Realty Income Corp (O) — Q3 2025 Earnings Call Transcript

Thank you for joining us today for Realty Income's 2025 Third Quarter Operating Results Conference Call. Discussing our results will be Sumit Roy, President and Chief Executive Officer; Jonathan Pong, Chief Financial Officer and Treasurer; Neil Abraham, President, Realty Income International; and Mark Hagan, Chief Investment Officer. 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. I will now turn the call over to our CEO, Sumit Roy.

Thank you, Andrea. Welcome, everyone. Realty Income's platform, which has been 56 years in the making, is a historically proven income generator with the ability to perform through a variety of economic conditions. The data-driven nature of our model, accompanied by decades of institutional experience and our top-tier talent, positions us to capitalize on an ever-increasing investor appetite for consistent long-duration income given aging global demographics. Additionally, our scale and diversification, spanning over 15,500 properties across 92 industries and more than 1,600 clients, provide strategic proprietary data insights that position us advantageously in comparison to subscale platforms. Recently, we have seen an acceleration in capital formation for net lease vehicles in the marketplace, and we believe our platform is especially positioned to benefit from capital floors yearning for long-duration income. As we establish ourselves in the private capital arena, our long track record of producing equity-like total returns with bond-like stability is resonating with investors. We recently launched a perpetual life fund and expect that initiative will provide additional capital to support our growth objectives and enhance our liquidity position. Turning to our operating results for the third quarter, our investment activity continues to reflect the multiple levers of growth we have at our disposal. Our addressable market is sizable, enabling us to look at opportunities substantially free from geographical property or industry constraints. This allows us to pursue the most optimal risk-adjusted returns for our shareholders and to pivot with ease when we identify capital allocation opportunities that others might be unable to execute on. Globally, we invested $1.4 billion at a 7.7% weighted average initial cash yield, equating to a spread of approximately 220 basis points over our short-term weighted average cost of capital. This brings our total year-to-date investment volume to north of $3.9 billion, surpassing the investment volume we completed in all of 2024, excluding the Spirit merger. This quarter, we sourced $31 billion in volume, resulting in a selectivity ratio of 4.4%. This brings our total year-to-date sourcing volume to $97 billion, eclipsing our prior high watermark for annual sourced volume of $95 billion reached in 2022. 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. Turning back to our investment volumes for the quarter, we again leaned into Europe, which accounted for approximately $1 billion or 72% of our investment volume at an 8% weighted average initial cash yield. The European investment opportunity continues to screen more favorably on a risk-adjusted basis compared to the U.S., which has become increasingly competitive with smaller platforms competing for similarly sized transactions. In contrast, the European investment opportunity remains compelling, driven by a fragmented competitive landscape, a larger total addressable market than the United States, and a current cost of debt for euro-denominated 10-year notes that is approximately 100 basis points inside of U.S. dollar costs. 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 almost $16 billion in gross asset value and approximately 18% of our total annualized base rent. Transitioning to the U.S., we invested $380 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 the pace of deployment of capital. Moving to our operations, the third quarter reflects the structural advantages of our business model, including portfolio diversification, which mitigates exposure to idiosyncratic credit risk and supports advanced data analytic capabilities. To that point, our proprietary predictive analytics AI tool, developed over the past 6 years, informs decision-making across sourcing, underwriting, lease negotiations, and capital recycling. We believe this allows us to be proactive operators and reinforce the reliability of our long-term cash flows. As of quarter end, our portfolio comprised over 15,500 properties spanning 92 industries and more than 1,600 clients. The naturally defensive nature of our essential retail-oriented portfolio, including grocery and convenience stores, combined with our scale and diversification, positions us to perform through a variety of economic environments. We ended the quarter with 98.7% portfolio occupancy, approximately 10 basis points ahead of the prior quarter. During the quarter, our rent recapture rate across 284 leases was 103.5%, representing $71 million in new cash rents, with 87% of leasing activity generated from renewals by existing clients. We remained active in our approach to optimize the portfolio. In the quarter, we sold 140 properties for total net proceeds of $215 million. During the quarter, we sold 18 convenience store properties for approximately $55 million at a blended 5.5% cap rate and a weighted average remaining lease term of 11.3 years. This pricing is approximately 75 basis points lower than where we are acquiring portfolios of superior assets. This transaction reflects strategic portfolio optimization, first by leveraging our scale to acquire assets at a portfolio discount and then by monetizing more mature properties individually at tighter cap rates. The sale allowed us to redeploy capital into superior opportunities and demonstrates our ability to unlock value through selective dispositions. Finally, we recognized $27.3 million, or approximately $0.03 per share of lease termination income during the quarter. We realized such income in situations where our asset management team, in conjunction with input from predictive analytics, determines that lease termination presents the best probability-weighted risk-adjusted net present value outcome. While we do not guide to this line item, we have added historical lease termination disclosure at the bottom of our consolidated income statement in our supplemental documents. The purpose of the disclosure is to add improved transparency on the separate and inherently different revenue streams of base rent and termination income. Overall, the stability of our results continues to demonstrate how the benefits of our platform enable us to stay agile, manage risks effectively, and drive long-term portfolio performance. Now 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 from $5 billion to approximately $5.5 billion. In addition, we are increasing the low end of our AFFO per share guidance, now anticipated to be in the range of $4.25 to $4.27. As discussed previously, our guidance contemplates approximately 75 basis points of potential credit loss, most of which results from certain tenants acquired through completed public M&A transactions. Our credit watch list remains manageable and granular, staying flat to the prior quarter at 4.6% of our annualized base rent and with median client exposure of just 2 basis points. With that, I will turn it over to Jonathan.

Thank you, Sumit. Realty Income has a proven track record of providing equity-like returns with bond-like stability. The inherent consistency of our earnings has allowed us to produce predictable leverage metrics as well. We finished the third quarter with a net debt to annualized pro forma EBITDA of 5.4x, a fixed charge coverage ratio of 4.6x, and $3.5 billion of liquidity. Additionally, only 6.5% of our debt at the end of the quarter was variable rate, all coming from our revolver and commercial paper program. Subsequent to quarter-end, we closed on an $800 million dual-tranche unsecured debt offering, with a blended tenor of 5.3 years and a weighted average yield to maturity of 4.4%. Most of the proceeds were used to repay $550 million of unsecured notes that carried a coupon of 4.6%, and we are pleased to execute on this offering amid historically tight spreads in our secondary curve. As always, we thank our loyal fixed income investors for their continued support of our platform and their long-standing appreciation for the relative safety of our business and its consistent production of predictable cash flows. As of today, we also have approximately $1 billion of unsettled forward equity, which we believe is sufficient to fund all of our external equity capital needs to fund our investment volume guidance for 2025. I would now like to hand back to Sumit for closing remarks.

Thank you, Jonathan. We believe 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.

Sumit, you talked about Europe continuing to be the preferred market, and at least part of that was attributed to higher competition in the U.S. Is that something that you're starting to see as more structural? Or do you think the relative attractiveness and preference between those two markets will continue to swing back and forth?

It is true that there are more competitors in the U.S. than in Europe. Recently, there has been significant capital formation for net lease investing by firms like Blackstone, BlackRock, and Starwood, resulting in a number of new market entrants. Consequently, there is indeed greater competition in the U.S. For us, it's about what is available; most of the $31 billion we mentioned was sourced from the U.S. There isn't a lack of product. However, with increased competition for the same products, we must assess where we can find the best value and risk-adjusted returns. This analysis has led us to focus more on Europe, which explains why 72% of our investment volume was there. Looking ahead, I expect this trend to persist. While the majority of our activity will likely remain in Europe, we are beginning to see some momentum in the U.S. as well.

Okay. Got it. And then you obviously held the initial closing for the Core Plus Fund. Can you talk about what you've acquired in the fund so far and how that differs from the acquisitions you've completed outside the fund?

Yes. So Brad, unfortunately, there's very little I can share with you outside of what has already been disclosed. As you can see from our supplemental documents, we have increased the disclosure on what is going into the fund versus what's staying on the balance sheet. Given the fact that we are currently in the marketing stage of our open-ended fund, we are very limited in what we can share with regards to the fund. But what we've tried to complement is to give you more disclosure, and hopefully, you'll find this additional disclosure in the supplemental documents helpful in terms of your modeling, etc.

This is Kathryn on for Michael. My first question, so similar to the second quarter, the majority of your dispositions were vacant assets, and I'm just wondering if you can provide some color on the re-leasing process. Specifically, who are the buyers? What was the downtime for some of these assets? And how does that compare to the remaining assets that you're looking to sell? And then maybe just sort of the spread of the different categories of assets that you've been selling down.

Yes, Kathryn, this aligns with our ongoing strategy that we began in 2024. We discussed achieving a comparable amount of asset sales this year as we did last year, and the composition of those sales should be similar. To date, we have seen more sales of vacant assets, but we indicated that the second half of the year would focus more on occupied asset sales. This mix will persist. Our decision-making revolves around analyzing individual assets to determine the potential returns based on the rent prospective clients may pay versus the proceeds from selling the assets vacant. We are flexible in our approach; our main goal is to optimize economic returns on each asset. This determines whether we sell a vacant asset or seek a new tenant. Selling over 100 vacant assets was part of our strategy, as we believed that reinvesting the proceeds in the current market was more beneficial than holding onto the assets and incurring costs while waiting to lease them. The assets we've sold range from casual dining and quick-service restaurants to home improvement and drugstores. Our decisions depend on the timing of lease renewals and expected outcomes, assessing whether selling the assets vacant is the better option. This strategy will continue to inform how we manage asset disposals and capital recycling.

Got it. That's really helpful. And then my second question is you mentioned the predictive analytics platform, and I'm just wondering if you can comment a bit about how you expect that to help reduce G&A in the longer term and just how you sort of expect to maybe be able to use that to imply a few labor efficiencies and other components that could help bring down G&A in the longer term.

Yes, Kathryn, that's a great question. Let me talk about the AI strategy in two folds. I'll specifically answer your question on predictive analytics. This is a tool that effectively uses machine learning to continue to refine its ability to predict renewals, etc. This particular tool continues to learn every quarter. We go through lease expirations every quarter. The model predicts a particular outcome. We check that outcome against what actually happens. More often than not, the model is correct, north of 90% of the time in a lot of cases. Where it isn't, it tends to learn from that particular error by modifying its internal workings and algorithms. That's how the model continues to become better and better at predicting at a much higher level of certainty what the outcomes are going to be. This model is utilized when we are underwriting transactions on the front end, when we are making decisions on the asset management side as to whether we should hold or dispose of an asset. It is also used when our asset managers are negotiating with our clients, where we have a high level of confidence going into a negotiation that this is a location that is actually doing very well. That level of confidence obviously translates into the results that we talk about, the re-leasing spreads, etc. So that's one piece of it. The scale benefits will come from other AI implementations that we are doing, where we are using tools like PredictAP, for instance, is a perfect example where we had individuals doing clerical work such as getting invoices, tracking the invoices, and inputting the invoices into Yardi. All that initial front-end stuff is now being done by an AI tool called PredictAP. That's where you're starting to see the scale benefits and personnel are shifting from doing clerical work to quality assurance and approvals to validate that the coding has been done correctly. Various different stages of maturity depending on departments we look at and the kind of AI implementation we carry out. It's a journey that we are on, and the benefits of which will be realized by the company in years to come. We are very focused and excited about embracing it.

I wanted to ask you a little bit about the loans you made in Europe in the quarter. It looks like you found some very healthy opportunities on the yield side. Can you share maybe who those were with and if you would expect to see significant opportunity in that kind of arena over the next quarters or so?

So Smedes, as we've said, when we started going down the credit investment path of one of the verticals that we wanted to lean into, there was a strategic rationale behind it. What we had shared with you was we were already long the clients. We were doing 15-year, 20-year sale leasebacks with these clients. We were comfortable with the credit. Our ability to be viewed as a one-stop shop, a true capital provider across the balance sheet for some of these clients is something we wanted to lean into, and that was the entirety of the loans we did in the third quarter, with existing clients that we are very comfortable with, and we are higher up on the capital stack. We have a lot of collateral that underlies these loans, so we are able to generate a higher yield. The added benefit of doing credit investments in a high-rate environment is the fact that we have about 6% to 7% of our own balance sheet exposed to floating rate debt, and so it acts as a headwind for our financing. So to take advantage of investing in credit investments with elevated yield helps mitigate some of these headwinds. This is an avenue that we will continue to lean into, but we are going to be selective. The idea is to create closer relationships with our clients, and the hope is that it leads to more sale-leaseback opportunities with this client, which indeed was the case in the third quarter for one of these loan investments that we made, where we ended up doing an off-market $100 million sale leaseback as well.

Okay. That's helpful. And then, Jonathan, I just got to ask you on the guidance. You talked about these higher lease termination fees that we wouldn't have been expecting at that level. Is that what's driving down, I guess, or the implied decline in your same-store rentals through the balance of the year? Or are those totally separate issues?

Smedes, I would say the same-store calculation is separate from the lease terminations. The lease terminations are one-time in nature. If you're trying to back into a like-for-like excluding lease terminations, I think there are some offsets that come into play predominantly on the G&A side, which we view as just an investment in the future of this company and expanding the competitive moat that we benefit from. That takes dollars, headcount, technology, process improvements, etc. The reason why you're not seeing that flow through in Q4 on the AFFO run rate is really investments in that realm.

Sorry, just one more follow-up on the lease term income in the quarter. Can you discuss whether this was one or two larger tenants? Or is this a mix of tenants?

It was predominantly one tenant, and it's something that is really a function of our asset management team's proactiveness and getting ahead of potential move-outs and potential credit issues. This is something that you're going to see as part of our regular approach, maybe not to the extent that we saw in Q3, but certainly more active than we have historically. In 2024, we recognized about $16 million in lease termination fees already year-to-date. We're at around 30. On a go-forward basis, we may be closer to that 20-ish area. But with more churn and more proactive asset management activities, I think you're going to see this be more of a regular occurrence going forward but perhaps not as drastic as what we saw from one client in particular in Q3.

And congrats on a very active sourcing quarter on the investment side. I saw the allocation of new clients, leases as a percent of the leasing then tick up to 13%. I was hoping you could maybe discuss the industries or segments those new relationships fall into.

Jana, we certainly did have a few new clients join our portfolio, certainly some in Europe. There were some logistics deals that we did that introduced some new clients into our portfolio. They tended to be, by definition, some of the larger investments we've made. I wouldn't read too much into the fact that this particular quarter we had a larger number of newer clients than in previous quarters. This is more a function of us becoming more entrenched in Europe; we are starting to see new clients we are cultivating relationships with. They may be new to us, but they've been around for many years in these markets. That was the purpose of going into a market like Europe, where it's green fields ahead for us. That really is the makeup of what we ended up doing in the third quarter. I wouldn't read anything more into it other than new relationships mean better repeat business possibilities going forward.

Not to beat a dead horse on this lease term income, but just trying to understand how much revenue, like annualized revenue do you kind of give up taking the lease term right now. Can you maybe help us with that?

Yes, Anthony, as you can see, we are evaluating the situation and believe these clients are likely to pay. Although Jonathan mentioned potential credit issues on the horizon, that is not necessarily relevant to this particular client. By securing most of the rent upfront and building a stronger relationship while addressing issues for our client—specifically locations that are underperforming—it creates a mutually beneficial situation. In structuring this lease termination, we ended up better off compared to simply collecting rent for the remainder of the lease. We anticipated that they would not renew the lease and, looking at the overall situation, we concluded that opting for a lease termination, collecting that payment, selling the property, and reinvesting the capital was a much better outcome for us and for our clients than just passively collecting rent. While we could have chosen that route and been fine, it wouldn't have produced as favorable an economic result. We opted for the lease termination to resolve an optimization challenge for our client and to reinvest that capital effectively.

Okay. Got it. And then just my follow-up. Sumit, you mentioned about private equity and other private capital being more competitive in the U.S. market. Can you maybe just give us a little bit more color around what kinds of assets you see them going after or what the impact on cap rates has been? Or is there a certain segment of the market that keeps you out?

I wouldn't say it's any segments that keep us out. What I am sharing with you is, you know of these capital formations. These companies exist. Some of them have gone so far as to tell you exactly the strategy that they're going to be following. Some are small, so by definition, they'll go after the one-off market. It's across the spectrum on the lease on the net lease side. Investment grade, lower cap rate deals with growth tends to be industrial. There aren't a whole lot of retail investment-grade low cap deals with a lot of growth built into them in comparison to higher yielding retail assets. They're defined as their area of expertise. Others are playing retail across the spectrum of credit, and you’ll find them more in the one-off market than you would in these very large-scale sale leasebacks that we tend to pursue here in the U.S. That said, we absolutely look at the one-off market where it makes sense and where we have relationships, acting on those. It is patently true that you have more investors in net lease today than you did a year ago. This is not a function of more public companies; it's occurring on the private side.

This is Jenny on for Ron. Two quick questions. First one is same-store revenue growth of 1.3% year-to-date, but the guidance suggests 1% in 2025. So does it suggest a deceleration of same-store revenue in Q4? How should we think about it?

I wouldn't necessarily characterize it as a significant slowdown. The guidance remains around 1%, but there is a degree of caution since we still have three months to go. Any bad debt expense will factor into that. Even though we aren't seeing any substantial issues arise, that’s why we are being a bit cautious. Q3 also saw a positive impact from the theater industry, as we recognized some percentage rents that boosted the theater same-store performance into the 5% range. This is something we expect to normalize, and we are modeling it accordingly for the fourth quarter.

Perfect. That makes sense. Second question I noticed the IG client represent like 31.5% as of 9/30 versus 33.9% in June. Maybe comment a little bit on what's driving the change? Which tenant kind of moved out?

It wasn't moving out. It was simply Dollar Tree selling Family Dollar. Dollar Tree remains an investment-grade company, but Family Dollar is now a private company and that no longer has the investment-grade rating. Family Dollar represents circa 2% of our tenant registry, and that’s the delta between the new number you’re seeing in our supplemental versus what you’re comparing it to in the second quarter.

I noticed that the investment yields for Europe increased to 8%. I'm curious if there are any specific investments or types of assets that you could mention which led to these higher yields. Can we expect these upper 7% or 8% yields to be sustainable going forward?

Yes. So Jay, obviously, what's blended into that number, that 8% number, is circa $380 million of investments that we did on the credit side, which had a profile closer to 9%. Blending that with what we did on pure investments on the real estate side, which is circa 7.3%, that’s how we got to close to 8%. It was largely driven by these higher-yielding credit investments.

Okay. Appreciate that. And then for the re-leasing rent recapture rate, which has been 103.5% throughout 2025. Now as you look at the lease expiration schedule going forward and bumps up a bit starting in 2027, are these levels of recapture rates something that you think you can continue to achieve in those forward years and provide a boost to revenue?

Jay, I can't comment on anything in 2027, but I will tell you the way we are thinking about being proactive on our asset management side. If you look at what we've achieved in the last 3, 4, 5 years, it's been well north of 100%. The average that we've tracked for re-leasing spreads is slightly above 100%. It's been 101%. More recently, that number has gone up largely because we have become a lot more active on the asset management side of getting ahead of situations that could result in degradation of this recapture rate. The expectation and hope is that we will continue to be north of 100%. This proactive implementation by the asset management team, we hope, will continue to generate favorable results.

This is Ravi Vaidya on for Haendel. I wanted to ask a bit more about the AFFO guide for 2025. It looks like there were a couple of one-timers with the lease term fees, and you also raised the investment volume. I guess, why take down the high end of the AFFO guide at this point? Are there any offsets, maybe tenant credit or anything else that you might have considered as part of that?

Ravi, I think as we sit here today in November, we wanted to be more precise. The track record that we've had recently is we start relatively wide and narrow as we get more visibility into some of the puts and takes. That's what it is right now. The higher end of guidance, I think at this junction, we feel is probably a less likely one if you're looking at just deal volume because, at this stage, a lot of that deal volume we're projecting is towards the end of Q4, so very little impact. From a seasonality standpoint, there are some expenses in Q4 that come through a little higher, and I think leasing commissions are certainly one of them that might be a little higher than it was for the first 9 months of the year and, as I mentioned earlier, a little bit higher run rate on cash G&A.

And just in regards to your comments on competition here in the U.S., your advantage of scale really comes into play with the larger sale-leasebacks and the portfolio deals you mentioned. Are you just not seeing as many of these large deals where that advantage of scale can be leveraged?

Well, we did see one, and we talked about it in the fourth quarter of last year, where it was north of $700 million in sale leaseback, and all of the advantages that you just laid out played out for us. But yes, seeing $1 billion transaction sale leasebacks here in the U.S., we haven't seen as many. That doesn't mean those discussions aren’t taking place. There are some interesting transactions going on, but it's not something that happens every quarter. Those are specifically the types of transactions where we can lean into our advantages. We see many transactions in size in Europe, which is why we are able to do what we are doing.

Yes, that makes sense. Maybe with that thought and with the greater competition you are seeing here in the U.S., would it be fair to say that your growth in the U.S. or maybe even Europe is going to be dictated a little bit more by the composition of deals more so than in the past?

The composition of deals, yes, I think that is precisely the way to think about it. That doesn't mean that we won't see a quarter where we are back to doing the majority of transactions here in the U.S. But it will be a function of evaluating the types of transactions that create the best risk-adjusted returns on a relative basis. Those are the ones we will pursue. That is one of the advantages of the Realty Income platform, as we have many different swim lanes to evaluate, and we are seeing opportunities across all of those different lanes. It so happens that a lot of what we have done year-to-date, more than two-thirds of the transactions, have been in Europe, where we have seen the best risk-adjusted returns. If you unpack the sourcing numbers, the majority of sourcing is still here in the U.S., which continues to be a very active market. When you start looking at individual transactions and do the analysis, saying that on a relative basis, there are better transactions in Europe, that's where we're going to invest.

Jonathan, maybe if we could just go back to the question earlier on the guide. You talked about the high end of the AFFO guide. Just thinking about where the midpoint was and where you all came in at. There was the $0.03 of the termination fee that we've discussed. What was the offsetting factors to get you to the midpoint versus the quarter? I know G&A is a little bit higher. Non-reimbursables are a little bit higher. Is there anything else that we're missing?

Yes. Those two areas plus leasing commissions tend to be slightly higher in Q4. Just from a forecast standpoint, that is an AFFO deduction. That’s one thing to keep in mind for Q4. There are always going to be short-term headwinds when you are doing the right thing for the long term. Sometimes that's vacant dispositions. It was a record quarter for vacant dispositions for us in the past quarter. Rather than just taking any type of re-leasing spread just to keep someone in there, moving on to dispose and recycle that capital is something that could result in small dilution on a very short-term basis. That's really it. It's nothing that I would flag as a significant item one way or another. Just a little bit of everything.

Sure. So it stands at the same as the second quarter, at 4.6%. The credit watch list is 4.6% of our annualized base rent and we maintain a granular approach with median client exposure of just 2 basis points. Any one client has minimal impact on the overall.

On capital allocation, would it have been more accretive to utilize free cash flow for your loan book and then not buy the other $1 billion of properties using equity?

Yes, we have about $200 million of free cash flow that we generate every quarter, which is part of the mix of proceeds available for investments. When we have a menu of investment choices, we look at which investment is favorable. Clearly, we chose to make $360 million worth of credit investments. We’re looking at whether we're better off not raising capital and using our free cash flow to buy back stock, which we can do, or investing it accretively. We’re super selective in our investments and we've turned down $2 billion worth of investments in the third quarter alone because the spread wasn’t accretive. We're being strategic with our capital and making choices aligned with our overall growth strategy.

My second question is on lease term fees. Did you include that in your earnings guidance?

Yes, all of that is included in our latest earnings guidance. Our guidance reflects all the lease terminations, bad debt expense, and other expectations—including the increased acquisition guidance we issued this quarter.

I just want to get a clarification on the investment guidance increase. Does that include the fund investments? Just trying to get an understanding of how we should break down the investment guidance between the core portfolio and the private fund.

Yes, definitely we have given that guidance and disclosure in the supplemental documents. We have created a new form supplemental that we hope you find helpful. One will see precisely what portion of total investments is going on balance sheet, what portion is going towards the fund, and our pro forma. Everything should be clear if you go through that supplemental. We’d love feedback on it.

Okay. Great. And then appreciate all the color on the guidance so far. But could you talk about the other adjustments in your guidance? It increased by $0.04, but it didn't really help the full year AFFO guidance. Just trying to get a better understanding of what other adjustments are and what drove the guidance change there.

Upal, are you talking about the AFFO guidance? The midpoint of our guide is unchanged. There were some offsets predominantly against leasing commissions, G&A, and unreimbursed property expenses that were offsetting some of those gains.

Just a quick one on debt capacity when you look to Europe and the U.K. How much more can you borrow out there assuming no more investments as of today?

Wes, we're pretty much right where we need to be from a euro standpoint. That’s driven by incremental volume. We don’t have unused capacity. We do have some European commercial paper outstanding. Any issuance in longer-term debt financing will really be to term that out. New debt capacity will follow the lead of the volume side of things from here. On the U.K. side, we're at about 75% loan-to-cost right now, so we do have some capacity in the GBP side. We’ll continue to wait for a better opportunity.

I just wanted to talk quickly about the disposition program. I know over the last couple of years, you've really ramped that up as you look to recycle maybe vacant or less desired assets and reinvest into better opportunities. But just curious, is this going to be a bigger part of the picture? Will it remain the same quantum? Or should we expect that to tail off in subsequent years?

I don’t want to give guidance, but it’s not tailing off. This is very much part of our business going forward. Part of what I want to share with you is there was some debate around our portfolio discount. We are recycling some of our assets. I think I'm giving you the disclosure in my prepared remarks to keep emphasizing that when we are able to recycle capital, part of it is to realize this inherent portfolio discount that we see when we're doing large-scale transactions. That is much more strategic. We're going to be more proactive with recycling assets whether they are occupied or vacant. Rather than holding for an extended time to find one client for a rent that doesn’t make sense, we can recycle the capital today while taking into consideration the holding costs. This is an economically driven analysis, and with our growing portfolio size, you can expect recycling to be very much part of our strategy going forward.

Great. And my second question is just on the data center opportunity front. I understand that there's a tremendous demand in the United States but curious if you're seeing similar or increasing demand in Europe, where you may be able to achieve better pricing or able to close quickly or acquire these assets just given it's a more fragmented landscape.

Yes, Eric, we are very much focused on this in Europe as well. Data centers are part of our investment strategy moving forward. Some of the biggest U.S. developers are also big developers in Europe. We are cultivating these relationships, making certain investments to align with these large-scale developers, not only on products in the U.S. but also in Europe. We are happy with our performance today and the relationships formed, hoping that it translates into future transactions. Yes, some will be in Europe, and much will be here in the U.S.

All right. Thank you again for your help, Rocco, and thank you, everyone, for joining us. We look forward to seeing you in some of these upcoming conferences. Take care.