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REIT Active in New Hunting Grounds

Realty Income Corp. is carefully navigating a tricky U.S. economic recovery as it adds to its already sizable portfolio. For 2012, says CEO Tom Lewis, the game plan has largely been a continuation of last year’s, as the company aims to diversify beyond retail buildings and bolster its industrial holdings.

The company is still generally bullish on investment as it seeks out properties with high-quality, national and global corporate tenants with proven staying power.

“We made $1 billion in acquisitions last year, and we are expected to make around $650 million in 2012,” said Lewis, whose Escondido-based firm ranked at No. 22 on this year’s San Diego Business Journal list of the region’s largest publicly traded companies.

It was among four real estate investment trusts on the list, which also included BioMed Realty Trust Inc. (No. 21), American Assets Trust (No. 29) and Excel Trust Inc. (No. 47).

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Local REITs Going Strong

Experts have noted that all of the local REITs generally are well capitalized and have experienced healthy gains compared with a year ago in total revenue and in funds from operations, an industry-recognized gauge of the performance of real estate portfolios.

Realty Income recently issued its 500th consecutive monthly dividend on its common stock. Lewis noted that the first was issued in 1970, about a year after the company’s founding in 1969.

For much of the past four decades, the company was focused on retail and related commercial properties, including full shopping centers and stand-alone buildings. Lewis said the current retail climate is sending mixed signals, based on factors like geography and consumer demographics.

For instance, while upscale restaurants and retailers continue to seek spaces for expansion, to serve upper-income clientele, many consumers are still budget conscious — dining out less and doing their shopping at dollar stores and warehouse-club locations.

Realty Income has responded by acquiring several free-standing buildings with commercial tenants that have held up over several upturns and downturns. Those include retailers such as Walgreen Co., BJ’s Wholesale Club Inc. and Smart & Final Inc., as well as movie chains such as AMC Theatres and Cinemark Theatres.

Lewis said about half of Realty Income’s acquisitions this year will be outside of retail. The company over the past year has already been purchasing manufacturing, distribution and other support buildings operated by tenants like Coca-Cola Co., FedEx , Caterpillar and Boeing Co.

More Industrial Acquisitions

There will be more of those industrial-oriented acquisitions in coming months, Lewis said, as Realty Income looks to be in business with national and global tenants that have solid credit histories.

Others experts agree with Lewis’ assessment of retail real estate as a “bifurcated market,” which is prompting investors to move with caution.

Michelle Schierberl, a managing director of capital markets for brokerage firm Jones Lang LaSalle who tracks Southern California real estate, said a limited number of retail properties remain on the market that fit the goals of investors targeting that segment.

“Buyers are being very careful about their underwriting, and they’re having to be certain that they are staying within the parameters for their investments that they told their investors they would be using,” Schierberl said.

She said retail centers in coastal submarkets are generally performing better than those located more inland, meaning landlords have the advantage on the coast while tenants have more bargaining power elsewhere. One result is a regionwide chasm in expectations between the two sides on rental rates, even as San Diego retains an overall retail vacancy that is among the lowest in the nation for major metro areas.

Lewis said that in addition to keeping its holdings diverse across property sectors, Realty Income remains invested in markets across the nation. It is holding back in just one U.S. state until it finds a property whose expected returns justify that market’s above-average prices.

“Hawaii is the only state where we don’t own something — which is kind of odd, because I am from there,” Lewis said.

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