Sumit Roy
President & Chief Executive Officer at Realty Income
Thank you, Steve. Welcome, everyone. In the second quarter, I am pleased we were able to deliver strong results of the economy as well as the transaction market, navigate today's rate environment. We see to be real estate partners to the world's leading companies and the diligent efforts of our dedicated team resulted in AFFO per share of $1.06 representing a robust 6% growth compared to last year.
Combined with our annualized dividend yield in excess of 5% our shareholders owned a total operational return of over 11%. The power of our global sourcing and acquisition platform was on display this quarter as we deployed capital in the U.S. and Europe across retail, industrial and data center real estate, and the real estate-backed credit opportunities.
In total, we invested $805.8 million into high-quality opportunities at a blended 7.9% initial cash yield, or an 8.2% straight-line yield, assuming CPI growth of 2%. Of this, approximately $262 million of volume was invested in the U.S. at a 7.6% initial cash yield. The balance of approximately $544 million was invested in Europe at an 8% initial cash yield, including a $377.5 million investment in a secured note at an 8.1% yield issued by Asda, a leading U.K. grocery operator.
As we discussed in the past, we intend to pursue credit investments selectively, and only when it may eventually facilitate access to high-quality real estate opportunities, as has been the case with Asda. We also believe these credit investments represent a profitable means for Realty Income to participate in and benefit from the current rate environment. Furthermore, from a risk management perspective, we view these credit investments as a prudent, natural hedge to the inherent rate exposure as we have on the liability side of our balance sheet.
Providing further detail on investments in the quarter, we executed 79 discrete transactions with 55 clients, including two new clients across 22 industries. 31% of direct real estate investment volume was allocated to new sale leasebacks. Touching on our sourcing activity, we were pleased that our transaction discipline earlier this year is bearing fruit. As this quarter, we began to see a greater number of opportunities available at pricing that aligns with our cost of capital. This improvement supported the $200 million increase in transaction volume sequentially, and it drove the investment guidance increase to $3 billion in June, a 50% increase from our prior guidance. We believe the higher closed volume paired with investment spreads that are largely consistent with last quarter are signs the transaction market may be moving towards normalization.
Investment activity this quarter was funded in large part by adjusted free cash flow, which totaled approximately $200 million in the second quarter. Not having to rely on public equity enhanced the accretive nature of these transactions. The deployment of excess cash flow represents an important contributor to our growth. In fact, we believe we can utilize excess free cash flow together with our portfolio's internal rent growth to deliver an approximate 7% to 8% total operational return annually to shareholders without relying on public equity issuance. The portfolio's stabilized internal growth rate has risen in recent years, and now stands at approximately 1.5% on an annualized basis, in part because of the expansion of our European platform, where many leases are subject to uncapped CPI increases, as well as our expansion into the gaming and data center verticals, which where leases often include healthy annual rent escalators.
With the benefit of excess free cash flow, second quarter capital deployment activity resulted in investment spread of approximately 293 basis points, which like the first quarter is well above our historical spread of 150 basis points, in part due to the utilization of excess free cash flow.
As a reminder, these disclosed investment spreads utilize our short-term nominal cost of capital, which measures the estimated year one earnings dilution from raising capital on a leverage neutral basis to fund our investment volume. This is different from a higher long-term cost of capital, which applies a growth premium to our cost of equity to account for the long-term return requirements for our investors. While we remain vigilant in today's volatile environment, seeking only the most attractive risk adjusted return opportunities, we will also only utilize external capital opportunistically aiming to augment our growth rate at times when our cost of capital becomes increasingly attractive as compared to prevailing market investment yields.
An additional source of capital in the second quarter was dispositions. We utilize proprietary predictive analytic tools in combination with the insights of our asset management and research teams to drive the decision to sell 75 properties for total net proceeds of approximately $106 million, bringing the year-to-date total to approximately $202 million.
For the year, we expect to sell between $400 and $500 million of assets. As we continue to calibrate and hone our predictive analytic tools, advancing our investment pieces on each property in our portfolio, we may be more active on dispositions than in the past. We continue to optimize our portfolio composition and investment returns while broadening our use of organically generated capital to finance growth.
Another critical point of differentiation for Realty Income is the strength of our balance sheet, underpinned by our low leverage of 838 minus credit ratings by Moody's and S&P respectively, and our access to capital on a global basis. During the second quarter of 2024, the combination of internally generated cash flow and disposition sale proceeds allowed us to fund most of our investment activity without settling any newly issued equity capital while still maintaining our leverage metrics at or below our long-term targets.
Shifting to operations, our portfolio continues to generate very solid returns and to perform in a very stable fashion. Occupancy rose to 98.8% as of June 30th, a 20 basis point increase from the prior quarter. Additionally, our rent recapture rate across 199 leases was 105.7%, totaling approximately $34 million in new annualized cash rent. The size, scale, diversification, and consistency of performance from our global real estate portfolio continues to provide us with excellent visibility to revenue and is a key reason why we have not had a single year of negative operational return in our 30 years as a public company. Managing through periodic store closures is a natural part of our business model, and our top-tier credit research and asset management teams offer distinct competitive advantages, which have consistently enabled us to optimize value in these situations.
To that end, we would like to provide remarks on a few clients that are currently managing through store closures or have been in the news due to credit-related concerns. Importantly, in the context of our portfolio's size and scale, the aggregate financial exposure of potential loss rent is not expected to materially impact our ability to generate the consistent operational returns our shareholders are accustomed to. And it is important to emphasize our recent increase in earnings guidance takes all credit considerations into account.
Rite Aid, which represents 30 basis points of our total portfolio analyzed contractual rent as of June 30, 2024, is expected to emerge from bankruptcy in the third quarter. Through the remainder of the bankruptcy process, we expect to lose 12 basis points of rent prior to the resolution of assets vacated in the proceedings, which are ultimately released or sold.
Red Lobster represents 1% of our total portfolio annualized contractual rents and it is currently moving through the bankruptcy process. At present, as publicly stated, Red Lobster is targeting to emerge from bankruptcy in the third quarter of 2024. We continue to believe that our visibility into rent coverage and our master lease structure across most of our properties mitigate some of our potential risk. And while not finalized, we currently believe our recapture rate will be roughly in line with our historical portfolio-wide average of 84% for client bankruptcy restructurings.
Walgreens is considered closing certain stores. Looking out over the next two and a half years, we have leases representing only 26 basis points of our total portfolio annualized contractual rent that will expire over that time. Outside of a bankruptcy strategy, which we view as unlikely with Walgreens, these are the only stores Walgreens can legally seize contractual rent payments on once each lease expires. To provide context on historical capture rates in the drugstore industry, we have managed 166 lease expirations since 2013. 80% of these were renewed. That resulted in a blended recapture rate in excess of 100% of prior rent.
Dollar Tree, which is investment-grade rated, announced the potential split of their Family Dollar brand from Dollar Tree. If this were to result in store closings, Family Dollar leases representing only five basis points of our total portfolio annualized contractual rent are set to expire between now and year-end 2026. And of course, in the interim, they are obligated to continue paying rent through lease expiration. Our historical recapture results in the dollar store industries have been similarly favorable. We have managed 263 lease expirations since 2013, of which 86% of the clients renewed at a weighted average rate well north of 105%.
In case of our tier 1.5% of exposure, we feel the risks have notably diminished in the past 12 months. Cineworld reduced its debt by $4.5 billion through its restructuring, and AMC recently made improvements to its financial position by extending debt maturities and additional equity issues. It is important to note that in total, the rent at risk from Rite Aid, Red Lobster, Walgreens, Dollar Tree, as well as At Home and Big Lots, which is 11 basis points of rent, represents in total only 2.3% of our total portfolio annualized contractual rent through year-end 2026. And if we achieve the recapture rate in line with our long-term average for bankruptcies, which is 84%, this suggests only approximately 37 basis points of rent is at risk of ceasing, or an approximately $0.02 of AFO per share impact.
In addition, if they do take place, advance notice of potential store closures are of incremental value to us because they provide years, in many instances, to plan the optimal outcome at those locations where the client's plan is to leave while we continue to be paid rent. This $0.02 per share potential impact is manageable and is counterbalanced by the power and stability of our net lease business model, which is underpinned by diversification across more than 15,000 properties, 1,500 clients, and 8 countries on 2 continents. Hence, we believe it is important to separate the store closing headlines from the manageable impact they have on our financials.
With that, I would like to turn it over to Jonathan to discuss our second quarter financial results in more detail. Jonathan?
