The US investor who quietly became one of Britain’s largest retail owners

Five years ago, Realty Income was a new American investment trust. Since then, it has quietly become one of Britain’s largest owners of retail parks, shops and supermarkets.

Realty is a rare exception. While other investors are hesitant to invest due to the rising costs of financing and the uncertainty surrounding the future brick-and-mortar stores, Realty has been on a spending spree. Data from CoStar show that since 2019, when it purchased a few Sainsbury’s stores from British Land as its first overseas acquisition, it has spent £5.4billion on more than 300 UK properties.

It shows no sign of slowing down. Backed by a group of quantitative analysts, who collect market data at Realty’s headquarters in Southern California 5,000 miles from the company. Realty has also acquired dozens of supermarkets that were previously owned by Tesco or Waitrose. It paid £650million for 25 Asda shops last summer. Supermarkets are a good fit for Realty’s US operations, which focus almost exclusively on triple net leases.

In these deals, the occupier pays all costs associated with the building including taxes, maintenance, and insurance. The occupants love it because they are able to do whatever they want with their buildings, while the landlords enjoy it because it allows them to collect rent.

It may not seem like much, but Realty has grown to a size that allows it to do so. The company owns 16,000 commercial properties in over 100 countries, which generate $4.9 billion in annual rent. It is listed in the US and has a value of $54 Billion (£41 Billion). Segro, a warehouse landlord and the largest property company listed on the London Stock Exchange, is valued at around £12 billion.

Bill and Joan Clark founded Realty in San Diego 55 years ago. The company is still headquartered there in a glass office building surrounded by palms trees, a mile from the Pacific Ocean.

Since its 1970 purchase of a Taco Bell branch, the trust has grown a large portfolio in the US with tenants such as Walgreens 7-Eleven Dollar General FedEx LA Fitness CVS Pharmacy. It made its first foray into gaming in 2022, when it purchased the Encore Casino and Resort in Boston Harbour for $1.7 billion.

Walgreens and Dollar General are among the tenants of the investment trust in the US. Now, under the leadership of former investment banker Sumit Rai, the company has begun to gain a reputation in the UK and is outbidding investors or landlords and bidding up prices.

One industry insider stated, “They are relatively new and have come in a big way.” “They have been around for a while and were very focused on the US market. They came to Europe to grow.

Some rivals, frustrated by Realty’s large pockets and apparent desire to spend its money as quickly as possible, have suggested that the American giant can bid “a little bit loosely” due to its deep pockets.

Realty’s US portfolio is dominated by triple-net leases. It also bought buildings leased to single tenants such as a Travis Perkins builder’s merchant, a TK Maxx Warehouse and a Booker Cash-and-Carry. One property company’s chief executive said, “Someone told us they owned almost all the B&Qs across the UK.”

In the last two years, Realty broke with tradition by pursuing retail parks, which are properties that have multiple tenants. Its largest foray in this market was 12 months ago, when it paid just under £200 million for the retail parks of Ediston Property.

The industry insider stated that they had begun to expand their investment horizons over the past five years.In its quest to find high rental yields, Realty has explored less wealthy areas of the UK such as Scotland.

“Despite their long-term leases, they are buying more multi-let property. Things like retail parks, where there are many covenants, shorter leases and lots of asset management. It’s quite a different proposition.”

The move by Realty into retail parks raised eyebrows on the market. It takes more work to manage a site with multiple buildings and tenants, than a metal shed that B&Q has leased for 15 years.

The property manager said, “They don’t currently have a large team in the UK. We think they will have to rectify this at some point.”

Realty Income declined to comment on several occasions. It is believed that Realty Income has expanded its investment parameters in order to gain access to higher-yielding properties.

A property source stated that “They have been marketing themselves as a stock with a monthly dividend and they have grown the dividend for however many years consecutively.” It’s a great story, but to maintain it you have to chase yield.

Since 1994, when Realty went public, it has paid 650 consecutive dividends. These payments have increased in all 29 of those years.

Realty was almost universally agreed that it would only purchase assets with a yield of at least 7 percent. This has led Realty to explore areas of the market where many others have no interest: retail parks and shops in Telford, Lincoln, and Dundee, for instance.

One investor stated that “you can buy a decent retail parks — the best or second-best within their catchment areas — at a yield of 7 percent.” It’s not a sign of poor quality, but it’s just that they aren’t the most glamorous town names or catchments.

Realty still makes most of its decisions in the US. A “team of quants”, it’s said, analyses various UK commercial real estate data points. Someone who has worked with Realty stated that they run all these statistics and the computer gives them a suggestion to “buy in this city”. They then just leave.

Some people may find it undiscerning to follow the numbers. One owner of retail property said, “They have been yield-focused but we do not see them as quality-focused.”

Some disagree with the idea that Realty only targets cheaper and lower-quality properties that rivals avoid, arguing that it has a completely different business model.

One landlord commented, “They don’t say much.” If you do not sell your assets, you will have no concern about the future liquidity of that asset. You may want to consider buying in Scotland, Northern Ireland, Wales, or certain parts of England, where you can get an “illiquidity premium.”

Prices of commercial property in less-popular parts of the UK have been lowered in order to reflect that there are fewer buyers in these areas. The landlord said that if a property sells for [a yield] 6.5 percent in Manchester, it could sell at 7.5 percent in Scotland. It’s actually a pretty cute model.”