Speaker 1:

From the New York Stock Exchange, at the corner of Wall and Broad Streets in New York City, welcome Inside the ICE House. Our podcast from Intercontinental Exchange is your go-to for the latest on markets, leadership, vision, and business. For over 230 years, the NYSE has been the beating heart of global growth. Each week, we bring you inspiring stories of innovators, job creators, and the movers and shakers of capitalism here at the NYSE and ICE's exchanges around the world. Now, let's go Inside the ICE House, here's your host, Lance Glinn.

Lance Glinn:

Welcome in to another episode of the Inside the ICE House podcast. Our guest today, Sumit Roy, is CEO of Realty Income Corporation, that's NYSE ticker symbol O. Since stepping into the CEO role in 2018, Sumit has led Realty Income through a period of strategic evolution. We welcome him to the New York Stock Exchange to discuss how Realty Income is addressing the growing demand for stable income in retirement, its role as a capital partner to global enterprises, and how he and his leadership team are shaping the company's next chapter. Sumit, thanks so much for joining us Inside the ICE House. I really appreciate it.

Sumit Roy:

It's my pleasure, Lance. Thank you for having me.

Lance Glinn:

So, since stepping into the CEO role in 2018, Realty Income has evolved, like all companies have. Just take us through first, as we begin our conversation, the strategic vision that has guided this evolution from day one of your leadership, and how since that first day, you, and the team around you, have really mapped out a path to growth and success for Realty Income.

Sumit Roy:

Thank you, Lance. If you don't mind, I'll step back a little bit even further, and go back to the ethos that basically dictates everything we do within the four walls of Realty Income. To our founders, in 1969, they came up with the idea of income generation and capital preservation. That was really what was driving their business, and the idea of net lease formed in their earlier decisions that they made about what they want to invest in, et cetera. And it was 100% retail. There was an entire sector of retail that wasn't being banked, and they were looking for alternative capital. And fast forward to 1994, we listed on the New York Stock Exchange. We were a $500 million company, so fairly small. It was just basically a roll up, there was no actual primary capital raised, it was just a simple listing. And through 2011, we were 100% retail-owned, or very close to that. There was some amount of passive ownership.

Even when we do a raise on the equity side, we would do it 100% retail. So 100% retail ownership, 100% retail product is what we were invested in. We started to see the evolution with e-commerce. We saw what Amazon did between 2000 to 2010, 2011, how they dis-intermediated the bookstore industry with Borders and others. And we started to think about the whole idea of e-commerce, how was retail going to get delivered, and was brick and mortar the only channel for delivery? And we really pushed ourselves to thinking and coming to the conclusion that, no, that was not going to be the case. So when I joined Realty Income in 2011, we started to branch out, and Tom, who was our CEO then, and John, who was our CIO then, we came to the conclusion that we should branch out into industrial, single-tenant industrial, which becomes a core piece of how retail gets delivered. So those were the two asset types, and then we evolved during that time, to start to source out institutional investors and talk about net lease investing.

Fast forward to 2018, I wanted to take the opportunity to redefine the sandbox within which we played. We were a fairly successful net lease business at that point. We were about a 25, $26 billion company, but we were 100% in the US, and largely exposed to two asset types. And the way we started to redefine, and we had a strategy session with the board, and I just want to add that without the board support, none of this was possible.

Lance Glinn:

Absolutely.

Sumit Roy:

And I had a board, and I continue to have a board, that is incredibly forward-looking and willing to judiciously try new things, and so it helped us redefine the box of going international. That was one of the things. We looked at a lot of REITs that had actually tried that and hadn't been quite successful, and we wanted to make sure that we had lessons learned from that. And we felt like our cost of capital, our ability to source transactions, and the fact that there was less competition in Europe were all going to accrue to our benefit. So they allowed us to do that. The second piece was to start to look at other asset types. We looked at data centers, and we looked at gaming assets, and they were open to allowing us to consider that. Gaming on a more episodic basis, but data centers, we were like, "Okay, this is going to be the next...". Because of what we saw with cloud computing

Lance Glinn:

Yeah, yeah. I mean, just look now, right? Just look what we're seeing today.

Sumit Roy:

Exactly right. And so those are the big pieces that we said we need to make that part and parcel of our business. 2019, we had, 2019, April 1st, $0 of investments outside the US. Fast forward to today, it's north of 12 and a half billion dollars. We have gaming as part of our asset base. 3% of the revenue comes from gaming, and we have an exciting and growing data center investment thesis as well.

Lance Glinn:

So I'm glad you mentioned that expansion international, or that international expansion, excuse me, because we're going to actually talk about that in a lot more detail as we move forward in our conversation. But before we get there, now Realty Income, I think, sits at this intersection of really two global mega trends, right? The need for stable and growing income for an aging population and the pursuit by global companies for long-term real estate financing solutions. So first with the need for a growing income for an aging population, populations obviously are developing across markets, there's this demand for reliable passive income. People are obviously living longer, need more money to obviously retire and live a comfortable retirement. How does your monthly dividend model help address those challenges and meet the expectations of a generation that is increasingly focused on financial stability in retirement, as I was saying previously?

Sumit Roy:

Such a great question, because it goes exactly to the core of why we exist. Realty Income is the monthly dividend company. Our founders trademarked that slogan. We were, I believe, the first company to distribute our dividends on a monthly basis, and we've started doing this since our founding in 1969.

Lance Glinn:

Wow.

Sumit Roy:

So we've done over 600 months of continuous dividend distribution. And since our public listing in 1994, if you look at our track record, we've grown our dividend north of 4% annually. And every quarter since we've gone public, we've grown our dividend regardless of the economic cycle. So again, this income generation thesis runs very much through the core of everything that we do. And capital preservation. If you look at how our stock has performed from a total shareholder perspective, it's north of 13% annually since our listing in 1994. And so everything that we do, every channel, new channel that we pursue is about diversification. It's about creating scale. Today, our EBITDA margin is 95%. It's one of the ways we measure scale, and the fact that we have been able to establish ourselves as the go-to net lease name in Europe within such a short duration, since 2019, is again, a testament to our reputation, how we conduct ourselves, and the business that we've formed.

And we believe that we're just scratching the surface. The two mega trends that you've talked about are crucial, and we do sit at the intersection. Because sale-leaseback as a product, though more mature here in the US, is still in the early innings in Europe. And so as the product becomes more and more mature, the ability to do these larger deals, north of a billion dollar sale-leasebacks, which we are doing today, will become much more evident, and you need size and scale to be able to do that without running into concentration issues. And so given that we are north of an $80 billion company, we have the ability to underwrite a billion dollar sale-leaseback without running into concentration issues.

Lance Glinn:

And so you mentioned these over 600 months of consecutive dividends, which is incredible, and really a testament to everything you, and those before you, have been doing at Realty Income.

Sumit Roy:

Absolutely.

Lance Glinn:

How do you go balance the, I guess you could even call it the pressure, right, to maintain this dividend consistency with the need to obviously pursue growth and innovation in what is a changing macroeconomic landscape?

Sumit Roy:

I'm so glad, Lance, that you used the word "Innovation," because without that I don't think we would be the company that we've become. You have to constantly challenge the status quo. You have to constantly challenge the inertia. If you think about some of what we just discussed, in terms of how we've grown our business, and how we are leaning into AI as a way to continue to maintain scale. I mean think about it, we have 15,600 discrete properties across all 50 states and in eight countries in Europe, you need technology, and you need to be able to rethink what net lease investing is, which is what we have been able to do with the board.

But you're right, I couldn't have been successful without those that came before me, without the culture that they developed about constantly looking around corners, constantly pushing ourselves to redefine what net lease investing could be, and not being afraid to be the first. We started to make credit investments three years ago, again, with full blessing from our board, because we were long credits anyway. And when you're taking a 20-year lease, you're effectively saying, "I'm very comfortable with this credit." And so to be able to partner with our operators and clients, and help on the balance sheet side, direct lending, collateralized by real estate was an easy next step. And so this framework of being the real estate partner to the world's leading operators, companies in the world, is one that we hold very dear to ourselves.

Lance Glinn:

And I think to that point, with your scale and your cost of capital advantage, Realty Income, I think, is in a unique position to be a strategic partner to these global enterprises that you speak to. How do you envision the company's role evolving, and really the sort of capital markets ecosystem, not just as a landlord, but really as a financial partner to these big businesses?

Sumit Roy:

Yeah. You talked about two mega trends, I'll talk about two other things that is... One is very unique to us. When people talk about REITs, they talk about real estate investing. Very true, that is absolutely part and parcel of what we do. But the second piece, that is equally important, is credit underwriting. And for us, we have a very large credit underwriting team that not only helps us define the macro of where do we want to invest, what kind of retail do we want to invest in, what kind of geographies do we want to look at, but also the ability to underwrite the credit. Because you're going long the credit when you're effectively underwriting a 20-year lease.

Lance Glinn:

Absolutely.

Sumit Roy:

So for us, it's constantly redefining what this business needs to look like, is what has allowed us to stay ahead of the game. You talk about scale, and I talked about technology, but the data that we have created is the true gold, is the true value, is what separates us. We have gone through so many cycles, we have learned so much. We have so much releasing data, accurate releasing data, that we have taken this information and we started to invest in a machine learning tool, we call it Predictive Analytics, which is effectively an AI tool that we started to invest in 2019. Fast forward to today, this application that has learned on our own data, and continues to learn every quarter, we go through 200 to $300 million of renewals every year, and so this model continues to get refined.

We use it on the front end of our business, which is underwriting source deals, we then look at it in every element of asset management, from lease discussions, lease renewal discussions, to disposition discussions. Highest and best use is yet another element of this tool that we've developed. And this is just the surface. This is of course, proprietary, but AI, at large, is going to continue to be something that we are embracing wholeheartedly, and trying to figure out how can we use tools to continue to scale the business even beyond where we are today.

Lance Glinn:

Sure. And so let's stick with AI, because before we started recording we actually were having a whole conversation on it. And one of the things that I had mentioned was, right, we have a million-plus use cases now, and the anticipation is that there's going to be millions more to come, that we may not have even discovered yet, or that the tools to discover them may have not even been created yet and devised yet. What excites you just generally about AI when it comes to the REIT and the real estate space?

Sumit Roy:

First and foremost, I think the entire REIT industry needs to just lean into this. This is a game-changer. We don't know how AI is going to be used five years from now. What I do know with absolute certainty is AI will be part and parcel of our business, especially those that are surviving, not surviving, but being super successful. We are going to have two strategies. One is off the shelf, buy and adopt.

Lance Glinn:

Sure.

Sumit Roy:

But the second strategy, which we are developing as we speak, we already have some, is going to be a build strategy. And we need both in order to accelerate our adoption of AI. So for instance, we've used Predict AP, which is an AI tool that does a lot of what you just said, scraping information, putting it in from invoices that come in, putting it in a format, pushing it into Yardi, which is our ERP system. And then the ERP goes through the workflow of who needs to look at it, and give the go-ahead, and then it gets pushed into another system called Kariba, which does the automatic paying, and is connected with the banks. Those are the types of situations where you can see scale. You see how the accuracy levels are going to be much higher, and you see... But, and this comes back to the principles of how you do AI adoption, the ethics and governance of AI, one of our governance element is at the end of the day, it has to be a human that basically is responsible and accountable for every decision.

You cannot say, "I'm going rely on the system and the system made the mistake." Sorry, that does not work. And so it's elements of that that excites me. Of course, I have a background in computer science, which I don't know if it makes it easier or more difficult, but we are all-in.

Lance Glinn:

Yeah, and you mentioned that human aspect, right? And I agree with your premise, there has to be that human aspect to it, because you need to be able to guarantee your customers that there's going to be transparency, there's going to be trust, things are going to happen without bias.

Sumit Roy:

Correct.

Lance Glinn:

They need to be able to rely on you, and rely on Realty Income, and whatever company it is. They need to be able to rely on that company, that they aren't just relying on these models and doing whatever the model says, or giving whatever answer the model gives. Ultimately, it needs to come down to a human, and the human needs to take responsibility. So I agree to your premise that it ultimately ends with an actual person. And you mentioned your background in computer science, you have an MBA from the University of Chicago, obviously, that computer science background, just how has that combination of your experience of tech and finance, how has it shaped your approach to problem solving and strategic thinking in the real estate world?

Sumit Roy:

That's such a great question. Because I often talk to students, and I said, "Look, I didn't think I would end up in the real estate world." When I was doing technology, I got a master's in computer science as well, and was going down the path of doing technology consulting. What I share with them is, "Regardless of what your discipline is, whether it's philosophy, history, literature, you learn something." And what I learned from my degrees in computer science was basically how to take a problem and unpack it into small modules, and think about how does one solve a very well-defined question. So it starts with that, you need to have a very well-defined question, and then the answer not be, "Oh, it's this." Part of it needs to be how do I get to this?

Lance Glinn:

Sure.

Sumit Roy:

And so being able to take and decouple a complex question into its minute modules, that then build up to the final answer, is something that I'll always have, just given the training that I underwent.

Lance Glinn:

Sure.

Sumit Roy:

And so when we think about real estate, and when we think about the issues with real estate, interest rate environment dictates our cost of capital, how does one go about creating redundancy in that? When you think about the fact that we are exposed to so many different geographies, and therefore, the geopolitical risks that come with it, how does one get their head around all of that? Technology has to play a big role.

And so I'm a big believer that regardless of where you start, history tends to repeat itself. If you're a history major, you can learn so much to read signals before the conclusions are fully baked in. Like I said, it doesn't matter your discipline, you learn a lot, and you, through that particular lens, can solve problems. Having said that, have humility, and have the ability to stay quiet and listen to what others have to say, because you will learn, constantly learn. And I am so blessed with an amazing team of colleagues that work alongside me, and are constantly challenging the status quo, and coming up and approaching solutions to problems that we are defining for ourselves in very unique ways.

Lance Glinn:

And so early in our conversation, well, first off, not a history major, but a history minor, journalism major, that's how I ended up finding myself obviously, here at the New York Stock Exchange overseeing our vast podcast network. But you mentioned at the beginning of our conversation, you referenced the founders, Bill and Joan Clark, obviously starting Realty Income in 1969, acquired a single Taco Bell in Northern California.

Sumit Roy:

That's right.

Lance Glinn:

In order to now start what is a massive operation that you oversee. The company, you mentioned, went public in 1994. Last year, celebrating 30 years listed on the New York Stock Exchange. So first and foremost, I know it's a little bit late, but congratulations to that.

Sumit Roy:

Thank you.

Lance Glinn:

Just going back to that original point you made, how do you interpret the founding ethos of the company, and how has Realty Income's original mission shaped its identity over these last 55-plus years, and then obviously, what you're doing today and everything moving forward?

Sumit Roy:

Such a great question. Our original mission statement was all around the dividends. How do we continue to grow our dividends over time, making sure that we are investing in the right areas, in the right businesses, et cetera. There was a second piece that we've added subsequent to that which talks about investing in people and places. And even though that wasn't part of our original mission statement, Joan and Bill Clark were all about the people. You can have the most brilliant idea, the most brilliant strategy, but if you don't have the collective, the colleagues that are pulling in the same direction and being super excited about it, and a challenge doesn't sort of bring them down, but they lock arms and they try to figure out how do we get past this, because challenges are inevitable in any business. That was something we learned from our founders, and we've now formally made it part of our mission statement.

And I think that's what drives everything that we do, making sure that we are bringing in people, giving them an opportunity to continue to develop. And when somebody does fall, picking them up, and saying, "We are in this together." We are only as strong as the weakest link, I know this phrase has been used over and over-

Lance Glinn:

But it's true.

Sumit Roy:

It is very true.

Lance Glinn:

But it's true.

Sumit Roy:

It is very true. And a weak link is not just somebody tumbles. We all stumble once in a while. It's about creating that, that we are in this together. And I think that is so powerful, and the sum of the parts is so much less than what the entire collective can do if we are locked arms.

Lance Glinn:

Yeah. I mean, just based off your words, it's clear that that team component is central to what Realty Income is doing.

Sumit Roy:

Absolutely.

Lance Glinn:

So you mentioned early in our conversation, international expansion, and I want to talk about that now. Mostly consolidated in Europe, I think you mentioned eight countries right now. What initially just drew you to the market, and how did you evaluate its potential compared to, say, more mature US opportunities?

Sumit Roy:

Yeah. Part of it was this is 2018, we were looking at the UK as the first expansion, and we wanted to get very comfortable with the laws in the UK, and make sure that a bankruptcy situation, how does it get resolved? How could we structure transactions so that the leakage is absolutely the bare minimum, and what is the opportunity set? How big is this? What do we think we can do? If it was something that would've led us to an answer of doing a billion dollars, that's not good enough for us. When we started to peel the onion, what we saw was an amazing landscape of very fertile ground for sale-leaseback, and what we felt like we could do was come in and help consolidate the sale-leaseback industry. We also found that even though sale-leaseback as a product was there, it was done in small scale, and the ownership of that product was very scattered.

You had funds owning it, you had pension companies owning assets, you had insurance companies owning it, high net worth individuals owning it, so there wasn't this institutionalization in the scale that we wanted to create. So that was the market. When we did the market study, we saw that, and we were like, "Okay, this is a massive market for us." In some ways, 2x the size of the US. We think the US is $4-plus trillion, we think Europe is $8-plus trillion.

Lance Glinn:

Wow.

Sumit Roy:

So massive TAM. The second piece was our ability to take our cost of capital and transport it. The fact that we, I think I mentioned this, A-A3 credit rated, that was going to accrue to our benefit, especially in mainland Europe. Which today, if you look at our 10-year unsecured, it's at least 100 basis points inside in Europe versus what we can get here in the US. So same cap rates, much cheaper debt capital. That was again, part of the thesis that we were very fascinated with, and that's why we decided to go down this path. And we did an analysis of then looking beyond just the overall market, but where do we want to play?

Lance Glinn:

Sure.

Sumit Roy:

Grocery was a big area that we wanted to focus in on, and in fact, the first deal we did with Sainsbury's was a half a billion dollar transaction that got us into the UK. And fast forward today, again, team, it's super important. We have close to 50 people in the London office, we have about seven people in the Amsterdam office, so we have boots on the ground running this business for us. And yes, that was the original thesis, and thankfully it's worked out.

Lance Glinn:

Has it been a lot of learning by going, right? You start off in the UK, like you said, you wanted to first just get a sense of the different laws, the different rules, the different regulations that were involved with that country. And then I know a couple of recent expansions, Poland, Spain, has it been a lot of, okay, you see what works here now let's take it into this country? Has it been a lot of that, sort of learning by going rather than just thinking you know everything right off the bat?

Sumit Roy:

Yeah, and we don't. That is why partnering with the right law firms, partnering with the right accounting firms, learning from what others have done. I had several conversations with other CEOs that had left the UK, you know, "Why did you leave? What were the issues that you ran into?" We learned from that. So you need a full team, but there's a phrase, "Crawl, walk, run."

Lance Glinn:

Sure.

Sumit Roy:

It goes back to exactly what you were saying, Lance, and that's what we've tried to do, is we feel like from a theoretical perspective, we've got everything covered. We'll do one transaction, we'll learn, we'll put it into action, and then we'll keep evolving. And that's exactly how we've expanded.

Lance Glinn:

Making sure you're not going too fast too quickly.

Sumit Roy:

That is correct.

Lance Glinn:

Absolutely. So since, again, entering the UK, expanded into eight European countries, I mentioned before, Poland, Spain, two recent ones, how do you approach market selection and asset sourcing across such diverse regulatory and economic environments?

Sumit Roy:

So it starts with TAM. What can we do? What is the viable market, and viable being the keyword. Yes, $8 trillion is a lot, but what is actually actionable is a key component. And then geopolitically, how do we feel about investing in countries? There's a lot of instability on the eastern side of Europe right now, and we obviously took that into consideration. And so those couple of things are very key macro-considerations before we sort of dive in, and then we start to identify the operators with whom we want to do business, and we start to cultivate a relationship. So Carrefour was a perfect example of how we went into Spain. It was a very well established grocer that we felt very comfortable doing a sale-leaseback. Metro, which is, think of it as a Costco and a Sysco.

Lance Glinn:

Okay.

Sumit Roy:

The two companies here.

Lance Glinn:

[inaudible 00:27:36].

Sumit Roy:

It's sits on the intersection of those two. That was a large sale-leaseback we did in Italy, that got us into Italy. That's how we started to grow with our clients.

Lance Glinn:

So Sumit, as we begin to wrap up our conversation, we've talked about from the beginning, in 1969, to where Realty Income is now. It's grown from that single Taco Bell, excuse me, to a global portfolio, over 15,000 properties worldwide. So as you just look ahead, what is that long-term vision for the company, and how are you and the leadership team really shaping that future to achieve whatever that long-term vision might be?

Sumit Roy:

For us, I think net lease as a product within the real estate subsectors has finally come into its own. When you see the Blackstones and the Carlisles and the Brookfields start to come into this space in the way that they have, Morgan Stanley, you start to realize that, okay, people understand now what this business is about.

Lance Glinn:

Sure.

Sumit Roy:

But it's taken us 56 years to get to where we are, and so we feel like in order to really run a global business, like the way we are running with technology, with people, with the structure that we've created, it is a very high hurdle, and we just want to keep building on that. We do believe that capital preservation and income distribution are the two very key components of how we think about any investment we make, and that drives our strategy. And as our strategy has evolved, and data centers, we believe, is going to be a very big part of our strategy going forward, it's going to take us into new geographies. And this is a product that lends itself across the globe, and so the question really is not what Realty Income is going to look like five years, six years from now, and that's an interesting question, but how quickly can we get there is really the question that I'm challenging the team internally. And they're super excited about redefining, constantly redefining what Realty Income can become.

Lance Glinn:

It's not about what Realty Income will be, it's about how quickly you can get there. Sumit, I really appreciate you joining me. Thanks so much for coming here to the New York Stock Exchange and joining us Inside the ICE House.

Sumit Roy:

It is a pleasure. Thank you for having me, Lance.

Speaker 1:

That's our conversation for this week. Remember to rate, review, and subscribe wherever you listen, and follow us on X, @ICEHousepodcast. From the New York Stock Exchange, we'll talk to you again next week, Inside the ICE House. Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE, nor its affiliates, make any representations or warranties, express or implied, as to the accuracy or completeness of the information, and do not sponsor, approve, or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of length or clarity.