Sumit Roy
President, Chief Executive Officer & Director at Realty Income
Thank you, Steve. Welcome, everyone. We successfully executed on our strategy in the second quarter and continue to see momentum across the business. I would like to sincerely thank our one team whose focus and commitment continue to propel our business forward, serving all our clients and stakeholders. We believe the strength of our platform and quality of our real estate portfolio were evident in the quarter's results. Despite a challenging interest rate environment, AFFO per share grew 3.1% from last year to $1 per share. Combined with our dividend, we are pleased to have delivered a total operational return of over 8% on a trailing 12-month basis. Delivering stable and consistent growth is foundational to our mission at Realty Income. Underlying this growth, our team continues to source and invest in high-quality properties at accretive spreads to our cost of capital while partnering with our clients who are leaders in nondiscretionary low price point and service-oriented industries. Partnering with industry leaders across over 13,000 properties in a diversified real estate portfolio offers us durability of cash flows that results in the predictable nature of our revenues, earnings and dividend payments.
Our investment activities remain robust as we continue to demonstrate that size and scale are unique advantages in the sale leaseback and portfolio transaction markets. In the second quarter, we closed on approximately $3.1 billion of high-quality real estate investments, which brings our year-to-date investment activity to over $4.7 billion. Cap rates in our acquisitions appear to have stabilized after a meaningful adjustment period to a higher interest rate environment. Though in select situations, we continue to find unique opportunities to source and close on larger transactions where our relationships, platform and access to capital allows us to take advantage of more favorable terms. Our second quarter initial cash lease yield of 6.9% represents a 120 basis point increase compared to the second quarter of 2022 and resulted in a realized investment spread of approximately 133 basis points when calculating our WACC on a leverage-neutral basis using the cost of equity and debt raised in the quarter. In addition to closing our $1.5 billion U.S. convenience store acquisition from the EG Group, we remained active internationally during the second quarter, closing on $416 million of investments at an initial cash lease yield of 7.1%. This international activity includes the addition of a new geographic vertical in Ireland where we acquired two properties for $54 million at healthy cash yields. Given the transaction velocity, we have achieved in the first half of the year, we are increasing our outlook for investments to over $7 billion for 2023. Year-to-date, we have acquired 15% of source investment volume compared to an average of 7% over the last five years. In today's more constrained environment for capital, we have found the size and scale of our platform have become increasingly meaningful differentiators as we seek accretive growth opportunities.
Shifting to operations, our portfolio continues to perform, and we ended the quarter with occupancy of 99%, the third consecutive quarter at that level. This matches our highest occupancy at the end of a reporting period in over 20 years. Additionally, our rent recapture rates increased from last quarter to 103.4% across 201 new and renewed leases, bringing the year-to-date recapture rate to 102.7% across 377 new or renewed leases executed in the period. As further testament to the stability of our portfolio and the leading clients with whom we partner, our client watch list declined from last quarter and now represent less than 4% of our annualized rental revenue. This is the lowest level in the last five years. Finally, our same-store rental revenue increased 2.0% in the quarter, a tangible result of our purposeful decision to seek investment opportunities with higher internal growth characteristics as well as the benefit of uncapped CPI-based rent escalators, present in nearly 30% of the leases in our growing international portfolio. Our efforts to increasingly pursue leases with meaningful contractual rent escalators has helped contribute to a portfolio with contractual rent growth at approximately 1.5% per annum as of the second quarter, or 2% annual growth on a levered basis. Before turning it over to Christie, I would like to recognize the tremendous value she has brought to Realty Income, first as a Board member, and then as Chief Financial Officer. Her leadership and counsel through a very active period for our company has left a lasting positive mark as well. I would also like to congratulate Jonathan on his upcoming promotion to CFO. Christie?