Realty Income Corp (O) — Q2 2025 Earnings Call Transcript

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 120 basis points inside 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 informs 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 $4.24 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 Zips properties, and following At Home's Chapter 11 bankruptcy filing in mid-June of this year, we anticipate constructive resolutions. With that, I will turn it over to Jonathan.

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?

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 we are 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.

We are being cautious due to ongoing uncertainty regarding policies in both the U.S. and Europe. We aimed for accuracy and decided to adjust the lower end of our guidance up by $0.02, while keeping the upper end unchanged. The increase in acquisition volume by $1 billion is expected to be back-end loaded, particularly in the second half of the year. The impact of these accretive transactions, which will not dilute our position, will not be felt until 2025, but we anticipate seeing the benefits in 2026.

I wanted to ask you more about the acquisitions. It seems like there was a significant increase in the source volume at $43 billion, but with under 3%, it feels like getting into an Ivy League school. I'm curious, was the quality not as good? Did you become more selective in what you decided to invest in? It's just surprising that your investment activity decreased sequentially, while sourcing appears to have significantly increased.

That's a great question. Yes, we take pride in being highly selective, similar to the Ivy Leagues. The main reason is that, at the end of the day, we identified nearly $3.7 billion in transactions that met all criteria except for the initial yield. That's why we chose not to pursue those transactions. So, while 3% may seem very low, had we proceeded with the $3.7 billion, it would have aligned more with our traditional figures of 7% to 8% of the overall volume we typically examine. Part of the rationale behind exploring private capital and other funding sources is that we want to leverage and monetize the platform we have built, enabling us to engage in transactions we opted out of. Therefore, our selectivity remains a key principle, and our disciplined approach ensures that every action we take contributes positively to the bottom line, which is a significant factor in the $1.2 billion we successfully closed, rather than pursuing a larger amount.

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, that's a great question. In the U.K., we didn't focus heavily on retail parks; most of our growth in that area has been in Ireland. Retail parks continue to provide significant benefits both in the short and long term. The resurgence of retail parks in the U.K. and Ireland, including Scotland, has been impressive. Several positive factors are supporting this sector, such as the end of concession rents and a decrease in vacancies in Scotland, which is now better than the rest of England for the first time in a long while. We are actively acquiring vacancies, and the increases we are realizing from re-leasing these spaces are driving value creation. We are very enthusiastic about our progress in integrating this portfolio of retail parks, but that opportunity may be narrowing. Currently, we are the largest owners of retail parks in the U.K. and are preparing a detailed presentation to share on our website. This strategy has provided a favorable investment thesis over the last three years. Regarding your question, nearly half of our activities in Europe have been industrial. We also made loans against industrial assets in key U.K. markets. Overall, we are observing better opportunities in Europe from a risk-adjusted perspective, possibly due to reduced competition and our established presence in these areas. This enables us to receive priority access for deals, helping us boost our transaction volume. You can expect to see a similar distribution of total acquisitions between Europe and the U.S. in the near term, especially in the third quarter.

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 is about acquisitions. We discussed the sales activity and mentioned that 76% in Europe might be the largest skew. Could you explain if this is simply due to better funding and opportunities? Also, how do you see the differences between the European and U.S. markets at this time?

Yes, risk-adjusted is how we ultimately evaluate things. One of our key advantages is access to European funds. We raised about EUR 1.25 billion, with a total all-in cost of 3.69%. While I mentioned in my prepared remarks that this is 130 basis points inside, 3.69% is closer to 1.6% compared to what we could achieve in the 10-year unsecured bond market. This certainly contributes to our strategy. We are buying long-term leases, specifically 20-year leases in the industrial sector, from businesses that are either top operators or leaders in their field. From a risk-adjusted return viewpoint, this is the right approach. There are many factors to consider, but it’s not just about capital or product individually; the combination of both is quite compelling. I referred to Eko-Okna as one of our largest transactions in Poland, which has a rent coverage of 6x. Metrics like that, along with the initial yields we secured, make it challenging to compete in the U.S. where industrial assets, even in secondary markets, are trading in the mid-6s or even higher. All of these elements contribute to our increased focus on Europe. Additionally, there is a bit more stability and a stronger outlook for interest rates there, leading to more plentiful transaction opportunities than in the U.S., where we see a lack of stability. These factors explain why we're pursuing more deals in Europe, and it benefits us that we can explore opportunities wherever they arise. Thank you for your question.

My first question is about the competitive landscape. Our broker contacts have indicated that many portfolio deals are expected to emerge in the second half of this year. We've also observed a significant number of private buyers getting involved with companies like Fundamental and ElmTree. I'm interested in your perspective on this supply and demand dynamic and how you think it might affect your yields. Additionally, is there a possibility of a large portfolio deal that could exceed your guidance?

John, you are absolutely correct in your last statement. If we undertake a large transaction that isn't included in our guidance, we could exceed the $5 billion mark. Let's delve into how you framed your question, which is completely accurate. There is significant demand for the product we have been developing for the last 56 years in the private market. Companies like BlackRock, which executed the ElmTree deal, Starwood with the Fundamental deal, and JPMorgan, along with a few others like Morgan Stanley, are launching their own net lease funds. Blackstone is also actively creating its own net lease fund, showcasing the strength of this product. We see an inflow of interest from various capital sources aiming to use our platform for this strategy. I see this as mutually beneficial. We are well-positioned to be the platform these capital sources can rely on for a business model that is very safe, durable, and dependable. We often describe our cash flow as bond-like while having equity-like growth. There aren’t many products that can offer that balance. Therefore, it’s not unexpected to see more private platforms developing net leases, whether through organic growth or partnerships. This influx of capital is beneficial for our industry and brings more stability to our business. I believe we are ideally positioned to leverage these opportunities. While this may lead to increased competition and potentially lower cap rates, I doubt others will match our level of underwriting maturity. We have been competing with private capital sources, particularly from established players over the last decade. Given the uncertainty in interest rates, leverage remains a critical element for many strategies, and we are well-prepared to benefit due to our strong credit rating. Additionally, as we work on different channels, we aim to manage the volatility on our public equity side with private equity sources. I welcome these developments, as they will create more opportunities for us to engage in large-scale deals, which I highlighted as one of the megatrends in my earlier remarks. We are witnessing an increase in product availability in the market, and more companies are reaching out to us, emphasizing the need for the right partner. It’s not just about understanding net lease; it’s about finding a trustworthy landlord who will manage the assets over the long term, and that’s where we excel. I apologize for not answering your specific question directly, but I wanted to provide this broader context relevant to my comments on megatrends earlier.

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 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.

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 mean 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 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.

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 represents 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, the actual amount was $43 billion. It's hard to say for sure, but a portion of that $43 billion won't be included in the $1.2 billion we finalized this quarter and will be closed in future quarters. That's a good question. The point I mentioned about approximately $3.7 billion of transactions we chose not to pursue because they didn't meet our initial spread still stands. We expect that, with our expansion into new regions and our entry into data centers, these volume figures will likely keep increasing since we are now operating across a broader geographical area and additional asset types. You should see this trend continue. A part of this will definitely be closed in upcoming quarters, but I can't provide any further details beyond that.

The second question is about lease expirations; you have approximately 6% of ABR expiring this year and next. What portion of that represents noncore assets that you've identified for capital recycling opportunities? Additionally, how beneficial do you anticipate those potential sales to be as you seek more investment opportunities?

That's a good question. Whenever we have a lease rollover, we conduct an economic analysis to determine our next steps if the current client does not renew. One option is to look for an alternative tenant quickly to make that route feasible. Another option is to reposition the asset for its highest and best use, which we are currently working on within our development pipeline. A third possibility is to sell the asset while it's vacant, as we would have maximized its economic value, and keeping it would incur unjustifiable holding costs. We aim to sell promptly to operate efficiently. After this analysis, our data analytics tools and the expertise of our asset management team help us execute one of those three strategies without delay. Importantly, we do not wait until a lease is within the last three or six months of expiration. Our asset management team is already focused on assets set to roll over not just in 2026, but even some in 2027, particularly if they belong to the same client with a broader portfolio. The expirations in 2026 are around 4.5% in that ZIP code, and by the end of this year, that percentage will significantly decrease as we've addressed many of the 2026 assets in the past six months of 2025. This trend applies to many expirations. As for unique expirations next year, I don't foresee any major issues, as we have extensive experience with most of our clients. While there may be one or two assets from our M&A transactions that we haven't dealt with before, I don't expect them to make up a large portion of what is expiring this year or next.

I have a couple of quick questions. First, Jonathan, could you share your thoughts on the overall balance sheet and your growth liquidity in the current environment? Additionally, how are you approaching various funding sources, free cash flow, equity, and revolver dispositions in terms of 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.

I want to follow up on the previous question and answer. Considering the opportunity and limitations of third-party capital, it appears that sourcing deal volume shouldn't be a problem. Where do you think the constraints might be? Could they be related to the process, or is it possible to achieve a higher close rate? How should we approach this?

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.

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. Yes, it was a very opportunistic approach. We found more transactions in the industrial sector and on the credit side that fit our criteria better than continuing to pursue retail. However, it will vary; retail still constitutes 80% of our overall portfolio and will remain a significant part of our strategy moving 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, our interest in data centers remains strong and is continuing to grow, but we are still being selective in that area. As long as we find the right partners, locations, and clients for those assets, we would be very eager to invest significant capital in that space. However, we will maintain our selectivity. We have been approached with some transaction opportunities, but they do not align with our selectivity criteria. Nonetheless, we made an investment in the first quarter and hope to strengthen that relationship, with the expectation that it will yield positive results in the future.

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 there were around 100 million lease expirations, and if I remember correctly, 93% of our existing clients renewed their leases. I'm not sure how many of the remaining 7% were due to bankruptcies or other reasons. However, the expirations we experienced in the second quarter were largely consistent with our usual patterns. I've been discussing this for the last several years, and I believe this number will continue to rise. I genuinely think our asset management team and our data-driven approach to managing leases will become an increasingly important factor in creating value for us. If you look at our lease renewals and leasing spreads over the years, they have consistently been between 103% and 105%. This reflects the team's experience and the tools we've created to support them in negotiations. Instead of being concerned, we are actually looking forward to the increasing volume of renewals year after year. Next year may be relatively modest, but we are optimistic about 2027 and 2028.

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. Roughly speaking, about 3% of our total exposure is from Dollar Tree and Family Dollar. After the separation, 2% will be associated with Family Dollar and 1% will be from Dollar Tree. Over the next one and a half years, until 2026, there will only be 10 basis points of expirations for Family Dollar and another 10 basis points for Dollar Tree. This reflects our near-term exposure to those two brands.

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.

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.

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. It seems that your dispositions on vacant assets have increased sequentially. I would like to know your thoughts on how much more you need to do to reach a comfortable level. You mentioned in your prepared remarks that disposals have broadly increased, but any additional details on this would be appreciated.

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.

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.

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.