O - NYSE

Good day, and welcome to the Realty Income Second Quarter of 2025 Earnings Conference Call. [Operator Instructions] Please also note that this event is being recorded today. I would now like to turn the conference over to Kelsey Mueller, Vice President, Investor Relations. Please go ahead.

Thank you for joining us today for Realty Income's 2025 Second Quarter Operating Results Conference Call. Discussing our results will be Sumit Roy, President and Chief Executive Officer; and Jonathan Pong, Chief Financial Officer and Treasurer. During this conference call, we will make 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 the company's filing on Form 10-Q. During the Q&A portion of the call, we will be observing a 2-question limit. If you would like to ask additional questions, you may reenter the queue. I will now turn the call over to our CEO, Sumit Roy.

Thank you, Kelsey. Welcome, everyone. At Realty Income, the durable income we have historically delivered originates from the power of a data-driven platform. We have intentionally designed this platform to perform through a variety of economic conditions anchored by diversification and scale, predictive data analytics, a conservative balance sheet philosophy and a disciplined investment strategy honed over decades. We believe Realty Income's exceptional ability to deliver stable and growing income across the full economic cycle, together with our impressive size, scale and track record, positions us to capitalize on two key global megatrends. First, the growing demand for durable income-oriented investment solutions driven by an aging global population and increased emphasis on income stability from both public and private investors. And second, the rising interest from corporations to pursue asset-light strategies through large portfolio acquisitions or sale-leaseback transactions. Realty Income's differentiated expertise enables us to lean into these trends as we pursue adjacent growth verticals including private capital and credit investments, while continuing to anchor our strategy in our core real estate net lease vertical underpinned by our access to public equity. This approach allows us to capitalize on a broad range of emerging opportunities, delivering consistent income for our investors while further enhancing our menu of capital options for our clients. Turning to the details of our second quarter. Our investment decisions reflected the strategic flexibility of our platform. We believe our business model enables us to look at opportunities substantially free from geographical or industrial constraints, allowing us to pursue the most optimal risk-adjusted returns. Globally, we invested $1.2 billion at a 7.2% weighted average initial cash yield, equating to a spread of 181 basis points over our short-term weighted average cost of capital. For acquisitions, specifically, these investments have a weighted average lease term of approximately 15.2 years. This quarter, we sourced $43 billion in volumes, resulting in a selectivity ratio of less than 3%. The $43 billion sourced matches our source volume from all of 2024 and is the highest quarterly volume in the history of Realty Income. This is a testament to the size of our addressable market and our visibility to global net lease transaction opportunities, given the breadth and depth of our platform. Year-to-date, we have now sourced approximately $66 billion of investment opportunities, which puts us on track to eclipse our prior high watermark for annual sourced volume of $95 billion reached in 2022. 57% of the year-to-date volume has been sourced domestically with the rest in Europe. Turning back to our investment volumes for the quarter. We again leaned into Europe which accounted for $889 million or 76% of our investment volume at a 7.3% weighted average initial cash yield. Europe remains a compelling growth market driven by a fragmented competitive landscape, a larger total addressable market than what is available in the United States and a cost of debt capital that is currently more favorable with euro borrowing costs approximately of 120 basis points inside of U.S. dollar debt costs for 10-year notes as of today. Since entering the U.K. market in 2019, our disciplined underwriting and balance sheet strengths have enabled significant expansion across the continent with Europe now representing 17% of our annualized base rent. This quarter, we expanded into our eighth European country including a sale-leaseback transaction involving Eko-Okna in Poland, a leading manufacturer in the region. Transitioning to the U.S. we invested $282 million at a 7% weighted average initial cash yield. While transaction volumes have moderated domestically, this reflects selectivity, not a lack of opportunity as we continue to prioritize long-term risk-adjusted returns over pace of deployment of capital. Across the portfolio, we are increasingly acting as a full-service capital provider to our clients, offering a variety of real estate capital solutions in addition to sale leasebacks including credit solutions. With a 56-year operating history, we have long-standing relationships with high-quality operators worldwide, which creates opportunities to leverage these partnerships to offer tailored access to capital. Moving to our operations. The second quarter reflects the structural advantages of our business model, including portfolio diversification, built-in resilience across our top industries and advanced data analytics capabilities. To that point, our proprietary predictive analytics tool developed over the past 7 years inform decisions across sourcing, underwriting, lease negotiations and asset management. We believe this level of embedded intelligence allows us to be proactive operators and reinforce the reliability of our long-term cash flows. As of quarter end, our portfolio comprised over 15,600 properties spanning 91 industries and more than 1,600 clients. The naturally defensive nature of our leading sectors, including grocery and convenience stores, combined with our scale and diversification position us to perform through a variety of economic environments. We ended the quarter with 98.6% portfolio occupancy, approximately 10 basis points ahead of the prior quarter and above the historical median of 98.2% from 2010 to 2024. During the quarter, our rent recapture rate across 346 leases was 103.4%, representing $97 million of annual cash from prior cash rents with 93% of leasing activity generated from renewals by existing clients and we remained active in our approach to optimize the portfolio. In the quarter, we sold 73 properties for total net proceeds of $117 million, of which $100 million was related to vacant properties. Overall, the stability of our results continues to demonstrate how the benefits of our platform enable us to stay agile, manage risk effectively and drive long-term portfolio performance. Moving to our outlook for 2025. Given the continued momentum in our acquisitions pipeline and our progress year-to-date, we are increasing our 2025 investment volume guidance to approximately $5 billion. In addition, we are raising the low end of our AFFO per share guidance, now anticipated to be in the range of $4.25 -- sorry, $4.24 to $4.28. Within this forecast, we continue to see consistent tenant performance across our global portfolio. Our 2025 outlook contemplates approximately 75 basis points of potential rent loss, which is slightly higher than our historical experience but consistent with our expectations going into the year. Much of this credit loss is the result of certain tenants acquired through public M&A transactions we have consummated in recent years. As of quarter end, our credit watch list stands at 4.6% of our annualized base rent below the prior quarter and with median client exposure of just 3 basis points. Despite these small challenges, we are grateful for the strong results produced from our asset management team on recent bankruptcy resolutions. As shared last quarter, we are pleased with the 94% recapture rate on our 132

Thank you, Sumit. Our capital markets activity remained active in the second quarter and we view our liquidity and balance sheet as well positioned to address our active investment pipeline. During the quarter, we raised $632 million of equity through our ATM at a weighted average stock price of $56.39 per share. And as of today, we have another $654 million of unsettled forward equity which provides us with solid runway to fund our investment activities for the remainder of the year. Given our updated investment volume guidance of $5 billion, our implied second half investment volume of $2.5 billion would require approximately $500 million of incremental external equity to remain leverage-neutral after giving effect to the $654 million of equity already raised but not settled and an estimated $450 million of free cash flow for the second half of the year. In addition, our disposition pipeline is expected to accelerate as well, which would be expected to contribute meaningful equity-like proceeds to our sources of funding, further reducing our external equity need for the balance of the year. From a leverage standpoint, we finished the second quarter with net debt to annualized pro forma adjusted EBITDA of 5.5x in line with our leverage target that we have methodically maintained. Including our current outstanding forward equity, we had $5.4 billion of liquidity at quarter end which includes $800 million of cash and $4 billion of availability under our $5.4 billion credit facility. Looking forward, the debt capital markets remain open and constructive across all three currencies, particularly in the Eurozone. We consider our robust investment activity in Europe as a competitive advantage, creating additional net investment hedge capacity in euros which avails us of more debt capacity in this low cost of capital currency. Additionally, the forward FX rate from euros to U.S. dollars provides a favorable cost of carry that amplifies the organic growth of any net cash flow repatriated from our euro-denominated assets. Diversifying our sources of capital is a core strategic initiative as we scale our platform globally with the establishment of our Evergreen U.S. Core Plus Fund serving as a key milestone. We are energized by the opportunity to monetize the value of our platform by managing real estate on behalf of third parties. By using an open-end fund structure to invest in net leased real estate, we believe we will have the opportunity to enhance acquisition investment spreads, bolstering returns for our public shareholders while providing attractive and stable long-term returns to our private capital partners, each by applying Realty Income's platform and experience to the structure. Given the highly scalable nature of our platform and the vast addressable market for net lease real estate, we see this initiative as a powerful driver of long-term value creation for Realty Income. After launching our formal marketing process in February, we have been pleased with the breadth and depth of interest from prominent institutional investors. We believe these investors clearly appreciate the strength of our platform, the resilience of our asset class and the value created by our long operating history. Feedback has validated our fundamental view that scale matters and we look forward to sharing more soon. I would now like to hand it back to Sumit to complete our prepared remarks.

Thank you, Jonathan. We're confident that the structural advantages we've cultivated, including scale, diversification, discipline and data analytics, will continue to create value through a range of economic backdrops. Looking ahead, our focus remains on operational consistency and disciplined investment principles that have guided us throughout our 56-year operating history. Our long-term objective remains unchanged, deliver resilient and growing income through a diversified net lease platform. With meaningful scale and strategic flexibility, we believe we are well positioned to remain selective in today's environment and deliver lasting value for shareholders over time. I would now like to open the call for questions. Operator?

[Operator Instructions] And our first question here will come from Brad Heffern with RBC Capital Markets.

Sumit, you mentioned that you expanded into Poland in the second quarter. Can you walk through the opportunity you see in that market and maybe how it's similar or different to other areas in Europe?

Sure. Thank you for the question, Brad. Poland is a country that we have been talking about for about a year, 1.5 years. We are very excited by doing our first two transactions in Poland and getting it over the finish line in the second quarter. As you probably know, Brad, Poland is the second fastest-growing GDP in Europe today. It is the eighth largest in terms of population and sixth largest in terms of GDP growth in the European Union. And so that backdrop was the initial screen which sort of attracted us to the geography, to that particular country. And given some of the property laws, et cetera, that exist in that country as well as our ability to efficiently structure the transaction and the type of transactions that we've been following for a very long time, made it a very compelling geography to expand into. The two transactions that we got over the finish line, one was with Eko-Okna, and the other one was a grocery store operator, a Dutch grocery store operator. These were basically distribution centers and industrial assets that we invested in. And we are very excited about not only these two initial transactions that we executed, but the pipeline of transactions that we are starting to build in this country. So super excited about continuing to redefine the sandbox for ourselves. Obviously, that continues to contribute to yet another source of volume that we can source, and some of which is starting to get reflected in the $43 billion of sourcing volume that we shared for the second quarter.

Okay. And then on the acquisition, the only underlying guidance items that change was acquisitions. I'm assuming those deals are accretive. And so I'm just wondering why the low end moved up, but then the high end didn't change.

It's a function of continued conservatism on our part is one, there continues to be a fair amount of uncertainty in terms of policies that are being instituted here in the U.S. as well as in Europe. And so for us, we want it to be as accurate as possible. And we felt like it was important for us to move the bottom end by $0.02, but yet leave the top end where it is. The increase in acquisition volume by $1 billion, as you can tell, it's going to be back-end loaded, second half loaded. And so the impact that one would experience from -- and you correctly said these are all accretive transactions, we wouldn't be doing diluted transactions. The impact of which won't be experienced in 2025, but certainly we'll be -- we'll see the benefits of which in 2026.

And our next question will come from Smedes Rose with Citi.

I wanted to ask you a little more on the acquisitions as well. And really just -- if there were, I mean, it sounds like there was just a tremendous increase in the source volume that you mentioned at $43 billion, but with a less than 3% it's like getting into an Ivy League school. I just kind of wondering, was the quality of what you saw not that good? Did you become more sort of picky, I guess, in terms of what you chose to invest in? Or just sort of wondering because your investment activity went down sequentially, but the sourcing, it sounds like, kind of really ballooned.

That's a great question. And yes, we pride ourselves in being super selective -- yes, akin to the Ivy Leagues. But the main reason, Smedes, was, look, at the end of the day, there was close to $3.7 billion of transactions that basically checked all of the boxes, save for the initial yield. And that is the reason why we stepped away from pursuing those transactions. And so yes, 3% does seem very low, but had we done that $3.7 billion, it would be closer to what we've traditionally done, which is closer to 7% to 8% of the overall volume that we've looked at. And part of the reason why we are doing this private capital and looking at these other forms of capital that want to take advantage of the platform that we built and we want to monetize the platform that we've built is to be able to do these transactions that we stepped away. So yes, selectivity continues to be a governing factor and our disciplined approach to making sure that anything that we do day one is accretive to the bottom line is part of the reason why we got $1.2 billion over the finish line, rather than something much higher.

And then I just wanted to follow up. You obviously remained very concentrated in Europe during the quarter, as you did in the first quarter. Last quarter, you talked about finding a number of retail park opportunities. Was that a significant part of your investing activity this quarter? Or was there a particular asset class that you were able to execute on this quarter?

Yes. Great question. Actually, in the U.K., it was not the case that we did a whole lot of retail parks. A lot of it was in Ireland that we are continuing to grow our retail park portfolio. They continue to be a major source of uplift, both in the near term as well as long term. If you've been following the whole retail park resurrection, if you will, in the U.K. as well as in Ireland, et cetera, including Scotland, I would say it's quite phenomenal. A lot of positive factors are contributing tailwinds to this particular sector. Increasing rent -- concession rents are going away. Vacancy in Scotland today is actually inside of, for the first time in a very long time, of the rest of England. We are buying vacancies and the uplift we are being able to capture on re-leasing those vacancies is part of what's contributing to value creation. So for a variety of reasons, we are super excited about this journey we were on of assimilating this portfolio of retail parks. But that window is now starting to sort of close a little bit. And we are the largest owners of retail parks in the U.K. today. And we are in the midst of putting together a presentation that we'll post on our website that will go into a lot of details around this. But that's been a very favorable investment thesis that we executed on over the last 3 years. Most of what we executed in Europe, going back to precisely the question you asked, was on the industrial side. Almost half of it was industrial. If you look at what we did, some of it was we made a loan against an industrial asset as well in one of the primary markets in the U.K. as well as another loan that we made. And so that was the composition of what we did in Europe, and we are continuing to see from a risk-adjusted basis, better opportunities in Europe and part of it could be less competition, part of it could be we are playing in these multiple jurisdictions. Part of it could be we are an established name in these jurisdictions. And therefore, we are getting those first calls that's helping us drive this volume. And you should -- and I know you didn't ask this question, but you should expect similar composition of total acquisitions between Europe versus U.S. in the near term, especially in the third quarter.

And our next question will come from Ron Kamdem from Morgan Stanley.

Just two quick ones. Just starting back on just tenant health. You guys have sort of done, I think, more work than most in terms of evaluating the impact of tariffs. Now that we're a couple months into it, just can you remind me how you're sort of thinking about it. What's better than expected? What's worse than expected? And what's baked into the guide for bad debt?

I would say the 4.6% watch list that we've shared with the market has basically taken into account all of the various outcomes that could come out of these tariffs that are being discussed in the market today. Look, we've always felt like some of the more susceptible industries, i.e., furnishing apparel, electronics, those are the industries that are going to be most impacted by tariffs. And thankfully, either we have very little to zero exposure to these types of industries in our U.S. portfolio. And so we feel like the numbers that we've shared, Ron, at this point, the 4.6% and more importantly, the diversification within that 4.6%. We have 114 clients that we are tracking that represent this 4.6%. The average is basically 4 basis points per client. That captures the potential outcomes. And so this diversification obviously gives us a lot more confidence. And some of the names that we've already discussed, names like At Home, which we believe is at least one of the contributing factors to why they are struggling, was their overreliance. 70% of their product came from, were imported products and a lot of it was from China. That was one of the contributing factors to their performance along with obviously the leverage levels that they were running the business at, et cetera. But that's already played out. And so we feel like we have bookended what the possible outcomes could be, client by client, industry by industry. The only variable is where will some of these tariffs land. But at this point, we feel like we've got it pretty well bookended in terms of what we've shared with the market.

Great. My second question, just going back to the acquisitions, obviously we talked about the sale activity. We've also talked about, I think, 76% in Europe, which may be the biggest skew, I certainly recall. Maybe I guess can you contextualize just the -- is that just a reflection of the better funding, better opportunity? And how do you compare and contrast sort of the Europe versus the U.S. market today?

Yes. Again, risk-adjusted, right, that's ultimately how we look at things. But one of the key advantages we have is access to European funds. And I'm sure, Ron, you're aware that we raised about EUR 1.25 billion, and the total all-in cost was 3.69%. And though we talked about in my prepared remarks of that being 130 basis points inside, 3.69% is closer to 1.6% inside of what we would be able to do in the 10-year unsecured bond. So that certainly is a contributing factor. But what is the product that we are buying, if you're being able to buy long-term leases, 20-year leases, industrial product with businesses that are either the best operator within their sector or a leading operator within their sector, we feel like from a risk-adjusted return perspective, it's the right place to be. And there are a lot of factors that go into it, but it's not just the capital, it's not just the product, but the combination of the two makes it very, very impressive. I spoke about Eko-Okna as one of the larger transactions we did in Poland. The rent coverage is 6x. And so when you see metrics like that and you're able to get it at initial yields like the way we were able to. I mean it's very difficult to compete here in the U.S. where even in secondary markets, industrial assets are trading in the mid-6s. And that's some being generous here, they tend to go even more aggressive than that. So all of those factors contribute to us leaning a little bit more into Europe. And again, I don't want the statement to be taken the wrong way. There's a bit more stability there. There's a bit more stronger outlook to what's going to happen to interest rates, et cetera. And so I think transactions are a little bit more plentiful there than what we are seeing here in the U.S. It's just a lack of stability as well. So I think all of those factors go into why we are doing more in Europe. And again, it accrues to our benefit that we have all these avenues created and we can lean into wherever we find the best opportunities. So -- but thank you for that question.

And our next question will come from John Kilichowski with Wells Fargo.

Maybe just the first one for me is on sort of the competitive landscape here. I think our broker contacts have highlighted that there's a lot of -- there are a lot of portfolio deals expected to come to market in the second half of this year. And we've also seen a fair share of private buyers get involved with Fundamental, ElmTree. I'm curious how you're seeing this sort of supply, demand dynamic here. And what do you think the impact will be on yields for you? And if there's the potential for a large portfolio that could take you maybe well above your guide.

John, obviously the last statement you made in your question is very true. Yes, if we end up doing a very large transaction which has not been contemplated in our guidance, then yes, we will certainly go above the $5 billion. But let's talk a little bit about how you set up your question, which by the way is absolutely 100% accurate. There is a tremendous amount of demand for this product that we've been executing on for the last 56 years in the private market. You're absolutely right that companies like BlackRock that did the ElmTree deal, Starwood did the Fundamental deal, JPMorgan and there are a couple of others, I think Morgan Stanley, they're creating their own net lease funds. Blackstone has obviously aggressively gone down the path of creating their own net lease fund. This is a testament to this product. And the way we are seeing it is the inbounds that we are getting from different pockets of capital wanting to utilize our platform to execute this strategy. For me, this is a win-win. I believe we are perfectly situated to be that platform that these pockets of capital can utilize to execute this very safe, very durable, very dependable business model. We oftentimes talk about we have a bond-like cash flow, but equity-like growth. I mean, which other product gives you that? So I'm not surprised that you have more and more of these private platforms that are creating these net lease, either they are creating themselves organically or they're trying to do it through a partnership. So this is a good thing for our industry. More capital coming in, more stable capital coming into our business, I would add. And I believe that we are best suited or very well suited to be -- to take advantage of that. Will it create more competition? Will it push cap rates down? Sure. But will they have the same level and maturity of underwriting that we have? I don't believe so. We've been competing with private capital sources, at least in the last 10 years from the more established players. And the fact that the interest rate environment remains up in the air, leverage is a big part of a lot of these strategies and that continues to be something that we will benefit from most given our A-, A3 credit rating. And so -- and once we have these other channels that we are working on up and running, then we will also be able to address the volatility we see on our public equity side with some private sources of equity. And so I say bring it on. It's going to sort of create more opportunities for a platform like ours to do large-scale deals. And that's one of the megatrends I talked about in my prepared remarks. More and more product is coming into the market. More and more companies are engaging and saying, but we want the right partner. And it is not just, okay, we understand net lease, it's who's the right landlord that we trust, who will hold these assets the long term. And there again, we stand out. So sorry, John, I know you didn't -- you asked a very specific question, but I wanted to provide this context to frame my megatrend comments that I made during my prepared remarks.

No, that was very helpful. I appreciate the thoughtful response. And the second one for me, I just want to make sure I heard you correctly in the opening remarks. It sounds like you reiterated the 75 bp credit loss guide. I was just hoping maybe you could talk about what you've experienced year-to-date? And then what else is included in that number or if it's just sort of an open-ended source of conservatism?

John, it's Jonathan. So on a year-to-date basis, we've recognized about $17 million in reserves. That is a number that represents about 65 basis points of rental revenue for the first half. We are indeed reiterating the 75 basis point number for the full year. And so as you think about the second half, we do have some identified credits that we've kind of set aside and have an expectation or a base model forecast for in terms of reserves we may or may not take. We feel like that's perhaps a little conservative. We also have a little bit of cushion on top of that. But the one thing I'll emphasize that's a fully baked number, that includes accounts receivable that we might charge off. That includes a rent associated with vacancy, it includes carrying costs associated with vacancy. And so this is a fully baked number. And you'll hopefully see us outperform that. But to be clear, we are reiterating that for the back half.

And our next question will come from Ryan Caviola from Green Street.

Just wanted to ask a question on what you're seeing on net lease industrial assets in Europe versus kind of what you mentioned in the United States, how that surge of private capital interests had kind of affected pricing dynamics here. How is it different in Europe? I know that was the focus of the investments this quarter. And do you think that trend will continue?

That's a good question, Ryan. I just think lack of competition. We don't have the same number of potential buyers of assets with this wall of capital wanting to be invested in this particular sector, pushing for transactions in Europe, I think that's a big part of it. So we can be a lot more rational about assets. The second piece I would say is relationships. Relationships means a lot more, in our opinion, in Europe than it does here. And so when you have the right relationships with developers, you have the right relationships with the operators and they get to know you. It doesn't always come down to who's willing to pay the most. Certainty of close, desire to hold assets the long term, ability to do more repeat business, all of those factors, I think, also contribute to a much more, what I would call a rational market for industrial transactions in Europe. Having said that, cap rates are not the same across every jurisdiction. If you go to Germany, things are still pretty tight. And so we look for the right opportunities in places where we have the right yield, so that day one, we can point to accretion. And we've already talked about the ability to finance these transactions with much lower cost of capital. So I think that's where the rational pricing comes into play, Ryan, in Europe versus here in the U.S. where there's just a lot more competition.

Appreciate that. And then I know you telegraphed the entry to Poland a few quarters back and were able to execute on that this quarter. Does that round out the countries of interest on that side of the globe for now? Or are there still a few new countries you're looking at? Or is that kind of a fluid situation?

I would say there are a few other Western countries in Europe that we are looking at opportunities, but we haven't been able to get over the finish line. Some in the Lux states, some in the Nordics. But again, those are fair game. If we do a transaction, please don't be surprised. We'll obviously talk a lot about the details around those transactions, but otherwise, we are largely sort of identified the European strategy. But you use the word global. And so I don't want to discount our ability to continue to expand. Of course, we are going to do it as we did our European expansion. We've always looked at our neighbors with Canada and Mexico as potential countries to expand into. And a lot of this uncertainty around trade dynamics might create opportunities for us. So those countries, too, would be fair game. But look, the hurdle rate to go into a brand new country for us is very, very high. And I hope we've proven to the market and to you, Ryan, that if we do decide to expand, it will be with a lot of forethought and with a thesis that we will share with you and that will be the precursor to us going into these countries.

And our next question will come from Greg McGinniss with Scotiabank.

This is Elmer Chang on with Greg. First question is on the investment pipeline. Again, how much of the $43 million of deal volume you sourced during the quarter maybe represent larger portfolio deals that you have higher confidence in closing, say, maybe early next year instead of this year. And then how would you describe your ability to curate portfolios and also maintain pricing power in today's environment on those deals?

Yes. It was $43 billion actually. But yes, it's tough to tell. Certainly, there'll be a portion of that $43 billion that's not reflected in the $1.2 billion that we closed this quarter that we will be closing in subsequent quarters. So your question is a good one. But I think the comment I made around approximately $3.7 billion of transactions that we walked away from because it didn't meet that initial spread remains intact. And our expectation is that -- given this expansion into new geographies and our advent into data centers, some of these volume numbers are going to continue to track much higher just because we are now playing across a wider geographical footprint and additional asset types. So you should continue to see that, Elmer. And yes, and a portion of this we will certainly close in the subsequent quarters, but I can't go into any more detail than that.

And second question is, on lease expirations, you have about 6% of ABR expiring this year, next year. What percentage of that bucket represents noncore assets that you've identified for capital recycling opportunities? And how accretive would you expect those sales -- those potential sales to be as you look to source more investment opportunities?

That's a good question. Look, anytime we have a lease rollover, we basically go through the economic analysis of if the existing client does not exercise their renewal rights, then we have a couple of routes to pursue. One is -- can we find an alternative tenant and can we find them quickly enough to justify that particular route? A second route could be can we reposition this asset for a highest and best use, which we are happy to do and we are currently doing within our development pipeline. And then as a third outcome is to sell it vacant because we have realized the full economic value and holding onto this asset creates costs that holding costs that is not justifiable. And so we try to sell it, just to be very efficient. So once we've gone through that, and this is where our data analytic tools are very useful, along with the experience of our asset management team, we execute on 1 of those 3 strategies immediately. But the point I want to make is we're not waiting till a particular lease is within the last 3 months or 6 months of expiration. If I were to speak with our asset management team, they're working on assets that may be rolling over not only in 2026, but some even in 2027, if it's with the same client and they have a wider swath of assets. And oftentimes, what you might see today, the expirations in '26, '27, I think in '26 it's close to 4.5% in that

And our next question will come from Haendel St. Juste with Mizuho.

A couple quick ones from me here. First, I guess, Maybe Jonathan, can you talk about, I guess, how you're thinking or looking -- feeling about the overall balance sheet, your growth liquidity here in the current environment and also how you're thinking about the various funding sources, free cash flow, equity, the revolver dispositions under near-term opportunities?

Yes, Haendel. Yes, I feel very good about it. Obviously, we had a very successful euro bond offering in June. It was about EUR 1.1 billion. It was over 5x subscribed. We were very excited about just the lineup and the sponsorship that we got, and that gives us a level of confidence on a go-forward basis. We do have some debt maturities that are coming up. We do have about $850 million for the balance of the year. We have a $5.4 billion line. And as of quarter end, net of cash was only about $700 million drawn. So plenty of capacity there for us to be incredibly patient. The European pipeline, as we've talked about today, continues to grow, which I love hearing because that just means we're getting closer to issuing more denominated debt. And we had $800 million of cash at quarter end. And so you start adding up all of these tailwinds, not to mention the $654 million of unsettled forward equity. And there's very little equity that we have to go out there and raise externally to hit our acquisitions guidance. The $450 million of free cash flow is on top of that. And we haven't talked about disposition volume, and our asset management team continues to be extremely active on that front. So yes, $850 million of maturities coming out for the rest of the year sounds like a big number, but we have a multitude of sources to take care of that, and we're very programmatic about keeping our leverage at quarter end in that 5.5x level and the level of predictability we get from this cash flow that allows us to do that.

That's helpful. Great color. And then maybe one more. We saw some additional disclosure about the different return thresholds in the private fund platform. Sounds like you guys are slowly, steadily moving the ball forward here. So I guess I'm curious where we are overall in the process. When should we expect a launch? And I'm really curious how much of the $3.7 billion that you passed on during the second quarter for the on balance sheet that would have met the threshold for the fund.

So Haendel, bear with us for a little bit because this is a process. There's only so much we can share at this junction. There's a level of extreme due diligence that happens from the investor's side. But I think you've been able to pick up from our commentary that we've made substantial progress and even better than we would have hoped to start the year. The type of return thresholds, we've talked about this before, what's right for private capital is something that has a great IRR profile over the long term, 10 years plus, but may not necessarily have that year 1 yield. And of that $3-plus billion that we talked about, that was the primary reason why we had to pass on it. And so the expansion of the buy box by virtue of having tools like this that aren't thinking about this notion of year 1 investment spread, or they're thinking about true underwriting real estate over the long term and thinking about it from an IRR standpoint. We're not sacrificing IRR. There's just a different trajectory towards it. And that's really how we're thinking about what will go to private capital.

And our next question will come from Wes Golladay with Baird.

I just want to kind of build off that last question and answer. When you look at the opportunity and the constraints of the third-party capital, it doesn't seem like sourcing deal volume will be an issue. And so I guess where would the constraints be? Would it be on the -- be a constraint? Or would it be -- could you get a higher close rate? How should we think about that?

Wes, a portion of your question got lost, but I think you were talking about where would the constraints be. And you qualified that question by saying that it's not going to be sourcing volume. So if we heard you right, that is 100% true. We were not opportunity constrained. That's the beauty of this platform. What will be one of the constraining factors for this channel is the amount of capital that we are able to raise, to be able to execute the strategy. So far so good, more to come on that, but we are very excited about where we stand in the process today.

And our next question will come from Michael Goldsmith with UBS.

Retail concentration and acquisitions stepped down from about 72% to 47% in the quarter. So I know this will vary from period to period, but is there anything to read in that? Is that a function of opportunities? Is it a function of continued interest in diversifying the portfolio? Just trying to understand where your interest in acquisitions lies.

Good question, Michael. And yes, it was very opportunistic. We just found more transactions within the industrial sector and on the credit side that fit our box better than continuing to pursue retail. But it is going to vary -- retail still dominates 80% of our overall portfolio and will continue to be a big part of what we do going forward.

Got it. And as a follow-up, I think you mentioned in a response, your pursuit of different geographies and you brought up data centers. So just wanted to talk a little bit about what you're seeing from that asset class, the opportunity set to acquire further there and just like your overall interest in moving deeper to data centers from here.

Yes. So Michael, our interest in data centers remains intact, continues to accelerate, but the selectivity in that particular area also continues to remain intact. And so look, as long as we find the right partners, as long as we find the right locations and ultimate clients sitting in those assets, we would be very interested in deploying large swaths of capital into that space. But we are not going to compromise our selectivity. We have been approached to do certain transactions and it just doesn't meet our selectivity box, if you will. And so -- but look, we -- again, even on that particular area, we made an investment in the first quarter and we hope to continue to cultivate that particular relationship. And we are looking forward to it bearing fruit in the future.

And our next question will come from Jason Wayne with Barclays.

Just lease expirations ticked up a bit quarter-over-quarter. I'm just wondering if you could break down how much of that was due to leases rejected in bankruptcies.

I don't think we have that data, Jason. It's a good question. But it was circa 100 million plus/minus of lease expirations and if I remember correctly, 93%, we had a very high number of existing clients renewing their leases. So I'm not sure how many of that remaining 7% were bankruptcy-driven, re-leases or what have you. But I think it was still very much dominated by our natural flow of expirations that occurred in the second quarter. But this number -- and by the way I've been talking about this for the last 4, 5 years now, will continue to increase. And this is where I genuinely believe that our asset management team and our data-driven approach to resolving leases, et cetera, is going to start to become yet another driver of value creation for us. And over the last, I don't know how many years, but if you look at our lease renewals and our leasing spreads, they have been consistently in the 103% to 104% to 105%. And it really is a function of what I just said. It's the experience of the team and the tools that we've created to help assist the team in negotiating transactions. So instead of it being something that we are concerned about, we are actually looking forward to this continued increase in the volume of dollars that are going through a renewal process on a year in, year out basis. Next year, it's fairly muted. But in 2027, 2028, we are looking forward to those years.

Right. And then just on the Dollar Tree sale of Family Dollar, I'm just wondering how many Family Dollars there actually are included into the Dollar Tree exposure and if that's contemplated in your guidance for the rest of the year?

Yes, that's a good question. So rough numbers, please don't hold me to the precision. It's -- the total exposure from Dollar Tree, Family Dollar was circa 3%. Post this separation, it'll be 2% is going to go with the Family Dollar and 1% -- these are rough, okay? Directionally accurate. 1% will be Dollar Tree. Over the next 1.5 years, so through 2026 there's only 10 basis points of expirations coming through for Family Dollar, 10 basis points coming through for Dollar Tree. This is through 2026. So that's the near-term exposure we have to that -- those two flags.

And our next question will come from [ Dan Byung ] with Bank of America.

Just one for me. Are you starting to see an uptick in interest from U.S. buyers for the European deals you're looking at?

We have certainly seen a couple of private entrants into the European market. So yes, we are starting to see interest from American investors wanting to expand into Europe.

And our next question will come from Linda Tsai with Jefferies.

Can you delve more into the increase in the sourcing activity, the $43 billion, what accounted for that? Are you shifting your investment parameters? Or did AI play a role in how you're sourcing?

That's a great question, Linda. I never thought about using AI. So the channels of sourcing, they have not changed. The asset types, et cetera, they have not changed. Poland is certainly a new entrant that is now going to contribute and has potentially contributed to the $43 billion. But as more and more data center opportunities start to come in, that is going to help with these sourcing numbers being what they are. So that is certainly a contributing factor. But I wouldn't say that we have started to evolve the sourcing channels, but I think you shared with us an avenue that perhaps we should lean into.

Great. And then my second question is, you said the mix of Europe versus domestic investments would be similar next quarter. Do you think the initial weighted average cash yields would look similar as well?

I would say they will be similar to slightly better.

And our next question will come from Upal Rana with KeyBanc Capital Markets.

It looks like the probability of a Fed rate cut is likely in September, and it seems like there's a growing pressure for further rate cuts, if not this year, but it could occur next year. I'm just wondering if this could potentially change your strategy as it relates to Europe versus U.S. investments.

Again, a great question, Upal. And if you follow the way our stock trades, it is highly negatively correlated to interest rates. So if interest rates in your opinion does come down, it should have potentially, and I'm assuming that the 10-year comes down as well, it should have a positive impact on our cost of equity through the public channels. And so our ability to do some of those deals that we passed up on the $3.7 billion would increase. So yes, it could change our ability to do more here in the U.S. But it's still very unclear to me as to whether interest rates will be cut and/or even if it is cut, if it will have a disproportionate impact on the 10-year.

Okay, great. That was helpful. And then it looks like your dispositions on your -- in your vacant assets increased sequentially. I just wanted to get your sense of how much more you have to do to get to a level you're comfortable with. You mentioned dispositions broadly increasing in your prepared remarks, but any additional color there would be helpful.

Sure. What we have said, and we are reiterating this quarter is that it will be very similar to what we've done last year.

And our next question will come from Eric Borden with BMO Capital Markets.

Jonathan, I just want to go back to your comments around FX. I was hoping that you could talk a little bit more about the hedging strategy that you guys are currently pursuing today? And then if there's any potential tailwind, given the relative strength between the EU and USD built into the guidance today.

Sure. Thanks, Eric. I think first of all, to provide context, we have a formal hedging policy that forces us to have a level of discipline. We're not allowed to take too much risk one way or another. And so from a balance sheet standpoint, from an FX hedging perspective, we're pretty evenly matched from an assets and liabilities standpoint, especially in euro. And another thing that I would share is, I referenced the forward FX curve, you may not recall, but in 2019, when we did enter the international realm, we did a 15-year cross-currency swap. And that was because the forward curve between the dollar and sterling was extremely attractive. And so that's an option that we have available to us. But I think for us, we try and take as much discretion out of it by virtue of always having some level of hedged earnings, if you will, locked in. We never want to have a quarter where we're talking about FX headwinds or tailwinds. We want to focus on the core business, and I think we've been successful in that so far. Operator And with that, we will conclude our question-and-answer session. I'd like to turn the conference back over to Sumit Roy for any closing remarks.

Thank you all for joining us today. We look forward to speaking soon and seeing you at conferences in the coming weeks. Thank you, Joe.