Realty Income Corporation (O) Earnings

Management highlights

- Capital Structure Initiatives • Diversified equity capital sources have reduced reliance on public equity markets: public equity represented only 18% of year-to-date investment volume, down from a 47% three-year average • Year-to-date, the firm settled $825 million of forward equity to support $4.7 billion of pro rata investment activity, while maintaining leverage at the 5.5x target level • Leverage benefits from recent capital initiatives that diversified equity sources and lowered blended cost of debt • Open-ended fund structures and programmatic joint vehicles are structured to deliver permanent, growing fee income long-term - Portfolio Strategy • Disciplined execution across the platform maintains a high-quality portfolio, with disciplined capital allocation at attractive yields • The firm is actively pursuing capital recycling: selling lower-conviction assets to redeploy capital into higher-quality opportunities that improve key portfolio metrics including internal growth, lease duration, and credit quality • Industrial real estate (specifically single-tenant industrial) remains a core focus, with demand driven by broad-based sources including manufacturing, onshoring, and data center equipment storage, rather than only e-commerce • Data centers are a targeted growth opportunity, with the firm pursuing long-duration (15-20 year) leases with investment grade hyperscale/enterprise tenants, and actively managing tenant concentration risk • Credit investments are used as a relationship-building channel to access development-phase real estate, with higher yields reflecting development-phase risk, and are not intended to become a large balance sheet holding - International Operations • European investment pipeline remains strong, with focus on grocery, DIY, and industrial/logistics, including development driven deals tied to onshoring and advanced manufacturing • Countervailing competitive dynamics in the UK: high debt costs are offset by strong institutional capital inflow that is pushing cap rates down, with upward cap rate pressure only seen in Germany - Fee Income • Management fee income totaled $3.2 million in the second quarter, $3 million from the fully deployed $1.7 billion cornerstone U.S. Core Plus Fund, plus $0.2 million from the March announced insurance joint venture; full year expected fee income is ~$10 million from the fund and $2-$3 million from the insurance JV

Guidance

- Full-year 2026 AFFO per share guidance has been increased to a range of 444 to 445 - Full-year 2026 total acquisitions guidance has been increased to $10 billion, up from the prior guidance of $9.5 billion, reflecting a strong investment pipeline and management confidence in sourcing and executing attractive opportunities - The firm's share of 2026 investment is expected to be approximately $9 billion, with almost all new investment going to the on-balance sheet portfolio, as the U.S. Core Plus Fund has fully deployed its initial cornerstone equity and only has remaining leverage capacity to deploy - 2026 credit loss guidance is maintained flat at approximately 40 basis points of rental revenue, reflecting stable portfolio credit performance - Full-year 2026 lease termination income guidance remains unchanged at $45 million to $50 million, following $1 million recorded in the second quarter - The AFFO guidance increase is driven by de-risked capital markets execution, stronger than expected investment pipeline visibility, improved clarity on deal closing timing, and stronger underlying business momentum

Segment performance

Segment performance is not broken out into separate product segment financial results with absolute values or revenue contribution percentages in the provided transcript. Management does mention specific business channels including on-balance sheet wholly owned acquisitions, the U.S. Core Plus Fund, joint ventures for data centers and insurance, credit/loan investments, and international European investments, but no separate financial performance metrics are provided for these segments in the available text.

Risks & headwinds

- Cap rate risk: If 10-year Treasury rates remain elevated between 4.6% and 5%, cap rates will eventually need to adjust upward despite competitive dynamics that are currently keeping cap rates compressed - Data center obsolescence and residual value risk: Management addresses this by focusing on prime locations, long 15-20 year leases with minimal landlord responsibility, and running downside scenarios including zero residual value assumptions, but long-term obsolescence risk remains - Public equity market volatility: The firm's diversification into private capital is designed to reduce exposure to volatile public equity funding, but reliance on public markets will continue depending on market conditions - Concentration risk: The firm actively manages tenant concentration for the data center portfolio, but concentration risk remains a key monitoring point - Credit risk: The portfolio watch list remains at ~5.5%, concentrated in home furnishings and casual dining, though exposure is granular with the top risk tenants representing small individual shares of the portfolio - Interest rate and refinancing risk: The firm has a naturally hedged loan book with debt maturing annually, which balances reinvestment and refinancing risk, but changing rates still create uncertainty for financing costs - UK market risk: Elevated debt costs in the UK create headwinds for attractive risk-adjusted returns, despite current competitive demand that keeps cap rates low

Analyst Q&A

• Q: The firm's Q acquisition cap rate was 6.4%, lower than last quarter. Is this due to competition, and how should accretion be viewed for this level? /

  A: The 6.4% cap rate is by design: over $600 million of lower-yielding assets were allocated to the U.S. Core Plus Fund, which accepts lower initial yields that do not meet on-balance sheet accretion hurdles. The remaining on-balance sheet portfolio still meets the firm's historical 150 basis point spread target, bringing the overall blended investment yield to 7.4%.

• Q: How much of the 2026 $10 billion acquisition guidance will go to on-balance sheet vs. third-party funds/JVs, and will new private capital channels be added in the next 6-12 months? /

  A: $9 billion of the $10 billion 2026 guidance is for on-balance sheet investment, as the Core Plus Fund has fully deployed its initial $1.7 billion cornerstone equity and only has ~$560 million remaining leverage capacity. Additional joint ventures with developers for new asset classes like data centers are possible, and the firm expects to add new permanent private capital channels over time, with minimal overlap between sources to maximize platform efficiency.

• Q: What is the strategy for data center investments, including downside risk mitigation and portfolio size targets? /

  A: Management actively mitigates downside risk by targeting 15-20 year leases with investment grade tenants in prime locations, and runs multiple scenarios including zero residual value to test returns. The firm does not have a fixed target for what share of the portfolio should be data centers, and will only pursue transactions that meet the firm's long-term return hurdles, with multiple opportunities currently under discussion.

• Q: Why was AFFO guidance increased, what drove the 2 cent midpoint hike if credit loss and fee guidance was unchanged? /

  A: The increase is primarily due to reduced execution risk from completed capital markets transactions (debt, cross currency financing, and priced forward equity) and much clearer visibility into the strong deal pipeline and timing of deal closings, which gave management more confidence to raise the full-year outlook.