Realty Income - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered resilient operating performance: revenue grew 9.5% year over year to $1.380B and AFFO/share rose 2.9% to $1.06, supported by 98.5% occupancy and 103.9% rent recapture on re-leasing.
• Estimates context: revenue was a significant beat versus consensus ($1.380B vs $1.298B; +$82M), while GAAP EPS missed ($0.28 vs $0.377), largely due to higher impairment expense; FFO/share was roughly in-line ($1.05 actual vs $1.057 est.).
• Guidance: AFFO/share 2025 guidance was maintained at $4.22–$4.28, but GAAP EPS was revised down to $1.40–$1.46 (from $1.52–$1.58) reflecting impairments and other adjustments; investment volume unchanged at ~$4B.
• Strategic pivot continues toward Europe (65% of Q1 investments), capturing attractive initial yields (~7%) and future mark-to-market rent upside in UK/Ireland retail parks; liquidity remains strong at $2.9B after recasting credit facilities to $5.38B and issuing $600M notes due 2035.
• Near-term stock reaction catalysts: sustained revenue beats versus consensus, clarity on tariff exposures (management expects negligible impact), and updates on fundraise momentum and portfolio transactions in Europe.

What Went Well and What Went Wrong

What Went Well

• Diversified growth with disciplined capital deployment: $1.373B invested at 7.5% initial cash yields, with 65% deployed in Europe, underscoring scale and sourcing advantages.
• Portfolio resilience: occupancy at 98.5% (down 20 bps QoQ but above long-term median), rent recapture 103.9% across 194 leases with minimal lease incentives (<$0.7M), and same store rent growth of 1.3%.
• Strong liquidity and funding access: $2.9B liquidity at quarter end; subsequently recast/expanded credit facilities to $5.38B (including $1.38B for the U.S. Core Plus Fund) and issued $600M 2035 notes.

Quotes:

• “Our ability to deliver reliable performance through varying market conditions remains a hallmark of our platform.” – Sumit Roy, CEO.
• “We invested $893 million at an average initial cash yield of 7% in Europe… This expansion offers geographic diversification and attractive dynamics.” – Sumit Roy.
• “We finish the quarter with net debt to annualized pro forma adjusted EBITDA of 5.4x; fixed charge coverage 4.7x.” – Jonathan Pong, CFO.

What Went Wrong

• GAAP EPS miss vs Street due to impairments: Net income/share of $0.28 below consensus (~$0.377), driven by $116.6M provisions for impairment and FX headwinds.
• Slight occupancy downtick QoQ: physical occupancy fell to 98.5% from 98.7% in Q4 2024; management attributes outsized vacancies partly to theater assets and selective vacant dispositions.
• Re-leasing to same tenant ran slightly below 100% on a handful of theater assets (dragging the sub-metric) even as total recapture remained 103.9%.

Transcript

Operator (participant)

Good day, and welcome to the Realty Income first quarter 2025 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Kelsey Mueller, Vice President, Investor Relations. Please go ahead.

Kelsey Mueller (VP of Investor Relations)

Thank you for joining us today for Realty Income's 2025 first quarter operating results conference call. Discussing our results will be Sumit Roy, President and Chief Executive Officer, and Jonathan Pong, Chief Financial Officer and Treasurer. During this conference call, we will make statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in any forward-looking statements. We will disclose in greater detail the factors that may cause such differences in the company's filing on Form 10-Q. During the Q&A portion of the call, we will be observing a two-question limit. If you would like to ask additional questions, you may re-enter the queue. I will now turn the call over to our CEO, Sumit Roy.

Sumit Roy (President and CEO)

Thank you, Kelsey. Welcome, everyone. Realty Income's first quarter results reflect the strength, consistency, and resilience of our business model, anchored by a highly diversified global portfolio. Our ability to deliver reliable performance through varying market conditions remains a hallmark of our platform. Over our history, we have strategically diversified our business model across client types, asset classes, and geographies, an approach that proves to be increasingly valuable in today's uncertain macroeconomic environment. Our portfolio is comprised of 65% U.S. retail, which includes high-quality clients that have demonstrated resilience through economic cycles. To that end, given the strength of our client base and our proactive portfolio management, we expect a negligible portion of our client base to be meaningfully impacted by tariffs, which has already been incorporated into our updated credit assumptions.

The diversification and quality of our portfolio, combined with our proven stability as an operator, position us to navigate potential external pressures effectively, as we have consistently done. Moving to the details of the first quarter, we delivered a FFO per share of $1.06, representing a year-over-year growth of 2.9%. This marks a continuation of our long-standing track record of positive FFO per share growth in all but one year over our 30-year history as a public company. This growth, combined with our 6% dividend yield, resulted in total operational returns of 8.9% for the quarter, underscoring the value of our platform. We leveraged our diverse sourcing avenues to focus investment activity where we saw the most compelling opportunities, notably in Europe.

In total, we invested $1.4 billion at a 7.5% weighted average initial cash yield, equating to a spread of 204 basis points over our short-term weighted average cost of capital. Importantly, 72% of our investment volume came from five transactions over $50 million, illustrating one of the many ways our size and scale drive value creation. We continue to benefit from a meaningful portfolio discount when competing for high-quality net lease investments in the marketplace. In the U.S., we invested $479 million at an 8.3% weighted average initial cash yield, and in Europe, which accounted for 65% of total investment volume this quarter, we deployed $893 million at an average initial cash yield of 7%. The region continues to offer compelling opportunities as we scale our business and seek to capitalize on the attractive dynamics of this large fragmented market.

Our international presence and capabilities differentiate us from most other net lease platforms. Importantly, it offers us geographic diversification, which helps navigate country-specific uncertainties. This expansion into Europe demonstrates how our entrance into new verticals can create immediate value and achieve scalability in a relatively short time. We believe our investments in talent, combined with the portability of our deep access to global capital markets, have enabled us to achieve scale without adding incremental risk to the enterprise. Turning back to the quarter, we continue to deliver strong operational results across our diversified portfolio, which now comprises over 15,600 properties spanning 91 industries and almost 1,600 unique clients. We consider our clients to be well-positioned through various economic cycles, given the inherently defensive nature of our top industries, including grocery, convenience stores, and wholesale clubs. Of our client base, over 34% are investment-grade, with average rent coverage of 2.9x.

As a reminder, over 90% of our retail rent comes from clients that we consider to offer one or more of the following: non-discretionary goods, low price points, or a service-oriented component for consumers. Over our long operating history, we have consistently found these types of businesses to be highly resilient during economic downturns. Combined with the significant diversification of our portfolio, we believe this provides investors with relative safety, as reflected in our long-term operating results. We ended the quarter with 98.5% portfolio occupancy, approximately 20 basis points below the prior quarter and ahead of the historical median of 98.2% from 2010-2024. Our rent recapture rate across 194 leases was 103.9%, with 92% of leasing activity generated from renewals by the existing client.

Consistent with our historical experience, these results were accomplished with minimal lease incentives, which totaled less than $700,000 during the quarter on over $46 million of new annual rents signed. We remained active in our approach to optimizing the portfolio. We sold 55 properties for total net proceeds of $93 million, of which $63 million was related to vacant properties. Overall, we believe our results reflect that we are operating from a position of strength as we continue to leverage our structural advantages, including a well-capitalized balance sheet, enhanced liquidity, and unmatched scale. These characteristics allow us to stay agile, work to capitalize on opportunities across our addressable market, and maintain discipline in our capital allocation decisions. Above all, the platform we have built is a direct reflection of the talent and experience of our dedicated team members.

Looking at the balance of 2025, we remain confident in our ability to deliver on our expectations despite the current market uncertainties, benefiting from our diversified platform that spans multiple geographies, asset types, and funding sources. As such, we're maintaining our outlook for 2025 FFO per share in the range of $4.22-$4.28. Consistent with last quarter's update, our 2025 forecast includes the expectation for 75 basis points of potential rent loss, with the majority stemming from properties acquired through prior M&A transactions. There have been no material surprises or incremental headwinds to our business as a result of recent geopolitical uncertainties, and while we remain vigilant, we believe our resilient, time-tested business model positions us well to navigate potential challenges. Additionally, we remain on track to deploy approximately $4 billion in investments throughout 2025.

Given the advantages of our platform, we are well-positioned to increase our capital deployment should attractive opportunities materialize. Despite market-wide uncertainty, our short-term weighted average cost of capital is actually lower today than it was when we introduced our 2025 investments guidance in late February. Before turning the call over to Jonathan, I'd like to share a brief update on our move into the private capital business, Realty Income's U.S. Core Plus Fund. This initiative represents a natural next step in the evolution of our platform and a strategic opportunity to broaden our capital sources and investment capabilities. We began formal marketing efforts in the first quarter and are pleased by the early interest and positive reception from large, well-known institutional investors. We consider this a clear indication that the differentiation of Realty Income's platform, scale, and long track record is clearly resonating in the market.

We continue to expect this will be a methodical process that will enhance our access to meaningful sources of capital over time. We look forward to updating the market on our progress at the appropriate time. With that, I'd like to turn it over to Jonathan to discuss our financial results and outlook in more detail.

Jonathan Pong (EVP, CFO, and Treasurer)

Thank you, Sumit. Fostering meaningful relationships is core to our ethos as a company, and we are grateful for the long-standing support of all of our stakeholders. Before diving into our first quarter financial metrics, I wanted to highlight two announcements we made in April that we believe are a testament to the trust our investors and lenders place in the durability of the franchise. In early April, we successfully closed on a $600 million 10-year unsecured bond offering, which priced at a 5.34% semiannual yield to maturity. We were grateful for the sponsorship from a very high-quality group of fixed income investors who participated in the transaction, which was well-subscribed amidst a volatile and uncertain economic backdrop. Last week, we announced the recast and expansion of our multi-currency unsecured credit facility to a total size of $5.38 billion, which compares to our prior facility of $4.25 billion.

The facility consists of a $4 billion revolving credit facility for Realty Income, bifurcated equally into $2 billion tranches, which initially mature in 2027 and 2029, respectively. Based on our current A3/A- credit ratings, borrowings score a crude interest at 72.5 basis points over SOFR. In addition, including the recast of the $1.38 billion unsecured facility for our U.S. Core Plus Fund, which, as Sumit mentioned, is in its initial marketing phase. The facility for the fund will be comprised of a $1 billion unsecured revolving line of credit with an initial maturity date in 2029 and a $380 million delayed draw three-year unsecured term loan. Establishing a robust source of liquidity for the fund provides meaningful debt capacity to pursue investment opportunities in the second half of the year.

From a balance sheet standpoint, we are well-positioned to remain active capital allocators with ample liquidity and modest leverage as we finish the quarter with net debt to annualized pro forma Adjusted EBITDA of 5.4x. Our fixed charge coverage ratio of 4.7x remains consistent with the 4.5x-4.7x range delivered over the last two years. Our exposure to variable rate debt remains limited, representing just over 6% of our outstanding debt principal at quarter end. As we look towards the balance of the year, we consider our long-term and permanent capital needs manageable and our liquidity and access to diverse sources of capital to be strong. We are confident in our ability to lean into opportunities should this period of economic uncertainty continue. I would now like to hand it back to Sumit to complete our prepared remarks.

Sumit Roy (President and CEO)

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

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question today is from Smedes Rose with Citigroup. Please go ahead.

Smedes Rose (Analyst)

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

Sumit Roy (President and CEO)

Great question. Thanks, Smedes. What is very compelling about Europe for us is, obviously, the investments we were able to make. 65% of the total volume came from Europe. We are targeting retail parks in the U.K. as well as in Ireland. That made up the bulk of the portfolio. What was very compelling to us about that particular set of transactions was the fact that the rents that we were underwriting were well below what would be deemed as market rents. We were getting these assets at well below replacement cost.

The fact that we are controlling a very wide swath of retail footprint is already starting to manifest itself in calls that we are getting from very large retail operators like Lidl and a few others that are very interested in helping us reposition some of these retail parks and give them a presence to continue to allow them to grow, as is their stated objective in these markets. This backdrop is obviously very favorable for investment purposes for us. That was the reason why we had the bulk of the investments coming in from Europe. Having said that, we saw plenty of opportunities here in the U.S. As you probably heard me mention, we sourced about $22 billion worth of product, and more than 60% of it was here in the U.S.

When you look at some of the credit that we were being asked to underwrite on the higher yielding side of the curve, we just could not get comfortable with the downside risk, the tail risks, if you will, on some of those credits. We are seeing plenty of opportunities. It is finding the right risk-adjusted opportunity that is compelling us to invest more in Europe today. You should kind of expect that to be the run rate for the first half of this year.

Smedes Rose (Analyst)

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

Sumit Roy (President and CEO)

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

Operator (participant)

The next question is from Brad Heffern with RBC Capital Markets. Please go ahead.

Brad Heffern (Equity Research Analyst)

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

Sumit Roy (President and CEO)

That's a great question, Brad. Look, I think we are very cautiously optimistic. What we did not want to do was try to extrapolate what we have achieved in the first quarter for the remainder of the year. There is a fair amount of uncertainty. There are a lot of transactions in the market, as our sourcing volumes would suggest. It is finding the right deals for us. Given the exogenous factors of a potentially higher interest rate environment for longer and allowing for some of the geopolitical trade-driven conditions to play out, we just wanted to be a bit more cautious. That is really the reason for not wanting to be overly aggressive in changing guidance, etc., at such an early stage. We want to be very deliberate.

We want to be very focused on making sure that if we are going to use equity, that we use it in a very appropriate fashion. That is the primary reason why we chose to leave the volume numbers unchanged.

Brad Heffern (Equity Research Analyst)

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

Sumit Roy (President and CEO)

No. No different than what we had highlighted. I believe it was in February when we were expecting some of these things to play out. I had gone through a list of clients that we felt like were more exposed to what would happen if tariffs were introduced. We feel like that's fully reflected in the numbers that we've shared with you with regards to our guidance, with regards to our bad debt expense. We feel very confident. I think Zips is a perfect example of a situation where we got 100% renewal, and we had a recapture rate of 93.3%, which was slightly better than what we had forecasted out at the beginning of the year. We feel like we did a good job of underwriting what the potential impact of some of these exogenous factors were into our portfolio.We do not expect anything new at this stage.

Operator (participant)

The next question is from Ryan Caviola with Green Street Advisors. Please go ahead.

Ryan Caviola (Analyst)

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

Sumit Roy (President and CEO)

Ryan, thank you. That's actually a very good question. Under normal circumstances, I would say that the backdrop that we are all experiencing today wouldn't be conducive to raising private capital. This is where I think we set ourselves apart. I don't know of any other company within our sector that can do what we are doing. Based on all of the conversations that we are having with these potential investors, we feel very optimistic about meeting the objectives that we have for raising capital at a point in time where, for most others, I would say, even on the private side, who have a history of raising private capital, this would be a difficult environment to raise capital. Look, we feel very optimistic. We look forward to sharing with you the results later this year. So far, so good is how I would play it.

With respect to, and I don't know if that's what you were asking, Ryan, private investors investing in our domain, we've seen a plethora of them coming in and wanting to create a net lease sleeve to their investments. They also tend to use higher leverage. One could make the argument that our product lends itself to higher leverage in the private domain. Given the cost of debt and given the elevated interest rate environment, that will continue to impede their ability to make investments in our space. Our investment profile tends to be core, core plus. In order for them to generate the kind of returns that they usually try to generate on their equity, this is not a conducive environment for them to invest.

I think for a variety of reasons, it really does lend itself to what we bring to the table, our history, our reputation. We are very hopeful of having a successful raise by the end of the year.

Ryan Caviola (Analyst)

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

Sumit Roy (President and CEO)

Thank you, Ryan.

Operator (participant)

The next question is from Haendel St. Juste with Mizuho. Please go ahead.

Haendel St. Juste (Analyst)

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

Brad Heffern (Equity Research Analyst)

Hey, Haendel. When you look at our guidance of $4 billion on the investment front, you're right. We do have $265 million of outstanding forward equity. We do have about $650 million on a run rate basis of free cash flow, which, of course, is equity-like in nature. Then debt to finance that remaining, call it $2.6 billion, and to take care of about $1.3 billion of refis that we have for the rest of the year. That's about $2.2 billion of debt that we'll raise. Obviously, given the sponsorship that we've been lucky enough to receive from the fixed-income investor base, we feel very confident across currencies that we can do that. The missing element, of course, is the new public equity that we would have to raise to fill that gap.

If you do that math, you're looking at $750 million-$800 million of new equity that we might have to raise for the balance of the year. However, that doesn't take into account any disposition activity that we might do. We feel very good about where the balance sheet is, and sources and uses of cash from here on feels very, very reasonable and modest in terms of what we need to go out and get from the public markets.

Haendel St. Juste (Analyst)

Got it. That is helpful color. One more, maybe on the other investment in the quarter, looks like a loan on a development project, yield around 10%, term just under four years. Maybe some color on who or what you are lending to, perhaps the risk profile, and then your appetite for perhaps doing more of this type of activity in the near term. Thanks.

Sumit Roy (President and CEO)

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

Operator (participant)

The next question is from Ronald Kamden with Morgan Stanley. Please go ahead.

Ronald Kamden (Analyst)

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

Sumit Roy (President and CEO)

Sure, Ron. The cap rate that we were able to establish, even absent this loan, was just slightly north of 7%. I think you should expect cap rates to be in that zip code. It is largely being driven by a fair amount of the uncertainty that exists, at least in the near term. Once we have a settling out of what is actually going to impact future capital raising and what the environment looks like from an interest rate environment perspective, you can start to feel, you can start to see some pressure potentially on the cap rates. Right now, we were expecting to see that at the beginning of the year, to be very honest, and we have not. It is a bit of a wait and see.

As the market becomes clearer around, like I said, where these policies are going to land, I think the cap rate environment is going to be a lot clearer. Having said all of that, this is actually benefiting us in some ways. Our cost of capital has improved throughout the year. The fact that cap rates are going to remain in the zip code that I've just mentioned, it allows us to create these outsized spreads, which obviously is a benefit. It does not come without risk, which is why here in the U.S., we chose not to pursue certain transactions. I do think that it will help create more opportunities going forward. We look forward to seeing how things settle out.

Ronald Kamden (Analyst)

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

Sumit Roy (President and CEO)

Yeah, again, a great question, Ron. Look, I think the way we are trying to address rent escalators is twofold. One is the organic rent increases that we are targeting. And you're exactly right. There are certain asset types, i.e., industrial and data centers, that tend to have more inherent rent escalators. The second is the strategy that I was trying to highlight that we are deploying in Europe, where we are buying assets that we feel has rent that's well below market rent. We feel like we can capture that mark-to-market on the rents come renewal times. If you see what we've done in Europe for the first quarter, I think the vault was just right around four years.

It is with an intent to capture that upside that we are inheriting or that we are underwriting is another way that we want to grow the top line without necessarily having to rely just on pure investments to drive growth.

Operator (participant)

The next question is from Greg McGinnis with Scotiabank. Please go ahead.

Greg McGinniss (Analyst)

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

Sumit Roy (President and CEO)

To anything in life, Greg, there is going to be ceilings. I will tell you, this is something that the team has done a phenomenal job on. We decided to go after retail parks because we started to see what the sum of the parks analysis was. We were targeting grocery. We were targeting home improvements like B&Q. We were essentially getting the rest of the parks for next to nothing. That is how it started. It was at yields that were well north of 8%, even 9%. A couple of factors contributed to that. One was that these assets were being held by institutional investors who were going through a natural capital recycling or their investment time horizon was coming to an end that created these opportunities for us.

Since our initial investment, which I would say was around three years ago, fast forward today, we have seen a massive cap rate compression. Now these same assets are trading in the mid-sixes. There has at least been a 250-300 basis points of compression from when we initially started buying these assets. The rents that we were underwriting to are also, based on our initial analysis, anywhere between 5%-6% below what the current market rents are. The other dynamic that we are starting to see is our ability, because we control so much of this retail space, our ability to go to some of these retailers, brand new retailers, IKEA, I already talked about a little, etc.

These are names that are coming to us and saying, "In order for us to execute on our growth plans, we would like to be in these locations that you now control." We are having holistic conversations on not only forming these relationships with these growing retailers, but potentially creating a value uplift by having them in our retail parks. I mean, I'm so excited I can keep going. We also have repositioning opportunities with extra land that we have inherited through this strategy. These are ways that we are trying to create growth, top-line growth, by executing on this strategy that we embarked upon three years ago. It has been super, super successful.

I would say in the U.K., we are in the middle innings, seventh, eighth inning of, well, not eighth, but seventh inning of a nine-inning investment cycle in retail parks. In the rest of Europe, and we're thinking Western, Western Europe for this similar strategy, it's still early days. The only other country where we own retail park is Ireland, where we just did a large portfolio. It has similar dynamics. It's accelerating our relationship with some of these very pristine retailers who want to grow and want to grow in the locations that we now control. The value uplift is tremendous.

Greg McGinniss (Analyst)

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

Sumit Roy (President and CEO)

Yes. That's a great question. What we have underwritten is a certain amount of vacancy that comes with not all parks, but a couple of parks that I would say is 1%-2% in that zip code of vacancy if you were to look at all of our retail parks. That's where you're starting to see when we are renewing either with the existing client or releasing to a new client, we are seeing a tremendous amount of uplift. Case in point, last quarter, the first quarter of 2025, we had a positive 7% recapture rate on these vacancies that we have backfilled. The CapEx involved is not substantially different from what we have been spending here in the U.S. I think in my prepared remarks, I shared that with you.

We feel very good about the strategy that we've implemented in the U.K. and now in Ireland. The flow-through is tremendous. We were doing the analysis. It has a very similar flow-through to an at-lease investment circa in the 95%-96% zip code. That's essentially our EBITDA margin.

Operator (participant)

The next question is from Michael Goldsmith with UBS. Please go ahead.

Michael Goldsmith (Analyst)

Good afternoon. Thanks a lot for taking my questions. First question, Sumit, in your prepared remarks, you made a comment about some opportunities that you looked in the U.S., but you passed because of the tail risk. I was just curious, did you bring that up just to talk about your underwriting process, or was that more just to compare the U.S. versus Europe and just the opportunities in either market?

Sumit Roy (President and CEO)

It was a combination of both those points, Michael. Obviously, when we are underwriting a particular lease term, you're taking into account the credit exposure to that particular lease and the ability of that operator to pay the rent for the duration of the lease. If you come to a conclusion that that duration is going to get disrupted, that in and of itself is not a disqualifier as long as we have a very high level of confidence that we are going to be able to backfill that position. That is not inherent to net lease investing, in our opinion. Any disruptions that we underwrite to create a timing delay in recapturing the value and a disruption in the value creation process. That's really what, whether it's here in Europe, I mean, here in the U.S.

or in Europe, we are trying to figure out what is the total expected return profile for any investment that we are making. We are pursuing the ones that yield the best outcomes, which in our case, we are finding them to be in Europe.

Michael Goldsmith (Analyst)

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

Sumit Roy (President and CEO)

Yeah. Look, this is very expected. If you see what we had shared, Michael, about where we would come out on occupancy, we had mentioned in the mid-98% zip code. That is still our expectation. We did have some outsized vacancies in the first quarter, which we have largely resolved. You talked about Family Dollar and Dollar General. Yes, there were a couple of Family Dollar assets that we did sell vacant. I'll also share with you that we have 38 Dollar Generals that came up for renewals, and we captured over 109% on those renewals. We had about five Dollar Tree Family Dollar renewals. There too, it was over 108.3% or 4%. These businesses are continuing to hold on to their assets and are continuing to perform very well, especially with the backdrop that we are all experiencing. Family Dollar is a bit of a question mark.

We'll see how it all settles out. In terms of Dollar General, Dollar Tree, those are going to continue to do well, in my opinion.

Operator (participant)

The next question is from Rich Hightower with Barclays. Please go ahead.

Rich Hightower (Analyst)

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

Sumit Roy (President and CEO)

Sure. Look, it's not any one of those things in isolation, Rich. When you're looking at, for instance, if you're going to look at something in a very discretionary business like entertainment, given the backdrop that one is experiencing, given that discretionary spending may be impacted by higher inflation, higher tariffs, et cetera, and recognizing that a particular operator within the entertainment sector may have a balance sheet that can't sustain a disruption to the top line, that's what will keep us on the sidelines. That is one of the main reasons why we try to look for certain characteristics, especially on the retail side that we've highlighted, non-discretionary, low price point, service orientation to their business.

We go to the next level, which says, "Okay, which particular sectors fall within these areas?" That does not mean we will not look at an entertainment opportunity if we are getting paid for it. If your total return is an 8% and you expect something to happen to this credit in the next four to five years, it is not really 8%. Your expected return is probably going to be in the low single digits in a good situation. Those types of assets we have stayed away from. Even on the industrial side, when we are underwriting a particular industrial asset and we feel like it is very specifically being used for that particular client and the client's business does not have the safety, the remote safety that one looks for, we are going to stay away from those very specialized builds in secondary, potentially even tertiary markets.

We saw a lot of those that we could get higher yields on. It is a fool's errand, in my opinion, where if all we are focused on is in today's yield and not underwriting to what the expected outcome is, it is not going to result in a good overall return thesis. On the private equity side, there are very good operators that actually come in and improve the operations of the business. We tend to stay away from operators who are pure financial operators, where they lever the business and they run it very efficiently. They try to extract all of the cash flows. Those are the types of situations that we try to stay away from. We have private equity operators who actually come in and are very focused on the operations of the business. Those we are far more comfortable with. It is a variety of factors, really.

Rich Hightower (Analyst)

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

Sumit Roy (President and CEO)

Yeah. Rich, you're not putting us on the spot. It's a perfectly legitimate question. Look, we feel that Plenty is going to emerge. They will emerge a much stronger company. They had a particular location here in Compton that they walked away from. They needed to go through a bankruptcy process in order to be able to do that. The main reason for that was that particular asset had they were producing leafy greens, which just could not get to the margins that they were expecting to get to. Our asset, if you might recall, Rich, has been created to produce strawberries. Today, two out of the 12 bays are in operation. The goal here is to get the remaining 10 bays in operation. They already have a takeout agreement with Driscoll.

Part of the process of going through a bankruptcy process was to, again, end up with favorable terms, etc., and emerge a much stronger operator, which is what we expect. We believe that they've also been able to attract a fair amount of private capital from some of their existing investors, i.e., SoftBank and a couple of others that want to see this particular business succeed. We feel like once they emerge, they're going to be a solid going concern. Having said all of that, let's assume the downside scenario that they don't emerge, which, by the way, is not our expectation based on the relationship that we have with them and how they're keeping us in the loop on exactly how the process is unfolding. If that were to happen, we control a very good piece of land.

We have the ability to convert this, albeit with some level of capital spend, into a distribution center. It sits right next to an Amazon site. By the way, it also has a lot of power that is coming to this site. Could we consider a data center site? Possibly. Those are the things that one would start to look into. The capital at risk is circa $40 million. That is all we have invested, and that is all we are planning on investing in this asset. The upside potential remains very, very strong.

Operator (participant)

The next question is from Jana Galan with Bank of America. Please go ahead.

Jana Galan (Analyst)

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

Sumit Roy (President and CEO)

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

Jana Galan (Analyst)

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

Sumit Roy (President and CEO)

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

Operator (participant)

The next question is from Jay Kornreich with Wedbush. Please go ahead.

Jay Kornreich (Analyst)

Hi. Thanks for the afternoon. Just wanted to follow up on you mentioning the investment volume leaning towards Europe for the first half of the year. I'm curious, as you look out towards the second half, I guess, what are you anticipating to occur, which will open up further opportunities in the U.S.? Do you expect opportunities in Europe to decelerate in the second half or just potentially have a more robust overall investment pipeline?

Sumit Roy (President and CEO)

Yeah. You're trying to unpack my words, Jay. Look, I am very hopeful that given the trend of what is happening to our cost of capital, which it is improving, we'll be able to do more here in the U.S. I'll tell you that of the volume that we sourced in the first quarter, there was about $2 billion that the only reason why we chose to pass was because we were not comfortable with the initial spread that we were making on that volume. The pricing was right for that type of product. The metrics from a real estate perspective were bang on straight. The operator that we had exposure to was ones that we've got an existing relationship with, but it was just that initial spread that kept us on the sidelines.

That is our hope that as the market stabilizes, our ability to do more here in the U.S. will get enhanced. I think Europe is on its own track, and we are continuing to be very optimistic in terms of what we can achieve there.

Jay Kornreich (Analyst)

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

Sumit Roy (President and CEO)

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

Operator (participant)

The next question is from Wes Golladay with Baird. Please go ahead.

Wes Golladay (Analyst)

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

Sumit Roy (President and CEO)

Yeah. Wes, I think we had talked about this, but I'll mention it again. Yes, there is a seed portfolio, which Realty Income owns 100%. That's what's going to go to seed the fund. We are not planning to pay down or sell down our interest, our being the public shareholders' interest in this seed portfolio. We are going to use that as a foundation to raise capital that we will then invest in new opportunities. Over time, we own 100% of the fund today, and over time, we will dilute ourselves down. We will continue to be a meaningful owner in the fund. That's where the alignment comes in. We genuinely think that the private capital is a complementary form of equity. Today, we have one source of equity.

We have heard our investors loud and clear saying, "Look, you've got this amazing platform that has the ability to invest a lot of capital." Part of the downside of that is you're constantly in the public markets. In order to create this alternative, we have decided to go down this path as a complementary form of equity capital that I believe we are the only one within our net lease space that can do that. I do not really see a major conflict. I mentioned that the initial yield is something that our public shareholders are very focused on, as they should be. It is of less importance to our private shareholders as long as we are able to meet the overall return profile that we are underwriting to.

That in itself creates opportunities for us to continue to leverage our existing platform and invest capital and then have a bit of an asset-like model for the public shareholders. Because without having to raise any public equity, we're able to generate permanent fee income that goes to the benefit of our public shareholders. That's how I see this playing in the future.

Wes Golladay (Analyst)

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

Sumit Roy (President and CEO)

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

Operator (participant)

The next question is from Linda Tsai with Jefferies. Please go ahead.

Linda Tsai (Analyst)

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

Sumit Roy (President and CEO)

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

Yes, initially, it started off as, "Hey, we're getting great assets at well below replacement cost," to, "This is a strategy we want to be much more aggressive on." Now that we do control the sites that we do, we are starting to see these strategies play out.

Linda Tsai (Analyst)

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

Sumit Roy (President and CEO)

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

Operator (participant)

The next question is from Upal Rana with KeyBank. Please go ahead.

Upal Rana (Equity Research Analyst)

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

Sumit Roy (President and CEO)

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

Upal Rana (Equity Research Analyst)

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

Sumit Roy (President and CEO)

Yeah. Upal, just to be clear, we didn't have a single asset that was rejected. All 100% of our assets were, they basically Zips continued to operate it. Where we did have the reason why it went from 100%-94.3% was we did negotiate the rent on some of their assets. That's where it went from 100%-94.3%. We did not end up having to go and find another client to step in as an operator on these assets. As part of that, we negotiated higher internal growth on an annual basis. We negotiated a longer-term lease in aggregate. We are very hopeful of them now having emerged. I believe they emerged last week with a balance sheet that is more conducive to their operations.

Operator (participant)

The next question is from Anthony Paolone with JPMorgan. Please go ahead.

Anthony Paolone (Analyst)

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

Sumit Roy (President and CEO)

Yeah. I would say overall, we're reiterating that 75 basis points for the full year. I think when you look at the footnote to the income statement, you did see that we recognized a little bit over $6 million of bad debt expense in Q1. Trending a little bit lighter for Q1. Just to stay somewhat conservative, we are keeping that original forecast, which includes some unidentified accretion in capital.

Anthony Paolone (Analyst)

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

Sumit Roy (President and CEO)

No, I would not say anything has changed in recent weeks. We just feel like we do not want to put ourselves in a box where we are extrapolating what we achieved in the first quarter and then find ourselves having to chase deals, which we would never do. We just feel like there is plenty of uncertainty right now. It is better for us to, when we have the signed contracts in place, come to you and say, "We are increasing our guidance," versus, "Increasing our guidance and then pursuing transactions that we expect will unfold." It is just how we have always done it, Anthony. You have been following us for a very long time. I just think it is prudent.

Operator (participant)

The next question is from Omotayo Okusanya with Deutsche Bank. Please go ahead.

Omotayo Okusanya (Analyst)

Yes. Good evening. The retail parks, I get everything you guys have said so far about where you see upside on a longer-term basis. I am curious, could you just talk a little bit about is there a big difference between retail parks in the U.K. versus kind of traditional big box retail in the U.S.? I think that's probably the way most of us are thinking about it. With big box retail, everyone's always worried about this intermediate strand from e-commerce and things of that sort. Is there anything really different about the retail parks in the U.K.?

Sumit Roy (President and CEO)

Yeah. I think the biggest difference is the net lease-like characteristics of retail parks, Omotayo. If you think about any capital spend that is required, i.e., you want to do striping of the parking lots or lighting or security, etc., that CapEx discussion happens upfront in any given year. All of the retailers that are out there who are on that particular retail park agree to sharing in that cost. The flow-through mechanism that we are seeing in the U.K. is very similar to what we would experience in a single-tenant asset where obviously the maintenance cost is all borne by the client. The only time it is different is when you have a vacant unit and you have business rates, etc., and that is the leakage.

That is no different than what you would have when you have a vacant unit or a vacant freestanding asset that we have because our client, either the lease expired or there was an event, and we are having to pay the insurance and the taxes as well as the maintenance of that building. From that perspective, I think that it is very akin to what we see in the net lease business. That is why you have not seen much of an impact to our margins given this strategy. Now, you mentioned omnichannel. A lot of what we have done is over the last two to three years. All these concepts that we are exposing ourselves to, including grocery, by the way, have already been experiencing the disruption elements of the omnichannel strategy.

I mean, the grocers that we have, if you look at the top four, top five grocers, they account for 75% of all internet-driven grocery expenses. These retailers, in some ways, have perfected their strategy to embrace omnichannel. Otherwise, they are no longer strong retailers today. Either they are basically surviving on their last leg or they no longer exist. I do not see that as much of an impact. What we do see is reconfiguring these sites from more discretionary use to non-discretionary uses. That is some of the examples that I was sharing with you, which will actually result in a valuation uplift as well as rent recapture uplift. That is really why we are doing this. It is different in some ways from what you experience here in the U.S.

Omotayo Okusanya (Analyst)

That's very helpful. Thank you.

Sumit Roy (President and CEO)

Sure.

Operator (participant)

This concludes our question-and-answer session. I would like to turn the conference back over to Sumit Roy for any closing remarks.

Sumit Roy (President and CEO)

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

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.