All right, welcome back everyone, and today we are joined by a very special guest. We're joined by Sumit Roy, the president and CEO of Realty Income, a company many of you are probably familiar with and know them as the monthly dividend company. So today we'll be discussing what's happening in the REIT market right now, and we really want to dive more into Realty Income's expansion into Europe, its private capital partnerships, and opportunities in credit and data centers. And we'll connect all of that to what matters most to dividend investors, ultimately how they can continue to grow the dividend over time. So Sumit, thank you so much for joining us today.
Thank you for having me, Eli. I appreciate it.
Yes, it's certainly our pleasure. Well, before we really start to dive into everything I just mentioned, maybe for people just discovering Realty Income for the first time, give them a brief overview of what exactly this REIT is.
Yeah, it's a great question. So we are the largest net lease company, and what exactly does net lease mean? So unlike when you think about commercial real estate, the leases that we enter into are with a single building and a single tenant. That's the underlying thesis, and the leases are structured in a way where the client, the tenant, is responsible for the property expenses, the maintenance of the building, the insurance that you have to pay for the building, as well as any property taxes associated with that building. So in an environment like today where inflation is high, etc., and some of these costs could be elevated, the landlord, in this case Realty Income, is insulated from those costs because that is borne by the client. So very simply, that's the business. We are north of $80 billion in enterprise value, and we'll get into our geographical footprint, which today includes both the US as well as Europe, and we are across multiple asset types, but the single thread being single asset, single tenant is the primary investments that we've made.
Thank you for that, Sumit. But I think one of the things that's important to a lot of income-oriented investors is obviously the predictability of cash flows, and the way these leases are structured certainly provide exactly that. Now, obviously, I'm a long-term investor. I think you're probably a long-term investor. Hopefully, most people who are listening are, but we have to acknowledge in the last month really a few sectors in particular, but REITs have been hit relatively hard. They sold off. When you see that type of decline, what do you think investors are reacting to, and has anything actually changed for Realty Income?
Yeah, fundamentally not much. You know, our register of clients are continuing to perform. If you look at how we've constructed the portfolio and the exposure that we have, they are, you know, going to continue to perform well. What has changed over the last month is the expectation of where the 10-year Treasury is going to sort of anchor out, and that has seen a dramatic move. And if you look at REITs at large, commercial real estate companies that trade publicly and are structured as a REIT, they are very sensitive to movements in the 10-year Treasury. And so as the 10-year Treasury moved up, you know, the equity sold off. And as far as I'm concerned, I think this creates an opportunity for long-term investors such as yourself to say, 'This is a great buying opportunity.' You know, if you think that the 10-year is going to go from 5.3 to 6, hold off. If you think that the 10-year is going to be in this zip code, 5.3 to 5.4 to 5.5, you know, this would be a very nice entry point in my mind to lock in these valuations at these levels, which I would argue is underrepresenting the true value of a lot of these companies. And within the commercial real estate space, net lease tends to be particularly sensitive to what is happening in the 10-year Treasury. And that is part of what you've seen with Realty Income's stock as well, where we've traded off commensurate with the movement in the 10-year Treasury.
I would agree completely, and I think one of the interesting ways to think about the 10-year right now is in terms of cost of capital, which obviously is half the battle for any real estate investment trust. And I want to get to that in just a moment, but I want to talk about Europe in general before we get into that conversation. Where do you see the most compelling opportunities in Europe today? And what does Realty Income's scale allow you to do across multiple markets that a smaller competitor might struggle to replicate?
Very good question, Eli. So why did we do all of these different things? Expand into a different geography, expand into multiple asset types. It all goes back to the fundamentals around the monthly dividend company and growing our dividend quarter in, quarter out for over 31 years now. Diversification. This is one of the ways that we diversify these various different cash flow streams that allows us, with a high level of confidence, to say that our cash flow stream, and you sort of aggregate this exposure, is very reliable, is very durable, is resilient to economic conditions. Economic conditions that may impact US companies does not necessarily have the same exact impact in Europe. So this diversification is key to why we have executed the model that we have. What that has allowed us to do, Eli, is create scale as the largest global net lease business. You know, if you look at our EBITDA margin, we are perhaps the most efficiently run commercial real estate business. It's at approximately 95%. So for every dollar of rent we collect, 95 cents drops down to EBITDA. That is a very high level of efficiency, and I think part of the reason for that is largely, you know, the diversification that we've achieved. So why did we take what was a very successful US-centric business into Europe? A few reasons. One, we felt like our A-rated balance sheet was transportable across to Europe, and we were able to get even better diversification. And if you look at where the 10-year Bund is trading at, it's at 3.7, 3.6 in that zip code, 160 basis points inside of where the 10-year Treasury is trading at. So for a similar cap rate, it allows us to capture better spreads in Europe than it would here in the US. The fact that there was less competition in Europe was another very interesting element of why we chose to go into Europe. We wanted to be viewed as the consolidator. We wanted to be viewed as somebody that was at the forefront of introducing the concept of sale-leaseback to some very large companies and operators that we felt like our business model was going to be very successfully received. If you think about the Decathlon trade, which was a multi-jurisdiction, multi-country sale-leaseback, we were the frontrunners largely for two reasons. One, we happened to be in five of the seven countries that they wanted to do the sale-leaseback. Two, we were willing to write a very large check, and the certainty of close with somebody like us certainly put us in the best position to win that transaction. And so being the consolidator in Europe, the lack of competition, our ability to transfer our cost of capital, and then be part of this maturation process for this product in Europe are some of the reasons why we went there. And fast forward to today, you know, Europe represents 20% of our overall rental revenue stream, and that's diversification.
It is diversification. And it's interesting to see how quickly the presence in Europe has grown. One of the things I'm curious about is, you know, concentration, huge advantage obviously for Realty Income, but it's not just geographic diversification, I would assume. Is there some multi... I mean, how do we, how do you avoid being on the surface level concentrated from a geographic perspective while potentially holding some of the exact same tenants in Europe? Is that something that Realty Income is consciously thinking about?
Very much so. And that's why, you know, every quarter we share with you what our top 20 tenants look like. There is very little overlap between clients that we are exposed to here in the US and clients that we are exposed to in Europe, and I think once you parse through the top 20, you'll be able to come to the same conclusion that I'm just sharing with you. So it is true client diversification from that perspective, and we've already touched on some of the macro diversification. The Treasuries here don't move exactly the same as the Bund or the Gilt. Yes, the movements may be the same, but the percentage movements is certainly not the same, and so that creates diversification. And the fact that we've also been able to lean in and take advantage of mega trends like the buildout in Germany on the infrastructure side as well as defense spending, the buildout on the logistics side in Poland and in places like Spain and Portugal. We were able to be, you know, first in line to partner with some of the best global developers and take advantage of these mega trends that we are seeing and the redefining of, you know, how goods are going to move from one country to the next. Given some of the geopolitical issues that we are seeing, we were able to take advantage of that, right? And I think, you know, those are the reasons why we feel this not only geography but asset type diversification that we have leaned into. Today, industrial represents almost 16, 17% of our business. 15 years ago or 16 years ago, it was close to zero. You know, data centers is approximately, you know, 1%, but we hope that given this generational trend that we are seeing with the digital infrastructure buildout, we hope to be able to take advantage of that and build that portion of our business. And the other piece that I would say that makes us very different is we are also being able to, because we are long some of the credit already, you know, we enter into 15-year leases, 20-year leases, so not only are we comfortable with the industry, but we are very comfortable with the operator within that industry and the moat that they have developed. We are sometimes able to lend to them higher up on the capital stack to not necessarily monetize their real estate, but even lend to them on balance sheet and assist in that way and take advantage of a higher rate environment, which, by the way, I genuinely believe that this higher rate advantage is going to be very propitious for us to sort of continue to invest on the credit side with some of our clients, and I do believe that that's going to be a good investment long term. So those are the various different channels that we have to invest on the asset side of the business.
So this is true diversification in every sense of the word. And before we expand on what you mentioned right at the end of that statement, you stated data center, very small portion of the overall business right now. We know there's opportunity there. I'm curious if, you know, say we're five years in the future, what type of allocation would you be happy to see Realty Income has to data centers at that point?
That's a great question, Eli. I want to be very clear about, you know, our desire to grow our data center portfolio. We are hyper-selective. We recognize the obsolescence risk that could exist in certain markets, but this particular product, if you look at, you know, some of the announcements that we've made, we have a JV that we entered into a few years ago with Digital, and then more recently, a few months ago, we announced the Cloud JV, a $6 billion. All of those assets are in Northern Virginia, you know, the epicenter of the data center industry globally speaking. And so for us, location, you know, powered land, the operator that we are going to have exposure to, the hyperscalers or enterprise users that we are going to have 15, 20-year exposure to, the developers that we are choosing to partner with, Cloud and Digital, all of that needs to be a double check mark in order for us to be comfortable to move forward on the investment side. And that's the reason why if you look at the profile of where we've chosen to invest, you know, it sort of mimics exactly what I told you were some of the high-level criteria that we are looking for. And, you know, we fully recognize that, you know, not all of these opportunities that we are seeing today are going to ultimately, you know, get over the finish line. And so for us, choosing the right partner, choosing the right contracts, choosing the right type of leases that we have a very high level of confidence in is going to be part and parcel of how we build out, you know, our data center exposure.
Well, this is a natural segue into really what I think the bulk of the conversation should be about. In the Q2 2026 investor presentation, there's a slide that I think is quite interesting. It highlights what Realty Income 1.0 looked like from 1969 to 2010, and it goes through a few of the focuses during that time period, but ultimately the result was stable income. Then we have Realty Income 2.0 from 2010 to 2025, platform and growing at scale, which is where we start to see stable income, consistent growth, more mergers and acquisitions at a much larger scale. And then we see today, we're calling this Realty Income 3.0, which states strategic partnerships and expanding buy box. Now, for people who may not be familiar with the REIT space, historically growth has come from two primary options: either issuing shares or taking on debt. But this is a new phase for Realty Income. And so instead of me talking about this, I think people want to hear it from you, Sumit. So I'll step back for a moment. What does Realty Income 3.0 actually mean for investors?
Sure. And thank you for the setup. It's, you know, I'd encourage folks to go to our website and look at that definition more closely. Look, I think the single thread, our north star, continues to be our dividend. We are so proud to be part of the S&P 500 Dividend Aristocrats Index. We raised our dividend quarter in, quarter out for the last 31 years as a public company. And so everything that we do is centered around how do we make sure that we continue to, you know, preserve our dividend and grow it in a similar fashion to what we've done in the past. And so 3.0 is around how do we sort of continue to diversify our sources of capital? You know, like you said in your setup, there has largely been two ways that we've financed our growth, you know, either through the public equity markets or through debt. And just to put a finer point on this, our debt is one-third and two-thirds of it is equity. That's the reason why we have an A-rated balance sheet. We are A-minus, A3, and S&P just came out with our A rating. And so we don't believe in, you know, leveraging our balance sheet to try to sort of manufacture growth. But at times like this, it's a perfect, you know, situation where you see our cost of equity capital get compromised, again largely a function of what is happening in the macro environment. We have to pull, we have to rein in, we have to say, okay, the, you know, if you look at what happens on the cap rate side of the equation, it doesn't change and alter as quickly as what is happening on the cost of capital. Our cost of capital is getting marked to market on a minute-by-minute basis, but the cap rates remain very sticky. So how do we, in this environment, you know, continue to make the capital allocation decision? A couple of things: we can choose to sell assets when we have this situation and recycle that capital into higher and best use. And by the way, the use of that capital could be multiple avenues. If we think that the best use of that capital is to buy back our stock, that might be the right answer. If the best use of that capital is to invest it in higher cap rate situations, that could be another channel. But there are multiple avenues that we could play. But that would be the strategy that we would sort of lean into. However, a few years ago, we said, what if we created other channels of more stable equity capital and utilized the platform that we've already created to sort of execute the net lease strategy for these private sources of capital? And that is this next evolution for 3.0. But who is the single biggest beneficiary of that? It is our shareholders. Because without having to finance these investments, they still are able to get the management fees, etc., that managing this third-party capital allows us to generate, along with the ability to co-invest alongside, you know, some of these sources of capital. So that is the reason why we sort of initiated and launched our open-ended Core Plus fund, which we closed earlier this year. And in the cornerstone round, we raised $1.7 billion of equity, which, by the way, has been fully deployed at this point, and the assets under management are now closer to about $3 billion. And that became a channel through which we can continue to leverage a platform that already exists, all of the asset management, all of the underwriting, the credit underwriting, etc., and basically generate fee income without having to pay for it. And so that accrues to the benefit of our public shareholders, and therefore, you know, our ability to continue to grow dividends. And it's a similar thesis around the insurance capital that we've raised with Apollo and Athene here in the US and with KKR in Europe. We did a similar relationship with GIC on built-to-suit industrial assets. And part of the reason why we did that was we could start an investment on the credit side and then have a path to owning that asset once the asset gets fully stabilized, so it goes through the development phase, etc. And so we wanted a partner who would be willing to come in and step in and be the equity, and GIC is that partner, with us providing, you know, debt capital for some of these buildouts and then having the ability to ultimately own upon completion. So we're trying to be creative and not tied to what is happening in the public markets as the sole driver of whether or not we can stay and invest, you know, to grow our business.
