Realty Income Corporation 2026 Q2 Earnings Call

Please go ahead. Thank you for joining Realty Income second quarter 2026 results conference call.

Joining us on the conference call today are Sumit Roy, President and Chief Executive Officer; Jonathan Pong, Chief Financial Officer and Treasurer; Neil Abraham, Chief Strategy Officer and President, Realty Income International; and Mark 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'll observe a one question and one follow-up limit during the Q&A portion of the call to ensure that everyone has an opportunity to participate. With that, I would now like to turn the call over to our CEO, Sumit Roy.

Thank you, Alex, welcome everyone. Realty Income delivered another strong quarter in Q2, reflecting the benefits of our diversified investment strategy and our position as a trusted capital partner to many of the world's leading companies. Our investment activity highlighted the breadth of our opportunity set, demonstrating our ability to invest across the capital stack, geographies, and property types to support accretive growth. Against that backdrop, AFFO per share grew 3.8% to $1.09 during the quarter. Year to date, AFFO per share was $2.22, representing 5.2% growth and a meaningful acceleration from the same period in 2025. This momentum supports a $0.02 increase in our full-year AFFO per share guidance midpoint to a new range of $4.44 to $4.45, representing growth of approximately 4% at the midpoint. We'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%-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 MW of capacity. We closed on the first stabilized asset last week and expect to acquire our share of two development assets upon stabilization.

Our partnership with Cloud Capital originated from a prior credit investment and has evolved into a long-term relationship focused on developing and owning hyperscale data centers across leading U.S. and European markets. Since announcing the venture, data center dialogue has continued to increase, expanding our access to opportunities across the sector. We believe the industry is still in the early stages of a 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-constrained markets and partnering with experienced operators that value our long-term programmatic financing capabilities. Across our investment activity, our scale and sourcing platform continue to be significant advantages that are difficult to replicate through individual asset acquisitions.

As an example, earlier this year, the fund acquired a combined 19-property portfolio leased to a top-performing quick-service restaurant operator for more than $100 million. A subsequent third-party valuation completed in connection with our Core Plus fund verified a prevailing market cap rate for the portfolio that is more than 30 basis points below our acquisition basis, providing tangible evidence of the immediate value creation that can be achieved through portfolio transactions. While acquisitions and capital deployment are important drivers of long-term growth, we are seeing increasing opportunities to create value through active portfolio management and capital recycling. During the quarter, we completed $161 million of dispositions, reallocating capital towards areas of the portfolio where we see the strongest combination of organic growth, pricing power, and value creation.

Importantly, this approach is not limited to non-core or vacant assets but extends across the portfolio whenever we believe capital can be redeployed more strategically. This disciplined approach enhances portfolio quality, improves capital efficiency, and supports sustainable earnings growth. Looking ahead, we continue to see attractive opportunities to recycle capital into assets that are better aligned with our long-term strategic priorities. We also continued to improve portfolio quality during the quarter, with investment-grade client exposure increasing to 34% of annualized rent from 32% in the first quarter. Portfolio fundamentals remain strong, with occupancy of 98.8% and 482 re-leased units generating a blended rent recapture rate of 102.7%, with renewals at 104.6%. This included a large batch renewal with a single client covering nearly 150 assets, demonstrating the scale and efficiency of our platform.

Industrial comprised approximately one-third of leasing activity during the quarter and generated a rent recapture rate of 105.8%, while international recapture rates reached 112.9%, reflecting the continued success of our U.K. value-add retail park strategy. Our international retail park strategy continues to benefit from limited new supply, strong retailer demand, and record low vacancy rates, helping drive attractive leasing spreads and incremental value creation. Importantly, the growth and diversification of our investment capabilities have been matched by similar progress on the capital side of the business. Our expanding capital platform is reducing our reliance on public equity while enhancing our ability to fund growth efficiently. With that, I'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 three and a half billion of available liquidity on a pro rata basis. Net debt to annualized pro forma adjusted EBITDA at the end of the second quarter stood at 5.4 times or 5.2 times inclusive of unsettled ATM forwards, which is well within our target range. Subsequent to quarter end, we further enhanced our liquidity profiles 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.

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 EUR 600 million denominated bond offering at a yield of 3.7%. Finally, we raised an additional $90 million of forward equity, bringing our current ATM unsettled balance to approximately $1.3 billion. Pro forma for these transactions, available liquidity increased to more than $5.7 billion. With our enterprise value approaching $90 billion and a robust pipeline of external growth opportunities, 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.