Realty Income CFO on Data Center Deals & Fed's Likely Interest Rate Hike

Diane (0:00)

With the continued focus on the Fed today, we want to welcome in Jonathan Pong, CFO of Realty Income, joining us here at the big board. Jonathan, thank you so much for being with us this morning.

Jonathan Pong (0:10)

Diane, thanks for having us.

Diane (0:11)

All right, so the path forward for rates is top of mind for everyone on Wall Street today, and of course it would affect your business. Let's start with just your thought on expectations. The consensus view is that we're gonna see a rate hike.

What's your thought on that?

Jonathan Pong (0:30)

So Diane, we think about rates in terms of the long end of the curve. The 10-year part of the curve, the belly of the curve is really what drives valuation.

Really for rates, but especially for Realty Income. And so clearly this backup in rates all the way up to 5% on the 10-year has had a bit of an impact. For us, we can't control that. The way that we think about managing the business and what we strongly believe in is that fundamentals at the end of the day for Realty Income, we are the monthly dividend company. Dividend yield today of around 5.5%, growing earnings at 4-5% as well. We think at the end of the day, that's really what we can control. And to the extent that the long end of the curve does put a little bit of pressure perhaps on or downward pressure on inflation, we think that'll eventually be a good thing and that'll get us back to a normalized period where we can outperform.

Diane (1:22)

For your business right now, what does the current rate environment and then the expectation of a rate hike, another 25 bips mean for revaluations?

Jonathan Pong (1:34)

Well, I think a lot of it is depending on whether you think this is priced in or not.

Reets have underperformed modestly over the last few weeks, and I think that's really the market fairly pricing in what's going to happen later on today. But I do think at the end of the day, reets tend to do quite well when inflation gets under control. So if rates do come down on the long end, that's going to be a good thing for valuations. We think a lot of it is priced in. But more importantly, when you think about the consumer-centric part of the economy, we see a lot of opportunity for us to outperform because in a moderating growth environment, Realty Income with the fact that over 90 percent of our retail tenants cater to a non-discretionary, low price point or service-oriented business, we think they're going to perform quite well regardless of the environment.

Diane (2:28)

You all have also gotten into the business of data centers. You recently announced a $6 billion HyperScale Data Center joint venture with Cloud Capital. Tell us a little bit more about that.

Jonathan Pong (2:38)

Sure.

You can't listen to the news today without hearing about AI CapEx. For us, we've been investing in data centers since 2023

It's nothing new for us. We obviously are a big believer in the secular growth drivers of AI CapEx and what that means for really the demand for data centers. What we're going to do is really focus in on quality. Realty Income is known to be extremely reliable. We're not in the business of taking on speculative risks. So the Cloud Capital joint venture really includes a stabilized data center as well as to build to suit developments where the lease is already in hand, pre-lease to leading operators that have very strong credit ratings, and that we think is going to be continued growth avenue for us. We're going to do it in a very measured and very intentional way, rather than deploying capital for the sake of deploying it into the space.

Diane (3:32)

Okay. Then tell me a little bit more about your expansion because you've expanded your footprint beyond just here. You've expanded into Europe.

When you think about that diversification, it feels like it's the potential to both reduce risk, but it also creates some exposure. How do you balance that?

Jonathan Pong (3:50)

We think having more levers to grow is a positive. We have over 15,600 properties in the portfolio today. All 50 US states, but also 9 countries, in predominantly Western Europe. So for us, to have additional ways to deploy capital into long-duration leases, lease to leading operators in what they do, we feel extends the growth trajectory for Realty Income. And for us, we own everything from casinos, we own the Wynn Encore in Boston, all the way to the $4 or $5 million 7-Eleven. The diversification that one can provide for a dividend-oriented stock that's really catering to the retail investor looking for income.