously leaning into the data center side, leaning into the industrial side, and repositioning our overall portfolio to make sure that our net lease metrics that we focus on, KPIs that we are very focused on, continues to move in the right direction through this capital recycling.

That's a great color. Thank you for that. Jonathan, a question for you. Maybe if you'll allow me a two-part, it's just I want to get some clarification on what's in the other adjustments per share. It looks like we excluded that. The FFO for sure guide would be down. Maybe I'm misinterpreting it, so maybe some color on that. And that's just some color or thoughts on the duration of the loan book. Seems like there's a decent amount of I'm curious if you guys are expecting to be able to originate more or how you plan on managing that dilution. Thanks.

Hey, Handel. So the other category is really nothing new. It's primarily FX-related gains or losses that are non-cash in nature. You also have other CECL-related type of impacts as well. But that's nothing that would raise to the level of a cash adjustment that would impact ASFO and shouldn't impact ASFO given that it's non-cash and it's not recurring. I would say on the loan tenor, assuming you're talking about the investments that we make, you know, look, we've talked about this before, but when you think about the right-hand side of our balance sheet, when you think about, you know, legacy balance sheet with a fair amount of debt that's rolling every single year This provides a nice hedge, if you will, a natural hedge where if rates go down, yes, theoretically there's reinvestment risk, but also the other side of our ledger is also much more attractive in refinancing at much lower rates and vice versa. So we manage it, we look at it just as closely as we look at the liability side of the balance sheet, and that's how we risk mitigate and forecast what our exposure is should there be various scenarios play out in Thank you.

Our next question today comes from with Deutsche Bank. Please go ahead.

Yes, good afternoon, everyone. Just along Handel's line of questioning in terms of capital recycling, could we see that also manifest itself as kind of new JVs or doing more with your current JV partners or how do you kind of think or is it

are you kind of thinking much more just kind of outright asset sales?

Yeah, the idea being recycling. So, yes, we are continuously looking at our portfolio, Omotayo, and we are trying to figure out, you know, where are the assets that are mispriced in the market where we don't have a long-term hold strategic outlook on certain portions of our portfolio. and we'd much rather sell those assets, raise that capital and redeploy it in either asset types or geographies or risk adjusted opportunities where we feel we have a much higher conviction on holding long term. That's what we're talking about. It's not supposed to represent you know, additional JVs, et cetera. That is not the idea behind the capital recycling that you should sort of think about when we are talking about capital recycling.

Thanks for the clarification.

Sure.

Thank you. And our next question today comes from Alex Hagan with Baird.

Hey, thanks for taking my question. On the data center hyperscale deals, can you speak if after these three assets, are you diversifying your tenant base or the end tenant base for your data center portfolio?

Sure. Thanks for the question. Yes, we are. Obviously, we announced the transaction three years ago with two data centers in northern Virginia that had a specific tenant in it. The transaction that we just announced last month, that's three data centers, has varied tenants in it that are different than the original two. So we currently have the five assets with different tenants in them. And going forward, as we continue to build out our data center portfolio, that is one thing that we're going to keep our mind on as part of our strategy in terms of, obviously, we want to focus on the investment-grade rated hyperscalers and enterprise users. and those work well for us, but we are going to be very mindful of making sure that we balance our concentration to any particular assets. Tenants, sorry, rather.

Nice. And kind of on the tenant question broadly, should we expect any new top 20 tenants entering the portfolio this year?

Well, Alec, when that happens, it'll be... announced, and I think it will be viewed very positively. Obviously, these data center clients tend to be very large. And, you know, when those close, could it potentially reshuffle our top 20? The answer is yes, but it will be viewed very positively, in my opinion.

Thank you. Our next question today comes from Ronald Campbell with Morgan Stanley. Please go ahead.

Great. Just staying on the data center portfolio theme, maybe can you talk a little bit more about sort of the economics, whether it's sort of stabilized yields or price per megawatt, just your views on that going forward, and also on the competition, right? Because I think there's a lot of big private equity players out there. There's other public capital. Just what that environment is like to get these deals through. Thanks.

Sure. Thanks, Ron. Let me hit the second part of the question first, if that's okay. Yes, there are a lot of people in the sector right now, both on the development side and people wanting to invest capital into this sector. So there is a lot of competition for both developing these assets and owning them. I think that one of the important things, though, is that there are a lot that are still in the development phase, if we're talking about the large hyperscale data centers. And There's probably a lack of a natural home for the ultimate long-term ownership of those assets. Some of the developers may want to keep ownership of them for the long term, but others do not. And so that does create, despite the competition out there and the players in the sector going after some of these assets, for somebody like us, whose model focuses on holding long-lease assets that have clients with strong IG credit ratings and with good annual bumps, there's a natural sweet spot for us to be long-term holders of that. And so I think that makes us perhaps a little bit different than some of the other people who are playing in the space right now. In terms of your question on cap rates, I think there's still a bit of just overall discovery going on in the market. There are a lot of these large assets are still rolling from the development phase into the potentially changing hands for the stabilized phase. And I think there's been some transactions that have been you know in the market recently they've been announced where there's some cap rate data out there on them and I think that's a good indication of kind of where cap rates are right now for these types of assets.

Great and then my second one if I may I think just going back I think the comments were 40 basis points in terms of chosen bad debt for this year just can you remind us the watch list sort of any changes over the last three months any sort of larger tenants or does it remain pretty Pretty granular. Thanks.

Hey, Ron. The watch list remains in the high 5% area. And, you know, it's a very granular watch list. I think there's 137 individual tenants that comprise that with a median of about two basis points. So, you know, at the very top, you know, it's usual suspects. I would say it's home furnishings, it's casual dining, and then drops off pretty significantly thereafter. So when you're thinking about, you know, any changes to credit quality in the portfolio, very stable, some things have come out, some things have gone on, gone in. But broadly speaking, from a guidance perspective, or from a forecast perspective, you know, the 40 basis points does still feel fairly conservative. And, you know, remind folks that our historical credit loss, you know, across our entire history has been in the Thank you. And our next question today comes from Jim Kammer at Evercore.

Please go ahead.

Good afternoon. Thank you. Again, if I go back to the data centers, there's no doubt there's an abundant opportunity out there for realty income. I'm just curious if I play devil's advocate. If you're underwriting E to zero residual value, given your bumps and you're going in representative cap rates, what would the zero residual value IRRs look like today?

Jim, we're not going to go into the details, but that is definitely one of the scenarios that one should look at. There's been a lot of debate about residual values, the fungibility of these assets. which is why the box that we've created takes into account where these data centers are located, what is the throughput required, do we see Northern Virginia suddenly in 20 years' time when the lease has come due no longer be the epicenter of data center world, or do we see data center demands completely dry up? And so based on that, you run various different scenarios and that is one of the reasons why we sort of lean into these very long duration leases. 15 to 20 years and preferably 20. And we are trying to partner with developers who have the ability such as cloud to get these types of long duration contracts with very minimal responsibilities on the landlord side. And so what we feel is when we run these various different scenarios, we are very comfortable with the downside. We are very comfortable assuming the outcome if the world were to completely fall apart and it is in fact going to be sold for land at the end. That is certainly a scenario we run, but the way we try to mitigate it is by looking at all of these other factors. What kind of an asset is it? What's the duration of the lease? What's the growth you're getting in it? What's your going in yield? Those are the things that you sort of protect, you know, will allow you protection when you're running these downside and Herculean scenarios. So that's how I would leave it.

That's fair. And then quickly, what was your tolerance in terms of absolute exposure to data centers as a percent of ABR or your gross investment?

We are not targeting a percentage of our portfolio needs to be data centers. What we are seeing is a once-in-a-generation demand for a particular asset type that has clients that we are very attracted to in locations that we find very interesting. And, you know, we are having multiple conversations. how many of those conversations actually translate over to transactions, time will tell. But this is a fascinating environment for us and we are very excited about the deals that we do get over the finish line, the deals that we pursue and are able to sort of enter into. We're gonna talk about it and we'll be able to defend those every day. But we are as focused on some of the obsolescence risk and the residual risk that people talk about. And there are obviously mitigants that we have built into the process to make sure that we only engage in transactions that have a return profile that meets our overall long-term return expectations.

Thank you for the question. Thank you.

Sure. Thank you. And our next question comes from Jason Wayne of Barclays. Please go ahead.

Thanks for the question. To step away from the data centers, so on the rest of the investment pipeline, you said you were still interested in Europe. Just wondering if you can give kind of a mix of what's in the pipeline today. Sure, Neil would take that.

Sure. So, look, I would say the mix today is largely reflective of the kinds of things we've done in the past and continue to like. So, we're looking at deals in grocery, in DIY products. on the industrial logistics space. And generally, many of these are with marquee names in their country or globally. Some of the industrial deals, as Sumit alluded to, are development driven. The majority of what we're looking at today, I would say, is in markets where there is also a theme that we're looking to play, whether it's onshoring or advanced manufacturing. And I think The pipeline looks quite good across Europe as we look at the back half of the year.

Got it. And then you mentioned that public equity funding was down to 18% of your investment volume this year. Is there any kind of long-term target there since the private capital is obviously more one-time in nature?

Well, Jason, I think it's going to depend on circumstances. and, you know, we're not saying we're never going to touch the public equity markets. It's been very good to us over the years and it's a very deep market. But we don't want to be beholden to just one source. So whether it's 18%, whether it's 50%, a lot of it's going to be dependent on what other partnerships and how we grow our existing partnerships and sources of private capital. And then obviously the bigger question is, you know, the volume of opportunities that we see is very robust. So It's hard to put a number there. What we do want to make clear is that all of these sources of private capital are meant to, as Sumit mentioned, not overlap with one another, but also increase the buy box for us. And so there are deals that are very high quality, and I think you see that with the Core Plus Fund in terms of what we're putting into the fund that we haven't been buying on balance sheet because of the lower initial yields. I think from that standpoint, the reason we went into this a matter of a few years ago was really to solve that one underlying question as to whether or not we could expand our sources of equity beyond the public markets, maintain a level of scarcity value in our securities, and not have as much exposure to a very volatile source of funding.

Yeah, and Jason, just to be very clear, you mentioned that it's one time in nature. It's the exact opposite of what we've created. I mean, the open-ended fund, by definition, will be a vehicle that will continue to raise capital out into the future. That's the reason why we constructed it as an open-ended vehicle rather than a closed-end fund. The JV that we have at GIC is meant to be a programmatic JV. Once we've utilized the initial capital commitment, the hope is that they will continue to deploy more and more capital with us. It's a similar situation with Apollo. So it is, we are shying away from partnerships, et cetera, which is one time in nature, or closed-ended in nature, primarily because we want this fee stream to be permanent and growing. into the future. So I just wanted to make that one correction, Jason.

Thank you. And our next question today comes from Janet Galen with Bank of America. Please go ahead.

Thank you. Good afternoon and congrats on the quarter. Jonathan, I just wanted to follow up on the guidance increase to better understand the driver of the two-cent increase at the midpoint. I guess there's no change to bad debt, no change to fees. Is it just primarily the higher investment volumes?

A lot of what drives AFSO in a very finite span of time is timing. And then obviously what we haven't discussed is capital markets because for obvious reasons we don't give capital markets guidance. And so I think between those two dynamics, especially that we're sitting here in August right now and a lot of the capital market execution risk have been taken off the table. And given the fact that we have much better visibility today on the deal pipeline and, importantly, the timing of when those deals will close, that gave us a lot more comfort to take this guidance range up. So I think it's really a combination of just de-risking certain question marks that you inherently have at the beginning of a year and then obviously a very attractive way pipeline of deals with more certain closing dates.

Great. Thank you very much.

Thank you. And our next question today comes from Anthony Powell and JP Morgan. Please go ahead.

Yeah, thanks. Good evening. I have a question about just the allocation of capital and your investments across these various buckets. I was wondering what A wholly owned acquisition yield needs to look like for it to be interesting. And the reason I ask is when I look at what you're doing, it seems like eights and nines on some of the loan investments and the sevens on the development and the fee enhancements from your various private capital sources will get you into the sevens as well. So when you get to a wholly owned deal, what does that have to look like to kind of be interesting and competitive?

Yeah, the answer is it's different by geography, Anthony. That's the reality, and that is something that we are tracking on a weekly basis. We have hurdle rates that need to be met because we need to permanently finance it, and what we try to generate is 150 basis points of spread. That's what we've historically achieved, and given dynamics that might be unique to certain geographies, The cap rates need to get to those levels is going to differ. Obviously, the cost of capital also comes into play, especially in places like Europe where they tend to be a lot lower given the cost of debt. But the corollary is also true. In places like the UK, I think there was a previous question that was asked, the cost of debt is slightly higher and therefore the expectation is that deals need to have a higher yield to satisfy that 150 basis points of spread. So there isn't one cap rate and it is definitely something that we track very, very closely and the team tracks very closely.

Okay. And I just have one just item that I'm curious about. Your fee earning AUM I think went up $1.3 billion from 1Q to 2Q. But when I look at like What your investment activity was, it was, you know, half a billion dollar difference between everything you did versus your share. Am I confusing concepts or I would have thought that AUM would go up kind of with that difference?

Anthony, I think you should think about the Apollo JV, right? That was a contribution of assets off our balance sheet and we are getting fees off of, you know, the portion that we are managing on behalf of our partner there.

Thank you. Our next question today comes from Greg McGinnis at Scotiabank. Please go ahead.

Hey, good afternoon. Not to belabor the point here, but taking us back to data centers for a moment. Are you open to data center investment in Europe? Curious how returns there are compared to the U.S. And then are you avoiding investing in the development phase or is that just the nature of the agreement with cloud that you would wait until stabilization?

Sure. Thanks, Craig. Thanks for the question. Without going into the specifics of the cloud transaction, I think the first part of your question, which was whether we'd be interested in investing in Europe or outside the U.S., the answer is yes to that. You know, we're certainly in a lot of different countries now in Europe. There are some very good data center markets there as well, the flat fees, plus some other, you know, emerging, very attractive markets. So that is absolutely something that we would be open to. I think, and as part of the cloud JV that we announced, as you saw, that that could present us with opportunities not only in the U.S., but also in Europe. Your question about, I think, cap rates and yields, and this ties back into Sumit's earlier answer, it really is dependent on a country-by-country basis. I mean, cap rates can be different, asking cap rates can be different, but our cost of capital also varies, you know, by region, by country, and so hard to give you a definitive answer on that other than, like everything else, you know, depending on where, what country those data center assets might be in, we're going to, you know, underwrite them and seek to get the same historical spreads and returns that we would normally get.

And then in terms of investing in the development phase versus post-stabilization?

Yeah, thanks. Sorry, I forgot about that part of the question. There are ways that we can, for example, and I think we've mentioned this, what led to our cloud JV and the three seed assets was actually by lending during the development phase of projects. And so that is something that we can do. We can play in different parts of these phases of these assets, not just with cloud, but with other potential transactions as well.

Okay, thanks. And then on the loan investments, the initial yields were up to 9.2% this quarter. Is there anything in particular that was driving up that yield? And assuming a similar kind of rate environment going forward, are your expectations, you know, what are your expectations on turning those investments into real estate versus recycling that capital back into more loans?

It could have multiple reasons as to why we do the credit investments, Greg. Part of it is precisely what Mark was mentioning, that it is a way for us to then have access to the real estate, which is acting as the collateral in the development phase. And we are able to, depending on where we invest, able to get outsized returns depending on the risk that is associated with that investment. But the idea has always been that we will use credit investments to either have a channel to owning that real estate, because that's one way to play it, or to build relationships with operators that have a pipeline of assets that we are interested in. And more often than not, the investments that we are making is secured by real estate, real estate that we would love to own. And so that's the thinking and thesis behind the yield. If it's obviously a stabilized asset, the yields tend to be lower. If it's during the development phase, the yields are going to be higher. So that's definitely going to be a function of the risk inherent in those investments. That will dictate what the yield is.

Thank you. Our next question today comes from Eric Borden at BMO Capital Markets. Please go ahead.

Great, thanks. Just going back to the guidance raised, On the two cents at the midpoint, when you mentioned capital markets, execution risk being taken off the table, is that primarily related to debt issuance or equity funding and cross-currency financing, or is just the overall funding visibility for the pipeline greater increased?

The combination of all of that, Eric, I would say... Obviously, debt financing, we've taken a lot of that risk off the table. The European markets and the shape of the FX curve has been very beneficial to us. And importantly, a lot of what we've done on the acquisitions and investment side is Euro-denominated. So we've had a net investment hedge capacity that can match fund the financing in the same currency as where we're getting rent and where we're deploying our capital. On the equity side, you can see we've got $1.3 billion of unsettled forward equity. And that's at a reasonable price, but certainly that's a risk where you have initial guidance that you come out with in February where you don't want to take for granted that you're going to be able to have that type of equity cost. And then I'd also say, just looking forward, part of it is also thinking about yields. And if we have more visibility to the pipeline, In terms of volume, you can assume that we would have pretty good visibility in terms of yields which translates directly into investment spreads. And so, you know, I would say it's really a combination of all the factors that you mentioned there.

Great, thanks. And then just on the same-star revenue, growth of 1.2% in the quarter with strength from the industrial and gaming sectors, but there was an offset of, you know, a 5.1% decline from the other bucket. Just hopefully you could provide some more color on what's driving the underperformance in that category, whether it's a specific asset type or tenant cohort.

Yeah, so, you know, when you look at the footnote in terms of other, you do see that we've had it Thank you.

All right, next question today comes from Lupo Reno with KeyBank Capital Markets. Please go ahead.

Great, thank you. You know, Sumit, on your updated investment guidance of $10 billion, is that a reasonable annual deployment run rate we should be expecting for the company can achieve going forward? You know, not looking for any future guidance numbers, but just, you know, there were some larger investments this year, so just curious if that's a level that we should expect going forward.

Well, Lupo, in 22, we did $9 billion. in 23 or 21, one of those years we did $9.5 billion. So this is the third year that we are forecasting to do north of $9 billion. And all we've done is expanded our investable channels and we've expanded our geography. So look, we are very comfortable guiding to 2026 at $10 billion and Obviously, we've been very open about the areas that we would like to invest in. We've talked about once-in-a-generational opportunity on the data center side. Those are the things that I would ask you to consider. In terms of sourcing, we are sourcing, you know, year-to-date, we sourced more than $62 billion. And this is very much in line with, you know, the all-time high that we had in 2025. And every year, as we've expanded these investable channels and geographies, you know, our sourcing numbers have gone up. So, I mean, one could even make the argument if we had a better cost of capital, things would be even simpler. But I'm not going to go into, you know, whether 10 billion is the right run rate or not. I can speak to this year being something that we are very, very confident about and very much believe in meeting.

Okay, great. That was helpful. And then just a quick one on the new client, Ren Recapture Rate. I know it only represents about 10% of the total releasing, but it was materially below the portfolio average. So just wanted to get your comments on what was driving that.

The 102.7% was materially lower than our guidance. I don't believe we give guidance on recapture rates. And so my team is showing me some numbers. Oh, are you talking about with new clients? Correct. I understand. So there were very few assets that went through, you know, a new client and Upal, what I would ask you to focus on is what is the blended rate that we are able to achieve? For the right client, we are absolutely willing to give rent haircuts and enter into a longer-term contract with more growth. Those are things that we will continue to play, and what we have said is we are a very mature, highly effective asset management business, and those are going to be areas that you will see fluctuate quarter over quarter. But what we focus on is when you take that into consideration along with releasing of the same client, what are we blending out to? Is that a positive number? And I would say that this almost 103%, that has largely been the case quarter in, quarter out since we've been tracking this number over the last eight, nine years now. So that That's something we talked about 10 years ago when asset management wasn't as big a part of our business. But today, what is it, Jeanine? Close to $400 million of leases that are rolling on an annual basis, and it will be close to $500 in the years to come. So it is very much a big part of our business, and it will continue to be a driver of growth. It's a team that I'm very proud of and they continue to post amazing results for us.

Thank you. Our next question today comes from Jim Hornreich at Cancer Fitzgerald. Please go ahead.

Hey, thanks. Just one question for me on the private capital fund. You mentioned deploying the initial $1.7 billion of equity from the private core plus fund. So wondering, where do you go from here? Were there any limits or barriers that led to the initial raise being that $1.7 billion? And then how should we think about the private capital fund growing in size from here?

Hey, Jay. So I think one way to think about it is for a cornerstone raise, that's when the Thank you for having me. I'll remind everyone that Sumit mentioned earlier, open-end, perpetual fund, which in the environment we've been in is not exactly the most active market from a fundraising standpoint. We were able to bug that trend, but now the focus is on performance. And so I think where we go from here is there's a lot of focus internally on making sure that You know, we're making all the right decisions. Should there be capital recycling? Obviously, the deployment of the capital has been a big focus on the right deals, with the right underwriting, the right structuring. And so, you know, we're constantly going to be hoping for business in terms of trying to raise capital. But, you know, the expectation was always you get the cornerstone capital in the door, you deploy it, you manage it, you show results. And then, you know, three years in, that's when your next round starts to really take off.

Okay, that's a couple of contacts. That's all for me.

And our next question tonight comes from Spencer Glincher with Green Street Advisors. Please go ahead.

Yeah, thank you. As real income continues to find accretive ways to grow, I'm just curious how big you envision the credit platform could be as a percent of overall investment volume in any one given year. And then can you remind us, do you have a dedicated team looking for these credit opportunities?

I'll answer your second question first, Spencer. Yes, we do. We had dedicated folks here in the U.S. as well as in Europe looking for, you know, transactions on the credit side of the equation. In terms of how big we would like for this to be, we don't, again, just like, you know, there was a question on asset type composition and what we want data centers to be or industrial to be, you know, We view credit as a way to ultimately get to owning assets fee simple. That is how we are using credit to enhance relationships with developers, to cultivate relationships with developers, and gain access to the real estate that we have a long-term view on. And so, you know, today it's a very small portion of our balance sheet. It's circa $3 billion. It's our credit investments. and you know and we feel like it has allowed us access to channels that wouldn't have been available to us had we not gone down this path and while we are investing higher up on the balance sheet with better collateral you know while generating yields that are quite compelling and so if that leads to then owning real estate I think it's a channel that we want to continue to lean into but Obviously, this is not something that's going to dominate our balance sheet. We are not a lending, we are not a bank, but it is a way to sort of cultivate relationships that allows us to execute our core business, which is owning net lease assets, long-term net lease assets.

Okay, great. And then maybe just circling back to the capital recycling, I know you provided a lot of great color around The direction there. But it looks like you've sold more occupied assets this quarter as a percent of your total disposition. So just speaking to your more proactive asset management, I'm just curious, is there any one credit or industry that drove elevated asset management in 2Q, or was this just a slightly busier quarter?

Yeah, it's – look, I hope that this trend continues. What you're going to see, Spencer, is that it could be a credit – and many others. We know where we want to put capital to work and if this could become a source of capital, that allows us to sort of reposition our portfolio in a way that is incredibly accretive, we want to lean into that. And so you shouldn't just look at occupied sale as a way to reduce credit. That could certainly be, you know, a reason to do that. But it is not the only reason why we would be selling assets, occupied assets, into the markets.

Thank you. That does conclude our question and answer session. I'd 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 in 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.