Some people may have been puzzled by the recent announcement that Realty Income Corp., the Escondido-based real estate investment trust that’s been focused on retail properties for 40 years, would be acquiring Napa Valley winery holdings from Diageo PLC for $269 million.
But a look at its growing but carefully picked portfolio — now numbering more than 2,300 properties in 49 states — shows that its reach extends well beyond stores and restaurants.
The REIT owns properties with long-term lease agreements with family entertainment centers such as Boomers, a division of Palace Entertainment; movie theater chains including Regal Entertainment Group; and big personal-fitness companies such as L.A. Fitness International LLC, along with leading players in other business sectors.
“People refer to us as a retail investment company because Wall Street needs to put things in a box, to describe what it is you do,” Chief Executive Officer Thomas A. Lewis Jr. said in a recent interview. “But we have always been diversified beyond the traditional retail industry.”
Diversity has helped its portfolio weather all kinds of economies in the past four decades. Lewis said the result has been dependable growth that some investors might consider slow and boring during economic boom times, but that many others, including older retirees, appreciate as a safe harbor in tough climates like the current one.
“We like to follow something like the doctor’s medical oath — first do no harm,” Lewis said. “Ours is, ‘don’t lose people’s money.’ ”
The Monthly Dividend Company
Realty Income, which trades under O on the New York Stock Exchange and bills itself as “The Monthly Dividend Company,” recently declared its 481st consecutive monthly dividend on its common stock. The latest was about 14 cents per share, payable Aug. 16.
That track record has helped attract investors, as the company has generally defied the roller-coaster stock market and corporate earnings trends of the past two years.
The company reported revenue of $327.5 million for 2009, not far off from its $330.2 million in 2008 and $296.5 million in 2007.
It posted net income of $131.1 million in 2009, compared with $131.8 million in 2008 and $140.4 million in 2007.
On July 28, for its second quarter, ending June 30, the company reported a revenue rise of 2.7 percent from the same period a year ago, to $83.5 million. Revenue for the first six months of 2010 rose 1.8 percent from the first half of 2009, to $166.7 million.
Net income available to common stockholders for the latest quarter was $25 million, down slightly from $26.5 million for the same quarter of 2009.
Christopher Lucas, a Virginia-based analyst with equity research firm Robert W. Baird & Co. Inc., noted that Realty Income’s practice of entering primarily into long-term leases with proven commercial tenants has allowed it to experience relatively little turnover in its properties, helping it maintain consistent income streams.
“It’s a company that historically has done what it’s said it is going to do,” Lucas said. “It’s not the kind of company that offers up a lot in the way of surprises.”
In a recent research report, Davenport & Co. LLC equity analyst Allan Bach, also based in Virginia, noted that Realty Income “has been one of the steadiest performing REITs over the last several years and continues to boast (one) of the cleanest and most flexible balance sheets around.”
Bach noted that the company has no debt coming due in 2010, and minimal debt due in 2011 — primarily a line of credit it tapped for recent acquisitions.
Solid Approach
Lewis held management posts at companies including Procter & Gamble before joining Realty Income in 1987. He said the REIT has essentially retained the investment priorities put in place by William and Joan Clark, who founded the firm in 1969.
For instance, the company focuses on deals involving businesses in basic “human needs” industries, that are leaders in their sector, and offer low-priced alternatives for consumers. Lewis said that approach has especially paid off in recent months as households have cut spending.
In deals that include lease-back arrangements — as was the case with the vineyard properties — the leases are nearly always “triple net,” meaning that the tenant not only pays rent, but also pays utilities, insurance, taxes and maintenance costs associated with the property.
The CEO said the winery deal, which was announced in June, is also an example of an investment with multiple income streams to bolster long-term returns. The acquired Diageo properties include 2,000 acres with vineyards, wine production facilities, retail and visitor buildings, with total leasable space of around 400,000 square feet.
While it sometimes issues bonds or uses short-term lines of credit, the company maintains its founders’ practice of not going into long-term debt to finance acquisitions.
“We have never had a mortgage in our 40 years,” Lewis said.
