Realty Income Corporation (O) Q3 2026 Earnings Report, Transcript and Summary

Good day, and welcome to the Realty Income Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded. I'd now like to turn the conference over to Alex Waters, Vice President, Investor Relations. Please go ahead.

Thank you for joining Realty Income's Third Quarter 2026 Results Conference Call. Joining us on the conference call today are Sumit Roy, President and Chief Executive Officer; Jonathan Pong, Chief Financial Officer and Treasurer; Neil Abraham, Chief Strategy Officer and President, Realty Income International; Greg Whyte, Chief Operating Officer; and Mark Hagan, Chief Investment Officer. During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in any forward-looking statements. We will disclose in greater detail the factors that may cause such differences in our Form 10-Q filed with the SEC. We will observe a one question and one follow-up limit during the Q&A portion of the call to ensure that everyone has an opportunity to participate. And with that, I would now like to turn the call over to our CEO, Sumit Roy.

Thank you, Alex, and welcome, everyone. The third quarter demonstrates the value of Realty Income's evolution into a more diversified capital allocator. We've expanded the levers available to us across both investment and capital formation, broadening where we can invest and how we can fund those investments. Few companies in our sector have the same ability to mobilize capital across geographies, asset types, investment structures and funding sources in an increasingly fluid market environment. We saw the benefit of those capabilities again in our third quarter results with AFFO per share of $1.12, representing growth of 3.7% year-over-year, alongside continued strength across our operating portfolio. Based on our performance and outlook, we are raising our 2026 AFFO per share guidance to $4.45 to $4.46 while reaffirming our $10 billion investment volume target. During the quarter, we invested approximately $2.6 billion, including $2.2 billion at our pro rata share with a cash yield of 6.8% and for property acquisitions, weighted average annual contractual rent increases of 1.9%. Importantly, those investments had a realized leverage-neutral spread of approximately 170 basis points to our short-term weighted average cost of capital and 53% of investment activity was with investment-grade clients. We sourced a record of approximately $59 billion of potential investments during the quarter, bringing year-to-date sourcing to more than $120 billion, already surpassing our prior full year record. This activity represented a 4.4% selectivity rate with 92% of our investment activity being relationship-driven. Jonathan will provide details on the financing that supported these investments. Our results demonstrate the value of having multiple investment and capital levers as relative economics change. Higher long-term interest rates have shifted the most attractive investment economics towards Europe, credit investments and private capital managed co-investments. These channels provide ways to enhance our investment spreads and create additional avenues to deploy capital when rate volatility pressures balance sheet acquisition economics. Against that backdrop, Europe stands out as an area of particularly attractive relative value. During the third quarter, we invested approximately $940 million in Europe, representing 42% of pro rata investment volume at an initial weighted average cash yield of 7.1%. More than 85% of our European real estate investment volume was industrial at an initial cash yield of 6.9%. One of our largest investments during the quarter was a $180 million e-commerce logistics facility in Western Poland, leased to a large investment-grade international retailer at a 6.8% yield. The recently constructed purpose-built facility sits within an established logistics hub and supports product distribution across Central and Western Europe. It is representative of the industrial opportunities we are pursuing in Europe, modern purpose-built assets within established logistics markets that serve broad regional demand. While price discovery continues to evolve in light of the higher rate environment, we remain constructive on Continental Europe heading into the balance of the year with opportunities emerging through existing relationships and across multiple markets. Our advantage is not simply geographic reach. It is the local teams, relationships and playbook we have built to evaluate Europe market by market and act when the economics meet our standards. In addition to broadening our capital sources, we have expanded the ways we can invest across the capital structure. During the third quarter, we invested approximately $250 million in credit investments, representing over 10% of total volume across retail, industrial and data centers. Credit investments represent a compelling way to pivot capital toward superior risk-adjusted returns in response to a higher rate environment. Our credit investment strategy draws on the same discipline and real estate expertise that underpin our equity investments with a focus on high-quality real estate collateral, strong counterparties and attractive positioning in the capital stack. These investments are in industries and assets that are already prevalent throughout our real estate portfolio and with partners who are leaders in their respective industries. Importantly, the higher yields available through credit can also serve as a natural hedge to the higher financing costs we incur in a higher rate environment, further strengthening the reliability of the cash flows our business produces. We approach these investments through a real estate lens. Credit can deepen our understanding of operators and the underlying real estate across both the U.S. and Europe, while facilitating a potential path to future ownership and strengthening our relationships with key market participants. Credit is not a substitute for traditional real estate. It is a complement and another lever we can use when the risk-adjusted returns are more compelling as they are today. Industrial offers a combination of industry tailwinds and embedded growth. It was our largest area of investment during the quarter with approximately $1.15 billion invested at an initial weighted average cash yield of 6.5%, with weighted average contractual rent increases of 2.5% domestically and international leases largely tied to inflation and market rent growth. Across e-commerce, manufacturing, digital infrastructure, adjacent uses and a growing range of industrial real estate client use cases, we are finding opportunities supported by durable demand. Those fundamentals are also reflected in increasing build-to-suit activity, repeat demand from existing customers and significant contractual rent growth. Dallas industrial fundamentals remain very strong, supported by substantial net absorption that continues to outpace new supply and drive vacancy lower. During the third quarter, we acquired a large logistics park adjacent to DFW Airport. The acquired portfolio has in-place rents that are approximately 45% below market, creating meaningful mark-to-market growth potential as leases begin to roll in a few years. Data centers also remain part of our long-term investment strategy, but we are staying selective. We are focused on top-tier supply-constrained markets, experienced operators, established clients with long-duration leases and strong annual lease escalators and real estate where we have conviction in the long-term residual value. Lastly, an increasingly important part of our capital allocation strategy is using our current portfolio as a source of funding. During the third quarter, we completed approximately $527 million of dispositions, including occupied sales of $395 million at a 7.1% net cap rate. We expect disposition activity to remain elevated in the fourth quarter. Year-to-date, disposition proceeds have reached approximately $875 million, already exceeding our full year 2025 disposition volume on the heels of a more proactive capital recycling program. Importantly, our disposition strategy is not just about reducing portfolio risk. We are also selling well-performing assets when the private market value and reinvestment returns create a better outcome. Our objective is to generate non-dilutive capital that can be redeployed toward investments offering superior risk-adjusted returns. Stepping back, we have broadened both sides of capital allocation, where we can invest and how we fund those investments. That adaptability matters because the best use of capital will change over time. Our focus remains on using the breadth of the business to stay selective, pursue the best risk-adjusted returns and act with conviction as market conditions evolve. With that, I'll turn the call over to Jonathan.

Thanks, Sumit, and good afternoon, everyone. From a financing standpoint, our strategic priority continues to be diversifying and scaling our sources of efficiently priced capital. We ended the quarter with approximately $5.4 billion of available liquidity, net debt to annualized pro forma adjusted EBITDA of 5.4x or 5.2x, including $1.1 billion of unsettled ATM equity raised at a weighted average gross price of $60.61 per share. Over 94% of our pro rata debt is fixed rate and our variable rate capacity is earmarked primarily for sub-3% European commercial paper. The value of that flexibility is evident in the relationship between our investment yields and funding costs. As Sumit noted, we completed approximately $2.2 billion of pro rata investment activity during the quarter at an initial weighted average cash yield of approximately 6.8%. Based on the actual financing activity we executed upon over the quarter, we financed these investments with a blended year 1 cost of capital of approximately 5%. As a result, we generated a leverage-neutral investment spread of approximately 170 basis points. These economics reflect a deliberate effort to broaden how we finance the business so that our investment decisions are not dependent on the attractiveness of any single capital source. As relative costs and market conditions evolve, the ability to toggle through a variety of alternatives allows us to preserve investment spreads while maintaining our leverage discipline. We put that approach into practice during the quarter by accessing both the euro-denominated debt and convertible markets. In July, we issued EUR 600 million of senior unsecured notes at an effective annual yield of approximately 3.7%, drawing on the depth and lower yield of the euro market. In August, we returned to the convertible market for the second time this year, issuing $1 billion of 3.75% convertible senior notes and generating approximately $950 million in net proceeds after purchasing a capped call that locked in an effective conversion price of $83.55 per share, up 35% from the reference price in August and up approximately 45% from today's closing price. Public equity remains a modest part of our funding mix with approximately $470 million settled through our ATM program during the quarter. Clearly, the breadth of our capital alternatives has allowed us to be less dependent on the ATM equity market. Specifically, public equity funded only 19% of pro rata investment volume year-to-date compared with an annual average of 47% over the prior 3 years. An important part of that evolution is our increasing access to private capital where the recently closed KKR joint venture extends our retirement and insurance private capital strategy to a new partner and geography. As part of the partnership, KKR invested EUR 528 million for a 49% equity interest in a portfolio of 54 retail and industrial assets across 4 European countries at a 5.9% initial cap rate, including recurring asset management fees. The structure of the joint venture gives Realty Income the ability to call KKR's interest between years 10 and 17 of the joint venture to effectuate a 6.4% IRR, which represents a highly attractive long-term cost of equity with a partner that values the long duration, consistent cash flow characteristics of a diversified net lease portfolio. The strategic significance extends beyond the capital raised in this transaction. By pairing long-term institutional equity with our sourcing, underwriting and asset management expertise, we are able to leverage our leading net lease operating platform and generate recurring capital-light asset management fees, expand our buy box of investment opportunities and minimize share dilution through fewer public equity issuances. Alongside these external sources, we are funding a larger share of investment activity with capital generated within the business through both adjusted free cash flow and portfolio dispositions. Through the first 9 months of the year, adjusted free cash flow and disposition proceeds totaled over $700 million and $875 million, respectively. Together, these funding sources have enabled us to address a substantial portion of our remaining funding needs for 2026, while still preserving significant liquidity and conservative leverage supporting our A-rated balance sheet. Turning to guidance. We are increasing our 2026 AFFO per share guidance by $0.01 at the midpoint and reaffirming our $10 billion investment volume target. We are also increasing our occupancy guidance to above 98.5%, reducing our nonreimbursable expense leakage guidance by 10 basis points at the midpoint to a range of 1.3% to 1.5% and lowering our expectation for credit loss from 40 basis points to approximately 30 basis points. These changes reflect strong asset management execution and better-than-expected tenant credit. We also continue to see a healthy volume and yield outlook for fourth quarter investment activity, which is fully prefunded from an equity perspective at meaningfully accretive investment spreads. As we look toward 2027, the importance of this expanded funding strategy is not simply that we have more sources of capital, but that we can adapt our financing as relative economics change. We also see an opportunity to build on existing programmatic and strategic relationships and develop new ones with well-respected institutional investors to allocate meaningful capital to net lease strategies outside of the public market. We look forward to sharing our progress as our private capital platform continues to scale. With that, I'll turn the call back to Sumit.

Thank you, Jonathan. Realty Income has evolved considerably, but our objective remains consistent: disciplined capital allocation that supports durable per share growth and reliable income for our shareholders. Today, we have more ways to invest and more ways to fund those investments than at any point in our history. That expanded opportunity set allows us to allocate capital toward the most attractive risk-adjusted returns while accessing the most efficient sources of capital available to us. As markets evolve, we believe these capabilities leave us well positioned to drive sustainable per share growth while maintaining the discipline that has long defined Realty Income. With that, I would now like to open it up for questions. Operator?

[Operator Instructions] And today's first question comes from Michael Goldsmith at UBS.

We heard a couple of times about this 170 basis point spread to the capital raised during the quarter. I think that -- it seems like it was done with attractive euro and convertible financing. So just looking at the current investment pipeline and today's funding markets, is that 170 basis point spread that you're talking about sustainable? Or how should we think about that going forward?

That's a great question, Michael. Obviously, we've just reaffirmed our $10 billion investment. You can do the math. The good news for us is we have effectively prefunded that entire investment. So -- and we've raised the capital at very attractive pricing, which we have shared with you in terms of how much equity we have outstanding on our forward, which is $1.1 billion, raised north of $60 per share and the capital recycling as well as the free cash flow that we are going to be leaning on to help fund the remaining investments that we have. So obviously, we have very good visibility into the yields that these investments are going to make, which is more akin to the first half of 2026. And the fact that we have also got very good visibility into how we are planning on permanently financing that investment gives us the conviction that Jonathan shared with you in terms of the spreads that we are going to be able to achieve.

And then just as a follow-up, you talked last quarter about doing capital recycling. We saw some dispositions this quarter. Maybe -- I think those were sold at a 7.1% net cap rate. So can you just talk about how you can -- how you plan on redeploying that capital just given that's a little bit of an elevated cap rate to some of the cap rates that you're using to acquire? Just trying to get a better understanding of the sources and uses of this capital recycling.

Yes. So capital recycling, and I think in the prepared remarks, we tried to describe what is it that we are trying to recycle. Obviously, some of it is just pure risk management. Some of it is making sure that if we have an outsized exposure to a particular client, we are trying to take advantage of it. But a lot of it is also being driven by this mismatch in terms of where we are trading, what we are able to buy. And I want to dive into that in just a bit, and were able to achieve in the private markets, given certain phenomena that we are seeing in terms of accelerated depreciation, the 1031 market, end of the year. All of those are creating a very favorable backdrop in terms of what we can potentially recycle this capital at. And so for us, this is going to become part and parcel of how we are going to fund our investments going forward. And I've already hinted at the fact that the yields obviously, were largely driven by the type of asset types that we were investing in, in the third quarter. And what one can't lose sight of is the fact that the inherent growth rate that these leases have is 1.9%, almost 2%, which is 100 basis points north of what you would find in our traditional U.S.-centric retail business. And so if we were to be sharing with you what the straight-line cap rates are, these would be north of 200 basis points off of where the day 1 cash cap rate that we have just shared with you. And so you can't lose sight of that element. And this is something that we are leaning into aggressively. We've grown our investable avenues, with one eye towards where can we find more inherent growth, organic growth in our leases and the fact that we are leaning into data centers and industrial and retail in Europe, those tend to have well north of what our traditional U.S.-centric retail business tends to have, which is circa 1%. So this, I think, longer term is going to start to manifest itself in our internal growth structure over the entire portfolio, thus lessening the need for internal -- sorry, investments, external growth driving the vast majority of our earnings per share growth. And that is the journey that we are on.

Our next question today comes from Brad Heffern at RBC Capital Markets.

Some of your peers have talked about a faster flow-through of higher yields and higher cap rates than we would typically see in times of rising rates. I'm curious, are you seeing that as well? And then can you give any color on how much you've seen cap rates rise so far if you have?

That's a great question, Brad. If I may, I'm just going to point to some statistics, and hopefully, it's going to help frame this question around how quickly do cap rates move? What are we seeing today in terms of cap rate discussions, et cetera? August 5, the 10-year treasury was trading at a 4.63%. Literally 30 days later -- 31 days later, October 5, the treasury had hit its high watermark of 5.35%. Today, it's back down to 4.9%. And as you know, our business, and it's not just net lease, it's real estate at large, tends to mimic what is happening in the treasury market in terms of cap rates. And we have said historically that when there is conviction around where the 10-year is going to settle out, people largely start to reprice. And you see a slight lag, maybe 12 months plus/minus, of cap rates starting to reflect what the cost of capital is. I would say today, that 12 month has shrunk. There are a lot more buyers of net lease assets. There are a lot more private buyers of net lease assets. But they too are impacted by what is happening in the debt capital markets a lot more than the public buyers are, but they do form a fairly large constituent that actually are buying and selling net lease assets. And so when the 10-year is fluctuating at the rate that it is, and I've just shared with you some numbers, it's very difficult to say long term, the cap rates have now moved up 30 basis points, 50 basis points. What makes it a bit more complicated for us to answer that question in generalities is these options that we have created. We are no longer just tied to the U.S. market. And yes, the phenomenon that I can speak to about cap rate movements here in the U.S. is largely tied to the 10-year treasury. But that's not exactly what's driving the European markets or the U.K. markets. And so the fact that we can play across multiple markets, across multiple asset types really does allow us to pursue the best risk-adjusted returns. But if your question is centered around the U.S., yes, the discussions that we were having literally a week -- 2 weeks ago, the cap rate discussions were much more elevated than what we were seeing during the third quarter. And it is also true that the more institutional the potential seller is, the larger the transactions that we are considering, the easier it is for us to engage in those types of transactions because they understand this mark-to-market cost of capital concept a lot more easily than perhaps a one-off seller in the market that is tied to and more emotionally involved in the assets that they are selling. So sorry for this long drawn-out answer, but the complication of our investment thesis warranted that longer answer.

Okay. And you kind of led me into my next question as well. You talked about Europe being particularly attractive on a relative value basis. Can you just talk through why that is? I mean you obviously have the lower rate debt over there, but yields over there have risen as well.

Yes. Look, I mean, when cap rates are similar to what it is here, but we can finance our debt with 3.7% paper, long-duration debt. I mean, the spreads that one can make is obviously a lot more compelling. And these are assets that we absolutely want to increase in terms of our focus like industrial. And when we -- I gave you an example of a type of industrial asset that we pursued in Poland with growth rates well north of 2%. And having these long-duration leases in locations that we are very long on in terms of industrial markets and seeing these dynamics reflect in much higher spreads, that's why we find the European markets quite compelling.

Our next question today comes from Tayo Okusanya with Deutsche Bank.

The question is around investment volume. Again, you guys reaffirmed guidance of $10 billion. But just based on a lot of commentary today, it kind of feels like there's some puts and takes of probably what that looks like today versus maybe at the start of the year. Can you just help us kind of think through kind of what the mix looks like kind of on a going-forward basis? It kind of -- it sounds like Europe is more now versus maybe at the start of the year. Industrial is more now versus the start of the year. Just kind of curious how that mix has changed and also how maybe investment spreads may also have changed in terms of how you were thinking about it at the beginning of the year versus now?

There's a lot that you've asked there, but thanks for your question. I wouldn't say that the mix has changed. In fact, if you look at what we achieved in the third quarter and in the second quarter, it's about a 50-50, slightly less international, slightly more here in the U.S. But you can think in terms of 50-50 as the volume of investments from a geography perspective. When we came into the year, we talked about wanting to increase our allocation to data centers. We talked about increasing our allocation to industrial. And those have largely played out as we had sort of forecasted at the beginning of the year. Of course, we are not in a position to tell you precise percentages of what that's going to look like. But we shared with you the intent that we had of trying to focus in on these areas because we saw the demand drivers for both these areas of the business. And we believe our house view is that these on a risk-adjusted basis were producing the best spreads day 1 as well as the overall return profile going through a full investment cycle. And that has largely played out to be the case. What we have then done is reacted to what we are seeing in the environment today. Look, things like did we expect the 10-year to hit a 5.35% at the beginning of the year? The answer is categorically no. But here again, I'm going to point to the fact that, that, though created a headwind for making equity investments in real estate here in the U.S., it actually created opportunities with our -- through our relationships, et cetera, on the credit investment side of the equation, where we were getting exposure to the same set of real estate, but rather than buying it at aggressive cap rates, we were taking credit investments against that real estate acting as collateral and allowed us to sort of take advantage of this higher and more volatile cost of debt environment. And so yes, those evolve and we react to market conditions. But I think that is what makes us different is our ability to reflect what is happening in the overall market and be able to take advantage of that on a real-time basis. So this year -- sorry, this quarter, our credit investment was circa $250-ish million, but at a very high yield. And it's largely reflective of some of the opportunities that we were seeing, and we took advantage of that. And so I think you're going to continue to see us be very flexible and be able to sort of lean into these levers that we have created to take advantage of the best opportunities. And it is also true, just to again reiterate the fact that the pipeline that we have for the fourth quarter, it's all prefunded. And so the volatility in the public markets is not going to have any impact in our ability to realize the inherent spread that we have underwritten to. And I think the comments have been made around it being very healthy.

And our next question today comes from Jana Galan at Bank of America.

Congrats on a strong third quarter. Jonathan, with the 2026 guidance updates, you imply maybe $0.01 to $0.02 AFFO slowdown in 4Q. I was wondering if there's any one-timers to call out? Or is this just due to kind of capital markets timing?

Jana, I think a lot of it just has to do with the timing of capital deployment together with -- you are right, some flow-through of capital markets activity. But nothing to look into. In fact, when you look at the fundamentals of the business, watch list is steady. I discussed how the credit loss component of the business is coming down from 40 to 30 basis points. And you are just seeing steady investment flow. And a lot of it is going to depend on when we actually close on those transactions during the quarter. There was some one-timers here or there. But for the most part, it's a clean flow-through into the fourth quarter.

And then when we think about next year, if there's any kind of meaningful one-timers to call out that occurred this year that won't be repeating?

No. I think for the most part, you can assume a fairly steady state of transactions that we benefited from in 2026. The big one that I would call out is obviously the lease termination income. But for the last 2 years now, we've been right at around a $45 million to $50 million run rate. And just given the proactiveness of the team and just given the more natural churn in the portfolio, we would expect that run rate to hold going forward in 2027.

Our next question today comes from Smedes Rose with Citigroup.

I just wanted to ask a little more about the credit investment that you highlighted with the higher yields and a 10% of volume. Are there any kind of parameters you think about in terms of the most that would be as a percent of volume or a dollar amount? And I was just wondering, do you originate these loans directly with the borrowers? Or is there another source where you are able to get these loans?

Yes. Good question, Smedes. What I'll ask you to do is we've talked a little bit about the strategy behind our credit investments. I think there are multiple reasons why we believe that credit investments makes a lot of sense at points in time in the economy. When we are faced with headwinds on the refinancing side with this higher interest rate environment, if we can make investments that can sort of dull that headwind by taking advantage of opportunities that we are able to generate directly with existing relationships, that is a major plus. And we are structuring these transactions in most cases, with higher collateral, less LTV, higher rates than what we would be able to do on the equity side of the equation. And what it allows us to do is obviously continue to strengthen our relationships with these existing potential clients and allows us to understand, especially if it's an asset that we are not very familiar with in a particular geography. It allows us to understand how those assets perform. It allows us to strengthen the relationship with these clients and clearly hedge some of the potential headwinds that one experiences in an elevated interest rate environment on the financing side of our business. So for reasons such as those, I think it is -- makes a lot of sense for us to make these types of investments at points in time. I would say that -- and we made this point very clear, one shouldn't say, "Oh, credit investments is now a substitute for what we are doing on the equity side." The vast majority of what we're doing, above 90% is still our traditional business. You talked about what is the allocation going to look like? We're going to be very much focused on some of the points that I've made. Is this a natural hedge to some of the finance -- the refinancing headwinds? And it's not unique to us. It's across the entire sector that we are going to experience in this elevated 10-year treasury environment. And how much makes sense for a balance sheet that has $85 billion, $90 billion of assets. That's what's going to govern what is the appropriate amount of credit investments that we should make. We are acutely aware of the reinvestment risk, et cetera. And so there are inherent breakers, if you will, that's going to dictate what this allocation needs to be. And I can tell you that we are not anywhere close to hitting those allocation numbers.

This may be provided or maybe you don't provide it, but what sort of -- I guess, the duration of that loan book, if you will, about potential reinvestment risk there?

We actually provide it on a quarter-by-quarter basis, what is the inherent length. And what we are trying to do, again, because it is so bespoke, that we are able to get a much longer duration on some of these more structured transactions. But today, that was right around 3.4 years was the credit investment we made in the third quarter.

And our next question today comes from Ron Kamdem at Morgan Stanley.

Just want to go back to the data center opportunity. Just given sort of rates, regulatory, everything we've heard, just anything changed in that opportunity or deal flow?

Great question, Ron. I'm going to have Mark speak to the data center business.

Sure. Thanks, Ron. Obviously, there's a lot going on in the data center sector, and we've all seen both the increase in power constraints and the increase in community concerns about power costs and water usage, AI, et cetera. So we're acutely aware of that and closely following that. But having said all that, we still are very constructive on the asset class and its match for our strategy. Again, I think what's really important, and you've probably heard us say this in the past is -- so we are still constructive on investing in data centers. However, we're going to continue to be highly, highly selective and very disciplined in sticking to what we laid out before as our core strategy, which is staying in top-tier data center markets, partnering with developers who are -- who have done this for a long time and are skilled at getting power and working through issues and so forth, having our tenants in the data centers, our clients be the strong IG hyperscale type profile clients and getting lease structures, duration, rent bumps and even ideally triple net lease provisions that really do protect us. And so obviously aware of and closely monitoring everything that's going on regarding the industry, but still remain constructive, but we will still remain highly selective.

Our next question today comes from Haendel St. Juste with Mizuho.

Sumit, I was hoping you could share a bit more about the new European JV here. Maybe some color on the target size fully deployed, including leverage, return thresholds, time line for deployment and how you're going to determine what goes into that JV versus on balance sheet for Europe?

Haendel, it's Jonathan. Are you referring to the KKR JV? I presume, yes?

Yes, yes.

Yes. So first of all, it's an unlevered JV. We would expect any future tranches to continue to be unlevered. Look, this is very similar to the Apollo JV that we did in the U.S. And what goes into this, obviously, ceded off our portfolio, very stable, fairly good duration, very fragmented portfolio, everything that you would expect insurance capital to be desiring. The net lease business model is uniquely positioned to work for this. On a go-forward basis, this is just part of the toolkit. The insurance JV won't be the only form of equity that we issue, but it is a very significant form of permanent equity, and that's part of what allowed us to deliver such attractive investment spreads on a leverage-neutral basis in the third quarter since the IRR that we effectively locked in was 6.4%. And a lot of that is based off of just being euro-denominated and lower base rates. On a go-forward basis, I would say expect more of the same. There's a different buy box that goes into these insurance JVs, and it does tend to be more of your lower initial yield, but very long duration, very diversifiable type of properties. And so I would expect some of the more stable, perhaps higher credit long duration type of properties to go into that and some of the higher return assets would go into other vehicles.

Jonathan, that was helpful. And since I have you, a follow-up is on the balance sheet here and the near-term debt maturities. I think you have another $2.9 billion, almost $3 billion next year at a sub-3 rate. So curious on kind of the initial thoughts on addressing that. And can you remind us what the weighted average rate on the new cost of debt you were able to raise this year versus the expiry? I know you had a similarly low coupon this year. So just curious kind of what we can learn from that to perhaps give us some sense of what perhaps the tools -- the leverage -- the different levers you're able to pull for addressing next year's maturities as well.

Yes. Haendel, look, it's no secret that we do have quite a bit of debt maturities next year, about $2.9 billion at 2.9%. But we've got more levers to pull than ever before. I think the big key and big differentiating benefit that we have is access to the euro market. So if you look at the cost of the 10-year fixed rate unsecured debt right now, the euro market is about 80 basis points inside of the U.S., and it's about 140 basis points inside of GBP. So while it's going to be hard to replicate the cost of debt that we were able to execute upon in 2026 because base rates are up pretty significantly, we do have the ability to play across the curve, especially on the euro side. And I think we've talked about this quite a bit, but to the extent we do have the euro-denominated acquisitions, we do tend to finance that with 100% euro-denominated debt. And then we blend out across the overall enterprise to stick to our 1/3 debt, 2/3 equity capital structure. But the fact that all of our debt can come from a currency that has meaningfully lower cost means that we can not only finance the growth in our business, but potentially even refi maturing U.S. dollar debt at lower rates than we would otherwise have to stick to that same U.S. dollar currency. So more to come on that front, but I do think we've developed a pretty good mousetrap to minimize the interest rate headwinds. There will be some next year, but we've got tools to minimize that.

Our next question today comes from Alec Feygin with Baird.

Just one for you, Jonathan. You gave some color about the moderate use of public equity in funding year-to-date. Do you expect that 19% number to be the new normal going forward?

A lot of it's going to depend on where the stock is trading. I think for us, there are certain components. One component is just structurally, we want to keep that public equity issuance to be as low as possible in any given year. All that said, if there is a better cost of capital for us utilizing public equity, we won't be shy about doing it. But I think at these levels and the ability for us to monetize existing real estate that we have on our balance sheet at cap rates that are nondilutive and potentially even accretive, we're going to push on that lever to the extent that we can. I think insurance JVs that will also serve as a source of permanent equity. But that also is tied to 10-year yield to a certain extent. So I think all of these things will come into the mousetrap of how we finance our deals. But I would say the days like 2023 when around 60% of our investment volume was funded through public equity, those days are highly unlikely of repeating again.

And our next question today comes from Linda Tsai at Truist.

Have you rank ordered the relative attractiveness of different sources of capital available to you as you look towards funding your '27 acquisition pipeline?

Linda, it's Jonathan. So I would say at the very low end, the most attractive is obviously European commercial paper because we can issue 30- to 60-day paper at 2.9%. And that gives us a very attractive carry as we're closing on transactions in the Eurozone. All that said, that's not a long-term or permanent source of financing. So then you start going up the curve on tenor, again, staying in the Eurozone, everything in the Eurozone to the extent that we are making acquisitions there gives us the flexibility to finance both debt and now equity with KKR via currency that has much lower rates than in the U.S. So I would say European commercial paper, European euro-denominated unsecured fixed rate debt, euro JVs. And then I would start from the U.S. dollar side in that same order as well.

And then when you look at the various strategies to drive durable growth, different investment types, retail, industrial, data centers, gaming, credit, on balance sheet, U.S. Core Plus fund JVs in different geographies, how do you think about the different multiples these levers represent? And what kind of premium do you think you should arrive at for your valuation?

Linda, you're obviously very familiar with our business. That was a good iteration of everything we're doing. But all of that needs to translate to AFFO per share growth. And that is the singular focus behind all these different levers that we have newly incubated, reestablished, what have you. And if that doesn't happen, then it's just an enumeration of different things that we are being able to do, but does not actually result in the most important metric that we track internally, which is our AFFO per share and more importantly, our AFFO per share growth. So I think your first question was the right one. What are the sources of financing that we have available that can help trap or permanently finance the spread investing that we are known for? And the more growth that we have, the better we can grow our dividends, et cetera, which is what is also incredibly important to a certain constituent on the retail side of our business. So I think what you need to take away from all of this is that given all these different avenues that we've created for ourselves, we have a lot more optionality. We are no longer tied to one geography. Things are moving much faster today than they used to 10 years ago, and I just talked about the volatility just here in the 10-year treasury market. And our ability to take advantage of where those highest risk-adjusted returns exist is what makes us different. And it will translate to a business that is more diversified, is less tied to the overall economy and is continuing to drive growth the way you have recognized Realty Income to be able to do in the past. That's the message. And you're starting to see some of the benefits of that in how we were able to prefund our third quarter, how we are able to, with a very high level of conviction, talk about our fourth quarter, et cetera. And it is because we are a very different company today, I would say, more diversified and safer. If you look at our AFFO payout ratio, it's amongst the lowest it has been in the history of Realty Income. And so that's who we've become, and we will continue to lean into that. And all of these different avenues that we've created will allow us to become the company that we want to become, which is we are much better off today than we were in the past, and we'll become even better off in the future than we are today.

Our next question today comes from Jason Wayne at Barclays.

Just in the third quarter, you were a bit more selective on the deals that you looked at versus the rest of the year. Just curious what's driving that and what the selectivity rate looks like on the deals you're looking at for the programmatic JV platforms?

Sure, Jason. It's Mark. Let me take that one and feel free to add in the rest of the team. So great question. Yes, we sourced, as Sumit said earlier, $59 billion in Q3, which was a record quarter for us. I think that going to your question of the selectivity ratio is the high percentage of that was actually from industrial and data center sourcing, which was circa 65% of that volume that we sourced. And so clearly, as I mentioned on one of the other answers, with respect to the data center volume that we sourced, our high selectivity on those assets and our discipline there and sticking to our core strategy leads to us naturally sourcing opportunities and not closing on as high a percentage of them. And I would say that on industrial, which is, again, a large percentage of what we sourced, there's just a lot of competition for industrial assets oftentimes at lower cap rates than perhaps other things. And so it's really that which led to that slightly lower selectivity ratio than we've had in the past. You asked the second part of your question, though. And if you could just repeat the second part of your question, please.

I think, Jason, you talked about our private capital investments. Is that right?

That's right. Yes.

Yes. So that strategy has not changed, Jason. In fact, we were able to raise almost, I think, $38 million, $39 million of equity capital for our open-ended fund, which was great to see because we -- I think in a previous call, had mentioned that this is -- the next few quarters will be us establishing our record and showing to the market that we are outperforming the ODCE Index. And the fact that we are getting inbounds, et cetera, is again very attractive. And obviously, it's a testament to the team and the performance that they are generating. But the strategy remains consistent. These are high-growth investments, lower yields that we would not be able to do on balance sheet and has a total return profile that is very compelling and will be -- will allow us to generate the Core, Core Plus returns that we have promised our investors. And we are, at this point, fully deployed on the equity side, including the new capital that we have raised and are super excited about the prospects going forward.

And our next question today comes from Jamie Feldman at Wells Fargo.

So I was just hoping you could talk more about the pipeline of capital, especially insurance capital. Clearly, you're growing this business pretty rapidly. How big is that pipeline looking for investment? And is there -- are there certain -- whether it's regions or property types that it wants you to focus on?

Jamie, it's Jonathan. So I would say, look, the underlying capital that is looking for this type of product is massive. That wouldn't be the issue. I think for us, as we think about what works for our business, we have to think through, okay, at this point in time, I don't know if we'd be able to get the same type of capped IRRs that we were able to get with KKR at 6.4% (sic) [ 6.408% ] and then Apollo at 6.875%. It's a different rate environment today. So I think right now, we'd probably be a little bit less eager to do those at current pricing. But obviously, if cap rates start to move higher and we see that spread math continuing to work, then this remains a very viable thing that we could do. And I'm not concerned about the appetite from folks like the ones that we partnered to do more of this and scale.

Okay. And then second, it sounds like you want to grow pretty meaningfully in Europe or see good opportunities, both for financing and for investment. A lot of news coming out of Europe also just in terms of fiscal issues and I don't know if I'd call it unrest, but certainly headlines. Are there certain countries that are just you're not interested in? Or are these investments so property specific that it almost doesn't matter what the overarching fiscal situation is or political situation is in countries? Or are there some countries that you're very willing to go into and some you're more hesitant?

Well, Jamie, you're absolutely right. There is a fair amount of turmoil in Europe. It started off in France. It's leaked into Italy. It's gone into the Benelux countries. And we are acutely aware of the political turmoil. But I think your instinct, though, in terms of what do we invest in, even on the retail side, what is the kind of retail that we invest in, and then, of course, on the industrial side of the equation, we are -- I'm not going to use the word insulated, but largely not subject to the issues that have recently come up in some of these countries. And so even the investments that we have in France, none of which were impacted by the -- by some of what you experienced in France, and clearly, the stuff that was happening in Northern Italy, et cetera, did not have any impact either. But just given the type of retail investments we do, which is essential, which is grocery, which is home improvement, et cetera, and where they tend to be located, retail parks that are not in city centers that they tend to be in the suburbs, et cetera, they are much more insulated, even though I said I wasn't going to use that word, from these types of turmoil than middle of the city, main and main and where these instigators can have a much bigger impact, I think, is part of the reason why we are seeing what we are seeing. So we feel largely insulated from these flare-ups that have occurred. And we feel very confident that the kind of investments that we are making are ones that will -- in the long list of priorities of impact, they'll be the ones at the bottom that will get impacted by these types of flare-ups. So we feel pretty good about that.

Our next question today comes from Greg McGinniss at Scotiabank.

Sumit, to ask a bit more directly and kind of reading between the lines on your commentary on credit investments, should we expect to see a more significant percentage of credit investments in Q4 and early next year compared to year-to-date, either until the cost of capital improves or real estate cap rates modulate higher? Or will Europe be filling that gap instead?

Look, I don't think -- I'm not going to give you answers on a quarter-by-quarter basis of what percentage our credit investments will represent. But what I will tell you is that -- and I think I've rationalized our investment thesis around why credit investments make sense. It is not going to dominate our investment allocation across the board. And I've already mentioned that we've got an $85 billion, $90 billion balance sheet. This will represent a subset of that, a very, very small subset in the single digits of allocation. And so the other thing I want to make sure that, Greg, you sort of appreciate is a lot of what we are doing is on a bespoke basis. And some of the transactions that you're going to start to see will have a look and feel that actually resembles an equity investment in the terms of duration, et cetera. But what's going to be very unique about these investments will be that it has a much higher yield with a lot more collateral where the debt component is going to represent a much lower LTV than a straight-up sale leaseback would. And that only happens because of the relationships that we have, the assets that we would like to sort of be exposed to, but not necessarily on the equity side because it is too expensive to play in that area. And so that's going to dictate the types of investments we're going to make. And this headwind that Jonathan just talked about from a higher rate environment on the financing, this does help mute that headwind by taking advantage of this higher rate environment. So I think that's the filter through which you should think about our credit investments. But it's not going to suddenly represent 15% or 12% of our overall balance sheet. That is not the intent.

Right. Okay. And then separately, when might we expect to see a second swing from Apollo or KKR that will help demonstrate the programmatic nature of the joint ventures? I'm not looking for specifics here, maybe just a nod as to whether or not that's expected within the next year. And then would those investments also require that adjusted spread math that Jonathan was talking about?

Yes, Greg, I think there's so much demand right now because the annuity origination business is driving demand for this type of paper backed by real assets. And so again, I would reiterate the optionality really rests on us. And again, I'll say the 6.875% with Apollo, I don't think that deal is there today because base rates are much higher. And so then we have to think about all the other sources of equity we have. We obviously have over $1 billion of free cash flow today. Dispositions are going to be a bigger and bigger part of our business, and it's going to be at cap rates that are nondilutive. We do have $1.1 billion of public equity that's still outstanding on a forward basis. And so we could be patient. But if we're not keen on raising equity at certain AFFO yields, I don't think we'd be keen on raising insurance JV equity at close to those yields either. Now the longer-term benefit is that we effectively keep all the upside in the leases because it's a capped IRR concept. But we do have to be mindful that if we want to be a modest user, maybe $1 billion, $1.5 billion a year of this type of equity like we did last -- this past year, do you really want to use it at a point in time where the rates are still fairly elevated? So TBD, but I would expect it to be $1 billion to $1.5 billion based off of our current run rate of acquisitions on an annual basis.

Our next question today comes from Eric Borden at BMO Capital Markets.

Jonathan, with the credit loss outlook coming down to 30 basis points, was there a specific tenant situation that resolved better than expected? Or are you mainly like releasing the cushion for unidentified losses? And then with the lower bad debt guidance in place, how does that change your calculus for the starting point for next year?

Eric, so I think for us, when you take out the pandemic year, we've been closer to about 20 to 21 basis points of credit loss on an annual basis. So coming down to 30, I would say, yes, part of it is releasing some unidentified cushion that we may have had. And obviously, sitting here in November, we have much better visibility. So 30 is probably even in and of itself, a little bit of conservatism as well. So say we're kind of inside that range by a bit. We're back to where we've historically been. Last year was a bit of an outlier just given all the M&A-related credit loss that we absorbed, that we expected and underwrote, but it all happened last year. So on a go-forward basis in 2027, I would expect us to kind of continue to chug along at very similar credit loss rates that we've experienced historically. So kind of in that 20 to 30 basis points range. You always want to be slightly conservative at the start of the year just because you don't know what's going to happen and then you release that unidentified portion as you get deeper and deeper into the year. But there's -- looking at the watch list today, looking at the health of the portfolio and the diversification of the portfolio, we don't see anything in the numbers or the analytics that would suggest there'd be any outliers above and beyond kind of that normalized run rate.

Great. And then just one on the industrial portfolio in Dallas. Just curious how much of that 45% mark-to-market can you capture over the next 3 to 5 years? And if there's any renewal options or other lease terms that could potentially delay that upside to you guys?

Let me take it. It's Neil here. So 100% of that is achievable in the next 3.5 years.

Our next question today comes from Jay Kornreich at Cantor Fitzgerald.

You added a new JV partner this quarter with KKR. And so I was just wondering if you can give any perspective as to how many other differentiated strategic partnerships you envision forming or if there's any examples you can provide of new strategies you'd like to implement?

Jay, I think we'll probably keep any new ideas or strategies under wraps. I think we've talked about this before. There's a very long incubation period for a lot of these strategies to go from concept to negotiation to closing documents. And so -- but I would continue to reiterate what we've been talking about. It seems like for the last 2 years that our #1 goal on the finance and capital market side is to create vehicles that are deep, programmatic that expand the buy box that have very little overlap amongst strategies and that avoid us being beholden to the public equity market. And so whether it's other strategic partners that value this operating platform, and there are many, I think what you start to realize when you start having these conversations is that having the track record, the size of the company, the institutional knowledge, the access to more data than anyone, all of those components are very much valued by very sophisticated and large institutions. And as you can see, just based off of the headlines, there's a lot of institutions that are looking to build net lease platforms themselves or acquire smaller ones. So if we have the ability to leverage that platform and to monetize our platform in ways that are unique to us, we're going to take advantage of that. And we're going to do it from the standpoint of very clean governance to ensure that we're not having too many strategies overlapping one another, whether it's by currency or return profile.

And our next question comes from Ryan Caviola at Green Street.

You've been transparent in this call that your interest has shifted away from U.S. retail and also seems to be the source of the ramp-up in dispositions with retail rent dipping in dollar terms this quarter. Where do you see U.S. retail settling in the long term as a percent of the portfolio? And what would have to change in the industry to make it attractive again?

No. We love U.S. retail, Ryan. I mean the idea is we are obviously finding opportunities that have better risk-adjusted return profile than what we are finding here in the U.S. It is also true in terms of inherent growth, et cetera, that U.S. retail tends to have a lot less of the internal growth outside of the more higher-yielding retail opportunities here. But then are you getting paid for the risk that you're assuming with those higher-yielding retail opportunities? And that's -- different people have different conclusions on that. And so for us, it's about, hey, where can we find higher internal growth, better risk-adjusted returns? And right now, we are finding it in areas that we have highlighted during this call. But 78% and let's say, the vast, vast majority of that 78% is U.S. retail. And so some amount of repositioning is warranted to come up with a much more balanced, more diversified portfolio. And I think that is what's driving where we are investing and some of the commentary that we have shared with the market, Ryan.

And that does conclude our question-and-answer session. I'd like to turn the conference back over to Sumit Roy for any closing remarks.

Thank you very much for joining the call, and I look forward to seeing a lot of you at Nareit. Thank you, Rocco.

Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.