Realty Income Corp (O) — Q1 2025 Earnings Call Transcript

Thank you for joining us today for Realty Income's 2025 first 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 two-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. Realty Income's first quarter results reflect the strength, consistency, and resilience of our business model, anchored by a highly diversified global portfolio. Our ability to deliver reliable performance through varying market conditions remains a hallmark of our platform. Overall, historically, we have strategically diversified our business model across client types, asset classes, and geographies, an approach that proves to be increasingly valuable in today's uncertain macroeconomic environment. Our portfolio is comprised of 65% US retail, which includes high-quality clients that have demonstrated resilience through economic cycles. To that end, given the strength of our client base and our proactive portfolio management, we expect a negligible portion of our client base to be meaningfully impacted by tariffs, which has already been incorporated into our updated credit assumptions. The diversification and quality of our portfolio, combined with our proven stability as an operator, position us to navigate potential external pressures effectively, as we have consistently done. Moving to the details of the first quarter, we delivered AFFO per share of $1.06, representing a year-over-year growth of 2.9%. This marks a continuation of our long-standing track record of positive AFFO per share growth in all but one year over our 30-year history as a public company. This growth combined with our 6% dividend yield resulted in total operational returns of 8.9% for the quarter, underscoring the value of our platform. We leveraged our diverse sourcing avenues to focus investment activity where we saw the most compelling opportunities, notably in Europe. In total, we invested $1.4 billion at a 7.5% weighted average initial cash yield, equating to a spread of 204 basis points over our short-term weighted average cost of capital. Importantly, 72% of our investment volume came from five transactions over $50 million, illustrating one of the many ways our size and scale drive value creation. We continue to benefit from a meaningful portfolio discount when competing for high-quality net lease investments in the marketplace. In the US, we invested $479 million at an 8.3% weighted average initial cash yield. And in Europe, which accounted for 65% of total investment volume this quarter, we deployed $893 million at an average initial cash yield of 7%. The region continues to offer compelling opportunities as we scale our business and seek to capitalize on the attractive dynamics of this large fragmented market. Our international presence and capabilities differentiate us from most other net lease platforms. Importantly, it offers us geographic diversification, which helps navigate country-specific uncertainties. This expansion into Europe demonstrates how our entrance into new verticals can create immediate value and achieve scalability in a relatively short time. We believe our investments in talent, combined with the portability of our deep access to global capital markets, have enabled us to achieve scale without adding incremental risk to the enterprise. Turning back to the quarter, we continue to deliver strong operational results across our diversified portfolio, which now comprises over 15,600 properties spanning 91 industries and almost 1,600 unique clients. We consider our clients to be well positioned through various economic cycles, given the inherently defensive nature of our top industries including grocery, convenience stores, and wholesale clubs. Of our client base, over 34% are investment grade with average rent coverage of 2.9 times. As a reminder, over 90% of our retail rent comes from clients that we consider to offer one or more of the following: nondiscretionary goods, low price points, or a service-oriented component for consumers. Over our long operating history, we have consistently found these types of businesses to be highly resilient during economic downturns. Combined with the significant diversification of our portfolio, we believe this provides investors with relative safety as reflected in our long-term operating results. We ended the quarter with 98.5% portfolio occupancy, approximately 20 basis points below the prior quarter and ahead of the historical median of 98.2% from 2010 to 2024. Our rent recapture rate across 194 leases was 103.9%, with 92% of leasing activity generated from renewals by the existing client. Consistent with our historical experience, these results were accomplished with minimal lease incentives, which totaled less than $700,000 during the quarter on over $46 million of new annual rent signed. And we remained active in our approach to optimizing the portfolio. We sold 55 properties for total net proceeds of $93 million, of which $63 million was related to vacant properties. Overall, we believe our results reflect that we are operating from a position of strength as we continue to leverage our structural advantages, including a well-capitalized balance sheet, enhanced liquidity, and unmatched scale. These characteristics allow us to stay agile, work to capitalize on opportunities across our addressable market and maintain discipline in our capital allocation decisions. Above all, the platform we have built is a direct reflection of the talent and experience of our dedicated team members. Looking at the balance of 2025, we remain confident in our ability to deliver on our expectations despite the current market uncertainties, benefiting from our diversified platform that spans multiple geographies, asset types, and funding sources. As such, we're maintaining our outlook for 2025 AFFO per share in the range of $4.22 to $4.28. Consistent with last quarter's update, our 2025 forecast includes the expectation for 75 basis points of potential rent loss, with the majority stemming from properties acquired through prior M&A transactions. There have been no material surprises or incremental headwinds to our business as a result of recent geopolitical uncertainties. And while we remain vigilant, we believe our resilient, time-tested business model positions us well to navigate potential challenges. Additionally, we remain on track to deploy approximately $4 billion in investments throughout 2025. Given the advantages of our platform, we are well positioned to increase our capital deployment should attractive opportunities materialize. Despite market-wide uncertainty, our short-term weighted average cost of capital is actually lower today than it was when we introduced our 2025 investments guidance in late February. Before turning the call over to Jonathan, I'd like to share a brief update on our move into the private capital business, Realty Income's US Core Plus Fund. This initiative represents a natural next step in the evolution of our platform and a strategic opportunity to broaden our capital sources and investment capabilities. We began formal marketing efforts in the first quarter and are pleased by the early interest and positive reception from large, well-known institutional investors. We consider this a clear indication that the differentiation of Realty Income's platform, scale, and long track record is resonating in the market. We continue to expect this will be a methodical process that will enhance our access to meaningful sources of capital over time. We look forward to updating the market on our progress at the appropriate time. With that, I'd like to turn it over to Jonathan to discuss our financial results and outlook in more detail.

Thank you, Sumit. Fostering meaningful relationships is core to our ethos as a company and we are grateful for the longstanding support of all of our stakeholders. Before diving into our first quarter financial metrics, I wanted to highlight two announcements we made in April that we believe are a testament to the trust our investors and lenders place in the durability of the franchise. In early April, we successfully closed on a $600 million 10-year unsecured bond offering, which priced at 5.34% semiannual yield to maturity. We are grateful for the sponsorship from a very high-quality group of fixed income investors who participated in the transaction, which was well subscribed amidst a volatile and uncertain economic backdrop. Last week, we announced the recast and expansion of our multicurrency unsecured credit facility to a total size of $5.38 billion which compares to our prior facility of $4.25 billion. The facility consists of a $4 billion revolving credit facility for Realty Income, bifurcated equally into $2 billion tranches, which initially mature in 2027 and 2029 respectively. Based on our current A3/A- credit ratings, borrowings will accrue interest at 72.5 basis points over SOFR. In addition, including the recast of $1.38 billion unsecured facility for our US Core Plus Fund, which as Sumit mentioned, is in its initial marketing phase. The facility for the fund will be comprised of a $1 billion unsecured revolving line of credit with an initial maturity date in 2029 and a $380 million delayed draw three-year unsecured term loan. Establishing a robust source of liquidity for the fund provides meaningful debt capacity to pursue investment opportunities in the second half of the year. From a balance sheet standpoint, we are well positioned to remain active capital allocators with ample liquidity and modest leverage as we finish the quarter with net debt to annualized pro forma adjusted EBITDA of 5.4 times. Our fixed charge coverage ratio of 4.7 times remains consistent with the 4.5 times to 4.7 times range delivered over the last two years. Our exposure to variable rate debt remains limited, representing just over 6% of our outstanding debt principal at quarter end. As we look towards the balance of the year, we consider our long-term and permanent capital needs manageable and our liquidity and access to diverse sources of capital to be strong. We are confident in our ability to lean into opportunities should this period of economic uncertainty continue. I would now like to hand it back to Sumit to complete our prepared remarks.

Thank you, Jonathan. In closing, we remain focused on methodically executing our strategy, supported by a resilient portfolio, strong balance sheet and a talented team across the globe. As the monthly dividend company, we have consistently returned capital to our shareholders throughout our history, underscoring our commitment to delivering predictable, reliable income streams. We are continuing to thoughtfully grow our business and create durable long-term value for our shareholders. I would now like to open it up for questions.

Hi. Thank you. I guess I wanted to ask you a little bit about the activity that you were able to execute on in the first quarter. It looks like the bulk of it was in Europe. Just wondering if you could maybe talk a little bit about what you're seeing in Europe at this point and maybe how that contrasts with opportunities available in the US?

Great question. Thanks, Smedes. So what's very compelling about Europe for us is, obviously the investments we were able to make, 65% of the total volume came from Europe. We are targeting retail parks in the UK as well as in Ireland that made up the bulk of the portfolio. And what was very compelling to us about that particular set of transactions was the fact that the rents that we were underwriting were well below what would be deemed as market rents. And we were getting these assets at replacement at well below replacement cost. And the fact that we are controlling a very wide swath of retail footprint is already starting to manifest itself in calls that we are getting from very large retail operators like Lidl and a few others that are very interested in helping us reposition some of these retail parks and give them a presence to continue to allow them to grow as is their stated objective in these markets. And this backdrop is obviously very favorable for investment purposes for us. And that was the reason why we had the bulk of the investments coming in from Europe. Having said that, we saw plenty of opportunities here in the US. As you probably heard me mention, we sourced about $22 billion worth of product and more than 60% of it was here in the US. But when you look at some of the credit that we were being asked to underwrite on the higher yielding side of the curve, we just couldn't get comfortable with the downside risk, the tail risks, if you will on some of those credits. But we are seeing plenty of opportunities. It's finding the right risk-adjusted opportunity that's compelling us to invest more in Europe today. And you should kind of expect that to be the run rate for the first half of this year.

Okay. And can I just ask you one more thing? You noted that the rent recapture was 103.9%, but on the same-store, the same list of clients, I guess the releasing was down about 50 basis points, but it was offset by other items. Is there anything going on there in your negotiations with the releasing to the same tenants that was driving that down a little bit or is that normal or?

No, look, obviously, if you look at the last few quarters, the renewals have been far superior with existing clients. So this is a bit of a one-off, but we tend to look at this in totality. We give you the breakup, so you can see that the vast majority of the renewals does come from existing clients. But I would chalk this off to a one-off, but I believe it was still 99.7%. And the vast majority of the renewals was well north of 100%. But we did have, I want to say, three theater assets, three or four theater assets that dragged it a little bit below the 100% mark, but still a very favorable outcome.

Yes. Thanks, everybody. Sumit you're 35% of the way to the guidance for the year on investments, and the first quarter is typically one of the lighter quarters too. You obviously left the guidance unchanged. I'm curious is that just reflective of the level of uncertainty right now or was the first quarter just particularly full to how the pipeline looks?

That's a great question, Brad. Look, I think we are very cautiously optimistic. What we didn't want to do was try to extrapolate what we have achieved in the first quarter for the remainder of the year. There is a fair amount of uncertainty. There are a lot of transactions in the market as our sourcing volumes would suggest. But it is finding the right deals for us. And given the exogenous factors of a potentially higher interest rate environment for longer and allowing for some of the geopolitical trade-driven conditions to play out, we just wanted to be a bit more cautious. So we want to be very deliberate. We want to be very focused on making sure that if we are going to use equity, that we use it in a very appropriate fashion. And so that's the primary reason why we chose to leave the volume numbers unchanged.

Okay, got it. And then on the tariff impact, you talked through some of the sectors that you thought would be well inflated. I'm curious, is there anything in the portfolio that you would call out as potentially actually seeing an impact?

No, no different than what we had highlighted. I believe it was in February when we were expecting some of these things to play out. I've gone through a list of clients that we felt like were more exposed to what would happen if tariffs were introduced. We feel like that's fully reflected in the numbers that we've shared with you with regards to our guidance, with regards to our bad debt expense. We feel very confident. And I think Zips is a perfect example of a situation where we got 100% renewal and we had a recapture rate of 94.3%, which was slightly better than what we had forecasted out in the at the beginning of the year. So look we feel like we did a good job of underwriting what the potential impact of some of these exogenous factors were into our portfolio. And so we don't expect anything new at this stage.

Thank you for taking my question. Just on the US Core Plus Fund throughout this sort of economic volatility, do you view this uncertainty as keeping other private buyers out or competition on the sidelines and it's helpful with Realty Income size and scale or how does the private fund work in an environment like this?

Brian, thank you. That's actually a very good question. Under normal circumstances, I would say that the backdrop that we are all experiencing today wouldn't be conducive to raising private capital. But this is where I think we set ourselves apart. I don't know of any other company within our sector that can do what we are doing. And based on all of the conversations that we are having with these potential investors, we feel very optimistic about meeting the objectives that we have for raising capital at a point in time where for most others, I would say, even on the private side, who have a history of raising private capital, this would be a difficult environment to raise capital. But look we feel very optimistic. We look forward to sharing with you the results later this year. And so far, so good is how I would play it. With respect to and I don't know if that's what you were asking, Ryan, private investors investing in our domain, we've seen a plethora of them coming in and wanting to create a net lease sleeve to their investments. But they also tend to use higher leverage. And one could make the argument that our product lends itself to higher leverage in the private domain. But given the cost of debt and given the elevated interest rate environment, that will continue to impede their ability to make investments in our space. Our investment profile tends to be Core, Core Plus. And so in order for them to generate the kind of returns that they usually try to generate on their equity, this is not a conducive environment for them to invest. So I think for a variety of reasons, it really does lend itself to what we bring to the table, our history, our reputation and we are very hopeful of having a successful raise by the end of the year.

Great. That's it from me. Appreciate it.

Thank you, Ryan.

Hey, guys. Good afternoon. A couple of quick ones for me. First, I wanted to talk about the balance sheet here a bit and your liquidity. You settled a lot of ATM in the quarter, I think $631 million, $69 million I think is remaining. So curious how you're thinking about the various funding sources available to you here and the capital required to meet your full year acquisition guidance? Thanks.

Hey, Haendel. When you look at our guidance of $4 billion on the investments front, you're right, we do have $265 million of outstanding forward equity. We do have about $650 million on a run rate basis of free cash flow which of course is equity-like in nature. And so and then debt to finance that remaining call it $2.6 billion and to take care of about $1.3 billion of refis that we have for the rest of the year. That's about $2.2 billion of debt that we'll raise and obviously given the sponsorship that we've been lucky enough to receive from the fixed income investor base, we feel very confident across currencies that we can do that. So the missing element of course is the new public equity that we would have to raise to fill that gap. And so if you do that math, you look at that $750 million to $800 million of new equity that we might have to raise for the balance of the year. However, that doesn't take into account any disposition activity that we might do. So we feel very good about where the balance sheet is and sources and uses of cash from here on feels very, very reasonable and modest in terms of what we need to go out and get from the public markets.

Got it. That's helpful color, John. So one more, maybe on the other end of the quarter, looks like a loan on the development project yields around 10% term just under four years. So maybe some color on who or what you're lending to perhaps the risk profile and then your appetite for perhaps doing more of this type of activity in the near-term? Thanks.

Good question, Haendel. Yes, this was an opportunistic loan that we've provided to a private global developer in the data center space. This is a data center park that's being developed in Virginia. The ultimate client that we have is one of the large hyperscalers with very high investment grade rating. And our hope is that this will lead to the ultimate ownership or a path to ownership of these assets. And so we are very excited about this relationship. Again, it speaks to who we are, our size and scale and the willingness of these very well-established highly reputable private developers to work with us directly.

Hey, just two quick ones. If you could just comment a little bit more on the cap rates in the quarter and more importantly just what you see for trends going forward as we go into this uncertain environment?

Sure, Ron. So the cap rate that we were able to establish even absent this loan was just slightly north of 7%. I think you should expect cap rates to be in that zip code. And it's largely being driven by a fair amount of the uncertainty that exists, at least in the near-term. Once we have a settling out of what's actually going to impact future capital raising and what does the environment look like from an interest rate environment perspective, you can start to feel you can start to see some pressure potentially on the cap rates. But right now, we were expecting to see that at the beginning of the year, to be very honest, and we have not. And so it's a bit of a wait and see. And as the market becomes clearer around, like I said, where these policies are going to land, I think the cap rate environment is going to be a lot clearer. Having said all of that, this is actually benefiting us in some ways. Our cost of capital has improved throughout the year. And so the fact that cap rates are going to remain in the zip code that I've just mentioned, it allows us to create these outsized spreads, which obviously is a benefit. And it doesn't come without risk, which is why here in the US, we chose not to pursue certain transactions. But I do think that it will help create more opportunities going forward and we look forward to seeing how things settle out.

Great. And then my second question was just strategically as you're thinking about sort of increasing the rent escalators of the entire portfolio. Can you talk about some of those other buckets like gaming, like Europe, and like the data centers and just the updated thinking there about getting the overall rent escalators in the portfolio up? Thanks.

Yes. Again, a great question, Ron. Look, I think the way we are trying to address rent escalators is twofold. One is the organic rent increases that we are targeting and you're exactly right. There are certain asset types, i.e., industrial and data centers that tend to have more inherent rent escalators. But the second is the strategy that I was trying to highlight that we are deploying in Europe, where we are buying assets that we feel have rent that's well below market rent. And we feel like we can capture that, mark to market on the rents come renewal times. And so if you see what we've done in Europe for the first quarter, I think the vault was just right around four years. And it is with an intent to capture that upside that we are inheriting or that we are underwriting is another way that we want to grow the top line without necessarily having to rely just on pure investments to drive growth.

Hey, good afternoon, out there. I just want to dig into the retail parks a bit. Sumit, you mentioned that those were acquired with below market rents, and I'm curious what the yield would be once those are at market. And then how much have you invested in retail parks to date? And do you see a ceiling to that investment?

To anything in life, Greg, there's going to be ceilings. But I'll tell you, this is something that the team has done a phenomenal job on. And we decided to go after retail parks because we started to see what the sum of the parks analysis was. We were targeting grocery. We were targeting home improvements like B&Q. And we were essentially getting the rest of the parks for next to nothing. That's how it started. And it was at yields that were well north of 8%, even 9%. A couple of factors contributed to that. One was that these assets were being held by institutional investors who were going through a natural capital recycling or their investment time horizon was coming to an end that created these opportunities for us. Since our initial investment, which I would say was around three years ago, fast forward today, we have seen a massive cap rate compression. And now these same assets are trading in the mid-6s. So there's at least been a 250, 300 basis points of compression from when we initially started buying these assets. And the rents that we were underwriting to are also, based on our initial analysis, anywhere between 5% to 6% below what the current market rents are. The other dynamic that we are starting to see is our ability because we control so much of this retail space, our ability to go to some of these retailers, brand-new retailers, IKEA, I already talked about a little, et cetera. These are names that are coming to us and saying, in order for us to execute on our growth plans, we would like to be in these locations that you now control. And we are having holistic conversations on not only forming these relationships with these growing retailers but potentially creating a value uplift by having them in our retail parks. And so it's, along with that, I mean, I'm so excited I can keep going. We also have repositioning opportunities with extra land that we have inherited through this strategy. And so these are ways that we are trying to create growth, top-line growth by executing on the strategy that we embarked upon three years ago. And it has been super, super successful. I would say in the UK, we are in the middle innings, seventh, eighth inning of, well, not eighth, but seventh inning of a nine-inning investment cycle in retail parks. But in the rest of Europe, and we're thinking Western Europe for this similar strategy, it's still early days. The only other country where we own retail park is Ireland, where we just did a large portfolio. And again it has similar dynamics. And it's accelerating our relationship with some of these very pristine retailers who want to grow and want to grow in the locations that we now control. And so the value uplift is tremendous.

Okay, thanks. And as a follow-up, can you just remind us on the potential vacancy risk that you take when acquiring these assets as well as the CapEx needs they may have.

Yes, that's an excellent question. We have accounted for a certain level of vacancy in some parks, specifically around 1% to 2% in that area. When we analyze all our retail parks, we notice significant uplift when renewing leases with existing clients or leasing to new ones. For example, in the first quarter of 2025, we achieved a positive 7% recapture rate on the vacancies we've filled. The capital expenditures required are similar to what we have been spending in the US. We are optimistic about the strategies we've executed in the UK and now in Ireland, and the flow-through is substantial. Our analysis shows it has a flow-through rate comparable to a net lease investment in the 95% to 96% range, which aligns with our EBITDA margin.

Good afternoon. Thank you for taking my questions. My first question is for Sumit. In your prepared remarks, you mentioned some opportunities in the US that you chose not to pursue due to tail risk. I was wondering if you could elaborate on that, particularly in relation to your underwriting process, or if you are comparing the US market to Europe and discussing the opportunities in each.

It was a combination of both points, Michael. When underwriting a lease term, we consider the credit risk associated with that lease and the operator's ability to pay rent throughout the lease period. If we determine that the lease duration may be disrupted, that alone does not disqualify the lease, provided we have a high level of confidence in our ability to fill that position. However, this is not a fundamental aspect of net lease investing in our view. Any disruptions we account for may cause delays in recapturing value and affect the value creation process. Whether in the US or Europe, we are focused on evaluating the total expected return profile for our investments and are pursuing those that offer the best outcomes, which we are currently finding to be in Europe.

Got it. Thanks for that. And as my follow-up. The occupancy is up 20 basis points, it sounds like you also sold some vacant properties, which include you had decreased exposure to the Family Dollar, Dollar General, Walgreens, CVS in the quarter. So can you just kind of walk through some of the moving pieces of the dispositions and the occupancy stepping down slightly during the period?

Yes. This was very much expected. We had indicated that our occupancy would be in the mid 98% range, which remains our target. In the first quarter, we experienced some significant vacancies, but we have largely addressed those issues. Regarding Family Dollar and Dollar General, we did sell a few Family Dollar properties that were vacant. However, we recently had 38 Dollar General properties up for renewals, and we achieved over 109% on those renewals. We also had about five Dollar Tree and Family Dollar renewals which exceeded 108%. These businesses are retaining their properties and performing well, despite the current challenges we all face. Family Dollar remains somewhat uncertain, and we'll see how that evolves. However, I believe Dollar General and Dollar Tree will continue to thrive.

Hey, good afternoon, guys. Just a couple for me. I guess sticking to the theme of underwriting for a second, as far as the maybe the less creditworthy or higher-yielding opportunities that you had foregone in the first quarter and maybe that's kind of the strategy you're sticking to. I mean could you help us understand, is it more related to the industry vertical of those assets? Is it the capital structure of the entity itself. Are they sponsor-backed private equity style deals? Just maybe fill out the picture a little more in that sense, if you don't mind?

Certainly. It's not just one factor at play. For example, in discretionary sectors like entertainment, we consider the overall economic conditions impacting discretionary spending, such as inflation and tariffs. We also assess whether a specific operator in this sector can manage any potential downturn in revenue. This is why we focus on certain characteristics, especially in retail, like nondiscretionary services at low price points. We then evaluate which sectors fit these criteria. While we might explore entertainment opportunities if they offer adequate returns, an expected 8% total return can actually translate to low single digits if risks emerge in the next few years. Therefore, we steer clear of certain asset types, even in industrial sectors, when the client's business lacks stability. We've seen many opportunities that provide higher yields, but chasing today's yield without considering future outcomes can lead to poor returns. In private equity, we prefer operators who improve business operations rather than those who purely leverage and streamline for cash flow. We feel more secure with operators focused on operational enhancement, making it a mix of various factors at play.

Okay. That's helpful color. And to shift gears for one second, not to put anybody on the spot, but I was hoping for an update on Realty Income's investment in Plenty, the, I guess, indoor farming business you announced a couple of years ago. I did notice that they are going through a restructuring. I'm just wondering how much capital is at risk from your balance sheet perspective? And what's the outlook there if you don't mind?

Yes, Rich, your question is entirely valid. We believe that Plenty will emerge as a much stronger company. They decided to walk away from a specific location in Compton and went through a bankruptcy process to facilitate that. The primary reason for this was that the asset was producing leafy greens, which were not achieving the expected margins. Our asset, as you may recall, is intended for strawberry production, and currently, two out of the twelve operating days are in effect, with the goal of getting the remaining ten days operational. They have a takeout agreement with Driscoll, and part of their bankruptcy process aimed to secure favorable terms and emerge as a stronger operator, which we anticipate will happen. They appear to have attracted significant private capital from existing investors like Softbank and others eager to see the business succeed. Therefore, we are confident that once they emerge, they will be a solid business. However, let’s consider the unlikely scenario where they don’t emerge, which we don’t foresee based on our relationship with them and their transparency about the process. If that happens, we hold a valuable piece of land that can be converted, albeit with some investment, into a distribution center. It's located next to an Amazon site and has considerable power supply. We may even explore the possibility of developing it into a data center. The capital at risk is about $40 million, which is our total investment in this asset, and that's all we plan to invest. Nonetheless, the potential upside remains very strong.

Thank you. Hi. And congrats on a strong start to the year. I'm sorry if I missed it in the supplemental, but can you provide an update of the weighted average and the median EBITDAR to rent ratio on the retail properties? I noticed the format changed a little bit.

Yes, Jana, and we'd love to get feedback from you and others on the supplemental, there was a lot of work done, and the idea was to try to make it a lot more user-friendly. We hadn't touched on the design for the last 10, 12 years. And so we try to incorporate a lot of the comments that we received from folks along the way, and this is our attempt at addressing those comments. So would love to get your comments anyway, sorry, I digressed. Coming back to your question, it was 2.9 times is the average rent coverage for our retail assets on the assets that we do get reporting. And it's 2.7 times, I believe, is the median rent coverage. So still very strong despite the environment that we find ourselves in.

Thank you. And then just jumping to the investment loan that you made. Just curious, given the volatility in the capital markets, do you see more of those types of opportunities that you'd like to lean into?

Jana, the idea is that if it allows us to form a relationship, which could then result in us ultimately owning these assets. That is the goal. And we believe that credit is a particular way to make headway in terms of forming relationships as well as finding a path to potentially owning the real estate. We also find that these investments that we are making have – they tend to be over-collateralized with the actual real estate underpinning the collateral for these investments, they get better returns in terms of yield. And we have some level of protection in terms of the duration. And so it does help meet a lot of strategic objectives. And the idea and I think I've said this before is, yes, where it makes sense for us, we will continue to make credit investments to achieve the objectives that I just laid out.

Hi. Thanks. Good afternoon. I wanted to follow up on your mention of the investment volume leaning towards Europe for the first half of the year. As you look to the second half, what are you anticipating that might create more opportunities in the US? Additionally, do you foresee a slowdown in opportunities in Europe during the second half, or do you expect a more robust investment pipeline overall?

Yes. You're trying to unpack my words, Jay. And look I am very hopeful that given the trend of what is happening to our cost of capital, which is improving, we'll be able to do more here in the US. I'll tell you that of this volume that we sourced in the first quarter there was about $2 billion that the only reason why we chose to pass was because we were not comfortable with the initial spread that we were making on that volume. The pricing was right for that type of product, the metrics from a real estate perspective, were bang on straight. The operator that we had exposure to was one that we've got an existing relationship with, but it was just that initial spread that kept us on the sideline. So that's our hope that as the market stabilizes, our ability to do more here in the US will get enhanced. And I think Europe is on its own track and we are continuing to be very optimistic in terms of what we can achieve there.

I appreciate that. Thank you. And then maybe just one follow-up now. Looking at Europe, are there any kind of next frontier countries or marketplaces that present a significant investment opportunity for you that you're targeting to potentially expand to next?

None that we haven't talked about already. I had mentioned Poland as a country that continues to be of interest. Obviously, it's a NATO country. There's a fair amount of investments. It's the second largest GDP growth country in all of Europe. With a lot more of capital in-sourcing going on in Europe, again, this is a phenomenon that we have seen play out over the last couple of months, we expect there to be more opportunities. And for the right opportunities, we are very excited about our ability to grow into Poland at some point. So outside of that I think we are already in six other countries in, well, seven now in Europe outside of the UK. And we just want to establish our footprint even deeper into these geographies. And I do think it will create opportunities for us given this capital in-sourcing that we are starting to see play out.

Hey, everyone. Just had a quick question on the funds. How are you thinking about the assets that will go into the fund? Do you have a pipeline of deals that you're looking at, any particular asset type? Will you see that with some Realty Income assets, just your latest thoughts?

Yes, Wes, I think we had talked about this, but I'll mention it again. Yes, there is a seed portfolio which Realty Income owns 100%. And that's what's going to go to seed the fund. We are not planning to pay down or sell down our interest or being the public shareholders' interest in this seed portfolio. But we are going to use that as a foundation to raise capital that we will then invest in new opportunities. And over time, we own 100% of the fund today. And over time, we will dilute ourselves down. But we will continue to be a meaningful owner in the fund. And that's where the alignment comes in. We genuinely think that the private capital is a complementary form of equity. Today, we have one source of equity. And we've heard our investors loud and clear saying, look, you've got this amazing platform that has the ability to invest a lot of capital. But part of the downside of that is you're constantly in the public market. And so in order to create this alternative, we have decided to go down this path as a complementary form of equity capital that I believe we are the only one within our net lease space that can do that. And so I don't really see a major conflict. I mentioned that the initial yield is something that our public shareholders are very focused on as they should be, but it is of less importance to our private shareholders as long as we are able to meet the overall return profile that we are underwriting to. And so that in itself creates opportunities for us to continue to leverage our existing platform and invest capital and then have a bit of an asset-light model for the public shareholders because without having to raise any public equity, we're able to generate permanent fee income that goes to the benefit of our public shareholders. So that's how I see this playing in the future.

Yes. That makes sense. I guess looking at your European deal, this quarter, you got both the high going in yield and then also the big pop later down the road. Could you talk about maybe how you're seeing the unlevered return on that or I guess the stabilized yield on the European assets once you get that mark-to-market?

I think that we could get 10.5%, 11% uplift from just the mark-to-market on the cap rate compression and potentially higher than that on being able to mark-to-market the rent, which will take us time. But as these rents start to roll, as we are able to reposition these assets with more pristine retailers I think the value is going to potentially go up even more. And one could make the argument and I'm getting an indication from Neil that we might be about 40% below what the valuation is in terms of when it's fully realized and fully repositioned with the right retail set up, that's the kind of value uplift that we could have on the retail parks.

Hi. In terms of driving the top line growth in Europe to recapture mark-to-market, is this a strategy you've had in mind for some time or something you're verbalizing more concretely now?

It's always been our strategy, Linda. What we found was what started off as saying, hey, you do the sum of the parts and we're getting these retail parks at a massive discount to what we would be pursuing these clients on a one-off basis. What started off that way, soon morphed into the more lands we started to control, the kind of conversations that we started to have with the retailers who wanted to grow and wanted to grow in our location basically formulated this strategy that we originally had theoretically, but now are starting to see play out. We've had situations where retailers like M&S have come in and have identified assets where they want to go and position themselves. And that in itself will be an immediate uplift in rent as well as in value just given what M&S represents for these locations. So yes initially, it started off as, hey, we're getting great assets at well below replacement cost to this is a strategy we want to be much more aggressive on. And now that we do control the sites that we do, we are starting to see these strategies play out.

What percentage of your portfolio are retail parks right now? And then what is the TAM?

In Europe, which represents about 10%, actually, it's primarily UK and Ireland, it's about 40%. And in dollar value, it's about $12 billion, $13 billion of total investments that we have, of which I would say between the UK and Ireland, it's about $10 million. And I would say about $4 billion is retail parks in terms of our investment, not in terms of the valuation.

Great. Thank you. Sumit, you mentioned possibly being in a position to increase investment volume and given the ongoing market volatility and the advantage of Realty's platform, are you seeing any market dislocations across larger portfolio transactions that you could potentially take advantage of? Thanks.

We're having discussions and look we were able to do one in the fourth quarter of last year. And I do expect that in this environment, this uncertainty continues to play out, more and more people are going to find the sale leaseback product as a positive alternative to the debt markets that's available. And so I think that, that sort of a backdrop could lead to larger transactions. But I just want to be clear Upal, the $4 billion that we've talked about, this is basically our flow business. This does not anticipate any large-scale $500 million, $600 million portfolio transactions. If those happen, which we hope does, then that's going to be an uplift to our earnings guidance as well as our acquisitions guidance.

Okay. Great. That was helpful. And then just on Zips, you mentioned that they were all released and were able to capture 94% of your prior ABR. Could you remind us of your original expectation with Zips and any details on who you released your locations to or if there will be any downtime there? And then are there any other tenants on your watch list that you want to high or give an update on? Thanks.

Yes, to clarify, we didn’t have any assets rejected. All our assets were essentially operated by Zips. The decrease from 100% to 94.3% occurred because we negotiated the rent on some of those assets. This transition did not require us to find another client to operate these assets. Additionally, we secured higher internal growth on an annual basis and a longer-term lease, and we are optimistic following their recent emergence with a stronger balance sheet that supports their operations.

Thanks. First one is just on bad debt. I think last quarter, you said 75 basis points for the year. And so I was wondering kind of what of that you think you've used thus far have visibility on kind of where it all sits?

Yes. Tony, I would say, overall, we're reiterating that 75 basis points for the full year. I think when you look at the footnote of the income statement, you did see that we recognized a little bit over $6 million of bad debt expense in Q1. And so trending a little bit lighter for Q1, but just to stay somewhat conservative, we are taking that original forecast, which includes some unidentified cushion intact.

Okay. And then just on the deal flow. I mean, you kept the $4 billion. The first quarter is obviously a stronger pace that would get you north of $4 billion. Has much changed in terms of the flow and pipeline just in recent weeks or the last couple of months given sort of the macro picture?

I wouldn't say anything has changed in recent weeks. We just feel like we don't want to put ourselves in a box where we are extrapolating what we achieved in the first quarter and then find ourselves having to chase deals, which we would never do. We just feel like there is plenty of uncertainty right now, and it is better for us to when we have the signed contracts in place to come to you and say we are increasing our guidance versus increasing our guidance and then pursuing transactions that we expect will unfold. It's just how we've always done it, Anthony. You've been following us for a very long time and I just think it's prudent.

Yes, good evening. The retail parks, I get everything you guys have said so far about where you see upside on a longer-term basis. But I am curious like could you just talk a little bit about is there a big difference between retail parks in the UK versus kind of traditional big box retail in the US? Because I think that probably the way most of us are thinking about it. And with big box retail everyone is always worried about the intermediation from e-commerce and things of that sort. So is there anything really different about the retail parks in the UK?

Yes. The main distinction lies in the net lease-like characteristics of retail parks. When it comes to capital expenditures, like repainting parking lots or improving lighting and security, those discussions take place at the beginning of each year. All the retailers in that specific park agree to share the associated costs. The financial flow we observe in the UK closely resembles what we see in single-tenant properties, where maintenance costs are typically covered by the client. The only exception occurs with vacant units, where business rates and similar expenses become a concern. This situation parallels what we experience with any vacant unit or freestanding property, especially when a lease has expired or a specific event occurs, necessitating payment for insurance, taxes, and maintenance. Therefore, this model is quite similar to what we find in the net lease sector, which is why our margins have remained stable with this strategy. Regarding omnichannel, much of our progress in this area has occurred over the past two to three years. Retailers, particularly in grocery, have been adapting to the disruptions brought by omnichannel strategies. The top four or five grocery retailers account for 75% of online grocery spending. These retailers have effectively embraced omnichannel strategies; those that have not are either struggling to survive or have disappeared. Consequently, I do not perceive this as a significant challenge. We are focused on reconfiguring sites from discretionary to nondiscretionary uses, which I believe will lead to increased valuations and higher rents. This approach is why we are pursuing these changes, making it somewhat different from the experience in the US.

That's very helpful. Thank you.

Sure.

Thank you all for joining us today. We look forward to speaking soon and seeing you at conferences in the coming weeks. Have a good evening.