I recently attended the EPRA ReThink Conference in Milan, one of the biggest annual gatherings of REIT executives and investors in Europe.
During the conference, I had the opportunity to sit down one-on-one with Realty Income (O) CEO Sumit Roy.
We discussed a wide range of topics, including the advantages and disadvantages of Realty Income’s enormous scale, its push into data centers, the rapid expansion of its private capital business, its growing European platform, and how management thinks about the company’s long-term growth potential.
Here are my main takeaways from the discussion:
The VEREIT acquisition was even smarter than I had appreciated: Realty Income acquired VEREIT in 2021 in a roughly $17 billion transaction. One aspect of the deal that I had overlooked was how it helped Realty Income solve its office problem. By combining its own office assets with those acquired through VEREIT, Realty Income was able to create enough scale to spin substantially all of these assets into Orion Office REIT (ONL). This allowed Realty Income to get rid of most of its single-tenant office exposure very early, without simply dumping the properties into the market and suffering major dilution. In hindsight, the timing was excellent because single-tenant office properties subsequently became much more challenged. To me, this is a good example of Realty Income’s management being very smart and creative to not just create value, but avoid potential losses.
Scale has drawbacks, but it is also opening doors that smaller REITs simply cannot access: One of my biggest concerns about Realty Income in recent years has been whether it has become too big for its own good. At its current size, it needs to invest billions each year just to move the needle. Roy did not dismiss this concern and seemed very conscious of the disadvantages that come with scale. But he also highlighted an advantage that I think investors tend to overlook: Realty Income can now participate in enormous transactions without creating major concentration issues. Data centers are a perfect example. A single hyperscale data center transaction can involve billions of dollars, making these investments impractical for most net lease REITs. Realty Income, on the other hand, has the balance sheet and diversification to participate at scale.
Data centers could become one of Realty Income’s most important growth verticals:
