Realty Income, already the largest real estate investment trust focused solely on owning single-tenant leased properties, is jumping into an emerging industry for growth: vertical farming.
The REIT, known for generating a reliable monthly payout for investors, has agreed to join a strategic real estate alliance to support the expansion of South San Francisco, California-based indoor agriculture firm Plenty Unlimited’s operations.
The agreement provides for up to $1 billion of development opportunities. It’s reportedly the first major deal of its kind between a real estate firm and a vertical farming company in the United States.
Under the terms of the deal, Realty Income will acquire and provide funding for properties that will house Plenty’s indoor farms. These properties will be leased to Plenty under long-term net leases, where the tenant pays expenses related to property management including taxes, insurance and maintenance.
Vertical farming has taken off in recent years as Americans have been buying more fresh produce. The concept also benefits from heightened interest in sustainable investments, those assets that have smaller negative effects on the environment. Vertical farming fits the bill: A large crop of food can be grown indoors in very limited space year-round, using relatively little water and often remaining pesticide-free.
Richmond Project
To kick off the new partnership, San Diego-based Realty Income will purchase the land and fund the first vertical farm on Plenty’s campus near Richmond, Virginia, in a project valued at $42 million. Plenty will lease back that portion of a larger campus.
Plenty plans to deploy several large-scale vertical farms on more of the 120-acre parcel it acquired last fall in the coming years, with a potential annual production capacity exceeding 20 million pounds across multiple crops including strawberries, leafy greens and tomatoes.
The site is adjacent to e-commerce giant Amazon’s fulfillment center in Meadowville Technology Park.
The campus’ first farm will grow strawberries for Driscoll’s and be the first in the world to grow indoor, vertically farmed berries at scale, according to Plenty.
“Indoor farming, as part of the revolution that we are seeing in ag tech, is something that we’ve been looking at for the better part of a year now,” Sumit Roy, Realty Income’s president and CEO, said on the company’s fourth-quarter earnings call this week. “And specifically working with Plenty to try to understand their technology and how they’re going to play in the ecosystem in terms of delivering crops in a much, much more efficient manner than traditional farming.”
Vertical farming is expected to grow into a $50 billion industry over the next few years, Roy said. Plenty has already established a position within the industry, drawing sponsorship or investment dollars from companies such as Walgreens, Albertsons and Driscoll’s, he added.
“These are some of the largest grocers and providers of end product to grocery stores,” Roy said.
Last year, Walmart struck a deal to invest in Plenty as part of the startup’s $400 million Series E funding. Under terms of that equity investment, Plenty will supply fresh greens to Walmart stores.
As Plenty’s real estate partner, Roy said the REIT will be given an opportunity to look at any real estate development that Plenty enters into over the next five or six years.
“Teaming up with Realty Income is a significant step forward in accelerating the deployment of our farms with vertical farm facilities that are purpose-built to support Plenty’s proprietary growing technology," Arama Kukutai, Plenty’s CEO, said in a statement. “The predictability and positive unit economics of Plenty’s farms make it possible for us to utilize more traditional forms of funding, such as this strategic alliance with Realty Income. This represents an advancement in the way indoor farming assets are capitalized and paves the way for their development as an asset class.”
A growing U.S. population, the shortage of land and water, and increasing pressure on traditional agricultural methods have led to a shift toward new farming practices such as vertical farming, according to analysis this month by consulting firm Frost & Sullivan. The adoption of the farming-as-a-service model and the extension of vertical farming into specialized crops from leafy greens will speed up market growth in three to five years, it said.
But as an emerging industry, vertical farming growth is not without its constraints, according to Frost & Sullivan. Unlike traditional farming, indoor farming is limited because of its lack of awareness in the public eye; operating costs are high, making products more expensive for consumers; it’s useful for a limited number of crops; and most indoor farms run on nonrenewable energy sources, making them susceptible to rising energy costs.
Previous deals to invest in vertical farming have had mixed success. In 2021, Dream Holdings, formerly known as AeroFarms, an indoor vertical farming firm based in Newark, New Jersey, and blank-check company Spring Valley Acquisition Corp. ended up breaking off an agreed-upon transaction with Spring Valley, deciding the deal was not in its best interests.