Realty Income’s Sumit Roy: Why private fundraising will now fuel listed property specialists

[MUSIC] Hello and welcome back to the Perry Podcast. I'm your host, McKenna Levin's. This week we're heading back into the world of listed reads, taking a slight turn from our usual path of talking about them. Rather than looking at listed companies as potential privatization targets for private real estate managers, we're focusing on something that's starting to reshape the market. Listed reads stepping into private capital markets and becoming serious competitors in their own right. While plenty of new private managers are still finding it tough to get first-time funds off the ground, a new group of very well-positioned fundraisers is coming to the forefront. Just last week, Data Center Read, Digital Realty, raised $3.25 billion US dollars for its debut private fund focused on hyper-scale development in the US. And not long before that, really income, a read specializing in long-term net lease assets, unveiled its second major private joint venture in just a few months, and this time with Apollo. This follows its first comical private fund, which was anchored last year by Singapore's Sovereign Malth Fund, GIC. So what's behind this shift? Why are institutional investors increasingly comfortable putting private capital to work with listed real estate giants that are, in many cases, still newcomers to private markets? And what's in it for the reach themselves? To unpack all of that, we invited Reality Incomes, CEO and President Sumit Roy to join the Perry podcast. He sat down with Perry's editor and chief Jonathan Brass for a conversation about strategy, scale, and what this trend tells us about where both public and private real estate markets are headed. It's a great discussion. Let's hear what they had to say. Subit Roy, really good to have you on the Perry podcast. Thank you very much for joining me. How are you doing? Very well, thank you. And thank you for having me, Jonathan. Yes, yes, excellent. Well, one of the reasons, as I mentioned, off outside of our recording for inviting you to join us on the Perry podcast, is because your organization and organizations a little bit like your sort of specialist reats have been clearly gaining a lot of traction with private institutional investors, which is obviously our backyard at PERE. And I wanted to sort of get under the hood of that and understand kind of why and how is this happening. So I'm really glad you could join us. And, you know, from your perspective, why do you feel that we are seeing such strong engagement from institutional investors in these private products of certain listed reats like your own? Oh, that's a great question, Jonathan. And truth be told, we are very happy with the level of enthusiasm we've seen. On the private side, we clearly had a thesis around what we did on the public side in terms of an investment thesis resonating on the private side. But to see the success that we've achieved, it's remarkable. I think what's underpinning this interest, you know, on the private side for aligning themselves with public platforms is, in my mind, a couple of reasons, three reasons, perhaps. One, you know, they're looking for real estate exposure, but they're looking for real estate exposure without the public market volatility. That's been the whole remit on the private side. And so is there a mechanism for them to be able to continue to invest in certain strategies that they find very interesting, but without having to sort of expose themselves to the volatility that comes with owning a public share? And so I think the thesis that we provided to our private shareholders is a platform that mimics what they're used to where they can invest in a platform that has a particular strategy that they find appealing without having to deal with the second-by-second volatility that one experiences in the public domain. I think the second reason is if they start to align themselves with these various different strategies that reach out to you, you mentioned digital, you mentioned us, you know, that's a data centaurid, we are a net lease read, it allows them to create a portfolio of exposures that they can be very deliberate about, you know. So it lends itself to portfolio construction saying, okay, this portion of my allocation will go towards, you know, data centers, this will go towards a net lease investment thesis, this can go to towards multifamily, what have you, while aligning themselves with some of the best-in-class platforms that have had a public record for multiple decades. And I think the third is the last point I touched on, which is, you know, when you think about our platform, we've been around for 57 years, and if people want to see the results that we have, sort of, generated, it is available every quarter for the last, you know, 26, 27 years as a public company and 57 years as a business. And so that level of transparency, the level of discipline that being a public company imposes on management teams, et cetera, and the tried and tested investment thesis, I think gives this institution of private institutional capital a lot of confidence that this is the right way to sort of potentially look at investing and exposing yourself to a real estate investment thesis. And I think, and I'm speaking now more mostly about real-time income, given our size and scale, our ability to sort of invest in technology, create our own predictive analytic tools, and use technology that is learning through machine learning and deep learning on data that is clean, our data, and using that to help implement the strategies that we have in place, is it true differentiator? You know, when you talk about the private GPs trying to go and raise first-time funds, they don't have the scale and the infrastructure and a 600-person team, you know, supporting a thesis that, by the way, has been tested over time. I think those are the reasons why the LPs today are partnering with public companies that have proven track records, that have the size and scale, that have the ability to invest in these types of technologies that really separate and create core competencies, I think is why we are seeing this level of interest. So I think that's really interesting to hear. And one of the things I was considering hearing you talk was when we talk about things that folks don't have, you know, a lot of institutional investors simply don't have permission to go and engage with first-time funds. But it feels to me that your organization's real-time income, and let's say digital real-time as well, they seem to be bucketed in a different way. It's like you're potentially not being considered as first-time managers and circumventing that rule that's in place for so many institutional investors. Is that your understanding of it? Could that be happening as you see it? Look, that was one of the concerns of going down this path. And when we saw the level of interest, it is difficult for me to discern whether, you know, the LPs that chose to invest with us overcame that natural hesitancy that one has of, we can't be first-time investors in a fund. What I will tell you is that these are seasoned LPs, pension funds, etc. That look for managers that they believe that they can trust. And I do think that the fact that we do have a public track record, which by the way, I wasn't sure what translator would do the private side, did translate over to the private side. They can see that there's a strategy that we have implemented, results that we've created that is very transparent and has the governance structure and has the repeatability that they're looking for. And like I said, you know, bringing a platform that is fully scaled to the four, which a first-time fund generally doesn't bring, I think advantages that we brought to the table that perhaps allowed some of these LPs to get over the fact that we are a first-time fundraiser. I think that is my perspective, but it is difficult without actually asking the LPs the question, do you have a remit to not invest in first-time investors, but you're choosing to invest in us? We never went on that path, but we were very happy with, you know, how things played out. I mean, it looks like you didn't have to go down that route. So, I'm not surprised you weren't probably such a conversational set of revelations. Interesting, now you mentioned track record. One of the things I've mentioned to you again off the recording here, that, you know, I had written a weekly commentary looking at, you know, your organization and digital as part of a cohort of potential new contenders in private real estate fundraising. And I was trying to list some of the advantages you had. You've touched on this already, you know, long-dated track record has got to be a part. You're also both, you know, examples of organizations operating in very popular sectors for institutional investors, and at least feels like it has a time in the sun at the moment. I also saw that you've got heavy co-invest as well. So, there's a lot of alignment and skin in the game in a way that perhaps the classic private equity real estate manager cannot compete with. They're doing low single digit co-invest. You're doing, you know, up to double digit, or even half of a program if it's a JV. Do you think that's playing a part in this too? I think so. I mean, you talked about net lease and that particular strategy having its time in the sun. One of the announcements, the recent announcements that we had was with Apollo. And I think I'm going to talk about that example just to highlight a couple of things. We are both playing the retirement game, but in different ways. They have a very large insurance business. They have an annuities business that they are originating at circa five to six hundred billion dollars of assets under management. And they're looking to match those obligations with investment thesis like ours that are long dated, predictable cash flow streams that one can sort of take to the bank, if you will, with very low volatility. And we have always believed that, you know, our thesis has been we had known as the monthly dividend company. We provide capital back to our investors on a monthly basis, but we are largely able to do that because of the kind of investment thesis that we have, which goes back to this net lease concept today. We are largely agnostic as to the asset type. We are looking for long duration leases. We're looking for exposure to, you know, businesses that have the profiles that's viewed as safe, that can sort of play through multiple economic cycles, have low volatility in their ability to be a profitable business. But yes, they're not necessarily massive growth businesses, etc. But that kind of investing and the fact that why, like I said, we are agnostic as to the asset type, it can be retail, it can be data centers, it can be logistics or industrial assets. I think that's where the two philosophies came together, you know, the relationship with the Apollo was they're looking to match fund their their obligations with the assets. We are the assets that they can invest in through their channels. And we get exposure to ultimate exposure to investors who are very much invested in, you know, creating this long duration predictable cash flow stream as the backlog to the annuities that they might be purchasing, etc. And I suppose the same could be the case for GIC, for instance, where you've got it's not in unities, it's not insurance, but it's another capital pool with long term purpose, the future vitality for the state. And there you've got again, common ground in terms of our problems to solve and a means to solve it through your platform. That's exactly right. They are one of the largest, you know, very much aligned with us in terms of their thesis around investing. It's long duration in nature. And, you know, they were looking to partner with us from an operations perspective and marry their capital with our operations. And our investment philosophy, which is also long dated in nature. And that's where the alignment comes in. And GIC also chose to invest, by the way, in our Core Plus fund, as a show of support and alignment that they saw with our platform, which by the way, I don't believe that they do traditionally. So I think in multiple ways, what we are trying to create is an ecosystem that is very complementary to what we have on the public side. And Jonathan, you know this, you know, there are points in time in the public markets where there's a disconnect between the fundamentals of the business and where your stock might be trading at a point in time. And it impedes our ability to fully execute our business plan. And so when we created this ecosystem of relying on private sources of capital, which have very distinct requirements and making and being very deliberate about minimizing the overlap between the Apollo capital between our relationship with GIC and our core end fund, which is absolutely our flagship fund, that was key to everything that we did. We also feel like we were new to this. So we made an investment, and that too is part of the scale thing. We felt like we could invest in. We brought in people who had run funds before. We bought in, you know, accountants who did fund accounting. We bought in, you know, advisors who had helped structure and use best practices to help us make sure that coming out of the gate, you know, we had a fund structure that would work and resonate with LPs. So our ability to do that without having raised a dollar of capital, I think was another reason why we were successful. But what I wanted you to take away from this is, yes, we've made a lot of these announcements, but they are truly complementary to each other and the overlap on these strategies are diminimous, if any. Well, I appreciate you unpacking, you know, the howl there, and we sort of touched a little bit on the why, on the why for your side, and we're getting a sense of the problems you're solving for your partners, but as you mentioned, or you've just touched on the problem you may be solving for yourselves is, you know, the diversity of capital markets that you get to sort of pump through your platform. I think you told me previously that you were looking for more than a single point of failure, which was a very interesting way of putting it. I like that phrase, but I guess that is a commentary on the periodic validity of the listed space, the equities part of the market capital markets to support your programs. You're looking obviously to bring in private capital to augment that. Is it to augment or ultimately replace? How do you how do you look at this? Can these things, can you fundraise in both channels or do you kind of need to pick a channel ultimately? Stay there. Yeah, that's a great question Jonathan. We truly believe that it is complementary. Look, we will always be a public company and the public markets for the last call it 31 years, 32 years have served us very well. We have now reached a particular size, you know, of circa 85 to 90 billion dollars, where we are continuing to see opportunities and the opportunities that we are seeing far supersede, you know, the assets under management on the public side and how they are growing. So our aspirations to continue to execute a model can no longer only be satisfied by the public markets. And, you know, based on some of the analysis that we've done, the private side looking for, you know, real estate investments is circa 10 times the amount of capital that we see on the public side. And so in order for us to fully benefit from the scale that we have created, we need these these complementary forms of capital to work in this ecosystem that we have created in a very synergistic fashion. And our open-ended Core Plus Fund is our flagship fund, you know, we want if we are raising capital and very importantly, it fits the strategy around what the return hurdles are on a net basis and meets the time horizon that we are talking about. That's the channel that we are going to use. Obviously, it's going to be somewhat constrained by how much capital can we raise on that open-ended fund. It's open-ended, so by its very nature, we are constantly raising capital. But like I've shared with you before, Jonathan, we invest and we have invested north of nine billion dollars per year. And if you actually look at some of the M&A transactions we've done and you sort of blend that together, it's circa 12 to 13 billion dollars per year. So we need capital. Some of it will come from the public markets, which we've been very successful leaning into. Some of it will come from, you know, our open-ended fund. And then there are certain strategies which doesn't really fit either one of our channels. And that is the Apollo strategy, you know, where they're looking for a total return in that 6.8% zip code, which is all they're looking for. So any excess return above and beyond that accrues to the benefit, you know, of our public shareholders. And if you think about the source of their capital, it's that insurance capital that has that delimiter. So it's a standalone strategy. They have a lot of capital which we can execute utilizing our platform and it'll benefit our shareholders. Can you see though a plausible future in which the private real estate fund raising has gone so well that, you know, for every dollar you could raise on the listed side, your raising 10 on the private side, that it starts to become a question as to whether you actually need to be listed in the future. You said you always will be a listed company. I think that's really interesting when I like to challenge it. And I ask if there is a future that could, there is a potential future in which it's not necessary. The public shareholder owns the scale, owns the platform and they will continue to own the platform going forward. But Jonathan, you're right, you know, if we are able to raise plenty of capital and act as if you're sharing for the LPs through that channel, that'll be a wonderful problem to run into. That means we have been very successful and the beneficiary of which has been our public shareholder because they helped seed this particular platform. And, you know, I hope from from your lips to God's ears that that is a problem that we run into. But it's, you know, if again, if you think about just our sheer size today, it'll be a great problem to run into. But I do think that, you know, we will evolve as a business. And if you think about the types of investments we do within the net lease construct, there are many different asset types that we are exposed to. We do have a credit business as well where we lend to our clients who we have helped monetize their real estate. We are long their credit anyway. So there are many different strategies, investment strategies that sits within this platform. And could I see them, you know, over time becoming much more distinct? I do. But could you be hinting at a kind of a private real estate credit fund to come, for instance? I won't go so far as that, Jonathan, that is not, you know, right now the, the ecosystem works very well. But yes, we will continue to tap into other sources of capital. We have a very large European business and obviously we are very well established in the UK. So this is, this is a matter of time and what I keep telling people is that we are not opportunity constrained. We will capital constraint. And that's the second piece that we are trying to solve and fully utilize a platform that is built for volume and built for a return profile through our investments that I think is very attractive today. Let's talk about Apollo for a moment. Obviously a very interesting announcement there. So in effect, we are working directly with an insurance company through the Apollo umbrella. And you know, this is the beginning. I do think that if you go across the spectrum and you look at all of the insurance companies that are out there looking for this kind of an investment vehicle, I don't think it's, you know, beyond the realm of possibility that we, we should work, you know, with some of them directly. But I do believe that Apollo is one of the largest originators of insurance product. And so this was a, I hope, a very fruitful programmatic, you know, relationship that it's a win-win for both parties. Well, both the GIC and Apollo setups look very programmatic in their nature and detail. Is the plan then to sort of further grow a wider cohort of private capital partners like this? We expect more of these partnerships to be announced in due course. I think yes, the answer is, and I already mentioned the fact that, you know, in Europe, something similar could come up. We've talked a little bit about, you know, making sure that anything new that we do is very well thought out that this inherent conflict that one sees in working with these different pockets of capital, those are very clearly addressed. And, you know, our core plus fund is the single most important structure that we have. And today, the three sources of capital that we have sort of tapped into, one is development that has a risk profile that is not fit our core plus fund. One is Apollo that has a return profile that's going to be substantially lower than what our open ended fund is going to be looking for. These are very distinct strategies that is satisfying very distinct pockets of capital. And so we will continue to add, but it will always be with an eye towards making sure that these overlapping regions are determinants to nonexistent when it comes to, you know, any conflicts that go to rise. That is something that we are going to be very focused on. But yes, this ecosystem will continue to grow over time. And the pockets of capital, too early for me to share that with you in terms of what they're going to look like, but they'll certainly be more in the future. If we were doing this podcast this time next year, would you have hoped at least that let's say we've got these two major partnerships that are well known that you've doubled that? Yes, exactly. That is the whole, that is the hope that, you know, these programmatic relationships, we keep adding assets under management, which will be a clear endorsement that original thesis and what our partners were expecting is being met is being exceeded. And therefore programmatically these things are growing. I don't know if it's going to be double or triple. I don't want to go in that direction. But as long as it's growing, that'll be, you know, a test of our original thesis playing out. But more importantly, you know, like I keep going back to, it's our core plus US centric core plus fund that I would love to continue to see, you know, growing, which again will be a testament to us producing the results as expected by our LLP's. So when I think about private capital markets today, it was very much propelled over the last three decades by institutional capital. And then lately, as we've talked about insurance money and you've obviously participated in this part, that is now becoming direct insurance capital is becoming a much more prevalent part of what is essentially a three-legged stool for capital markets for the biggest managers of private capital. The bit we haven't necessarily talked about is the private wealth channel, the retail capital. Now you could argue, obviously, you capture that by being a reap. But is there another way of capturing this cohort of investors that it's hard to actually measure the roof of this? It seems huge. It's increasingly better regulated. And there are increasing efforts by the biggest institutional level managers in private real estate, but other, but across private markets to include them in their programs, can you see anything on the drawing board? Is there anything on the drawing board that tailors for them directly, more directly? I think, you know, the way we are playing the retail side of the equation is through the insurance capital. That's one, two, we are certainly playing it on the public side. If you look at our shareholder registry today, 22, 23% of our shares, it's owned by retail. So, you know, that's the second way we're playing. What we have in sort of leaned into today is what you're seeing. A lot of these alternative asset managers, you know, tapping into high net worth channels, etc. To tap into the retail boxes. I want to sit down here and tell you, Jonathan, that we will never tap into that. What I will tell you is that we are so busy with the channels that we have created and some of the more other institutional channels that we have on the drawing board, that we feel that we can execute our business strategy and utilize the scale that we have and grasp the capacity that the scale creates through these various channels that we've already established and through some that we are thinking of bringing on board. So, I think that's how I would answer it. We think it's just a very volatile source of capital, you know, it comes in in large volumes. And when there is disruption and volatility in the market, you experience the outflows and that doesn't lend itself as much to, you know, this long duration investing and creating value over the long term teases that we have. And, you know, that's kind of the volatility that we experience on the public side that we are trying to mute on the private side. And so that's the one piece that we are going to keep a close eye on, but never say never. I think that's really interesting, particularly in light of, you know, comments you do hear from managers who run private reads, for instance, who talk about how, you know, the slew of redemption they've had to engage with have been orchestrated via quite robust infrastructure, shall we say, and that the gating mechanisms work. People would say these products don't work because look at the redemption cues, but then you can clearly see that this is a mitigate to dramatic outflows. And so there is a debate as to whether they do or they do not work based on these events, I suppose also based on your perspective, have I kind of already got your perspective on that in your prior answer? I'll add to what I've said, Jarton. Yes, there are these technical elements that one can introduce into the structure, which could mute the volatility on redemption, et cetera. But I do think that our business philosophy, the net lease business, which is an yield income oriented business, you know, aligns with the retail shareholders a lot more than a lot of other asset types that have less of an income orientation and more of a value enhancement play, you know. And so when that value thesis gets compromised, that's when you have, you know, disruptions in the market for us, so much of the value that we create for our shareholders is through distributions. We on the public side are distributing income on a monthly basis. So there is a cadence to how we create value that is much better understood and much better received by the retail investors. And so in some ways, you know, our product lends itself to retail investors a lot more than, you know, up your development or a merchant builder or, you know, where there's hope for cap rate compressions or mark to market on the rents that can be realized over a long period. I mean, it's a lot less about that because our durability of our cash flows, the inherent growth in our leases, there's that predictability that I think lends itself more to retail shareholders. So I've given you two sorts of, you know, extreme answers. So I'll let you conclude as to which direction we are going to go. But right now I feel like our thesis is resonating. We've talked a little bit about as to the why and we just feel very blessed of being in the position of being able to tap across the spectrum of private capital sources available to us. Well, so I really appreciate that. And I've got one more question before I let you go. It occurred to me, you know, OK, digital and real to income, you both have enjoyed the success on private fundraising. But you'll, you know, you clearly have asset classes as I mentioned that are extremely popular with institutional investors right now. And there perhaps is a dearth of opportunity in the private side at this point. So this is a very good place to go and find expertise. Should we look at these examples as the start of a major trend of listed REITs with specialisms, that time of institutional markets being able to get this type of fundraising achievement done, or do you feel actually not all REITs are created equal and this isn't going to be a widespread opportunity? I'm interested to know just how much of a new cohort of a contender are the REITs in the private fundraising space. My perspective is that, if you look at the REIT and you look at the sub-sectors within the REIT, we are obviously the most scaled model, we are international within the net lease sub-sector. But every sub-sector has one or two incredibly scaled businesses that dominate that particular sector. And we've already talked about the benefits of scale. There are investments that one can make, there are some test cases that one can pilot and be able to absorb if some of these things don't work, that a smaller sub-scaled company, public company, will not be able to invest in. So you get a lot more with a scaled platform and with skilled generally speaking, you have a history of performance. And so I think it's that mindset that will allow, because like I said, we made a conscious decision to create a dedicated fund team before we had raised even a dollar of capital. And the reason why we could do that is we have the size and scale. So when we go and market, we are able to say, this is the team, it's dedicated to you, it's going to function and feel and look the same as what you would experience on the private side. Oh, but by the way, you've got this 550, 600 person team that is going to be working and helping execute a strategy. I think that is very powerful. So I do see a lot more reads trying to access the private capital sources, but it's not going to be across the board. It's going to be the most scaled, the most yeah, the most scaled within every sub sector that can make these investments. I think they are going to sort of lean in and create this ecosystem of being able to pull in capital where it's available. So Maroi, thank you so much for your time. I think that was really illuminating and appreciate you being on our podcast. It's my pleasure, Jonathan, anytime. And that wraps up this week's episode of the Perry podcast. A big thank you to Sumit Roy, who laid out how scale, track record and meaningful co-investment are lining up with institutional investors growing desire to tailor their sector exposure, even as concerns fade about backing what are in many cases still first time private fund managers. He also shared how reality income is thinking about what comes next with plans to double and potentially even triple the number of its private partnerships by this time next year. And stepping back, the discussion points to a broader shift underway that some of the biggest specialist listed reads are increasingly well-positioned to follow the path carved out by reality income and digital reality as private capital raising becomes a more central part of their growth strategies. For more on the topic, visit PerryNews.com where you can read about digital real-tease fundraise. Thanks so much for listening and remember you can catch this episode in every episode of the Perry podcast at PerryNews.com/podcast or stream it on your favorite platform. Thanks again and we'll see you next week.