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Realty Income formula keeps it on steady ground

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This may not be the best time to own retail properties, but Escondido-based Realty Income Corp. has been working on a successful formula for decades.

Unlike the big mall owners -- such as General Growth Properties, which recently filed for Chapter 11 bankruptcy protection -- Realty Income (NYSE: O) sticks to buying generally smaller, single-asset properties that tend to fare much better during a recession.

The firm posted $30.08 million in net income on $82.89 million in revenues for the quarter ended March 31.

This was compared with $29.76 million in net income on $82.68 million in revenues for the same period a year ago.

Last year, the Escondido REIT posted $131.84 million in net income on $330.2 million in revenues. That was compared to $140.4 million in net income on $294.31 million in revenues in 2007.

The firm has zero debt maturing until 2013 -- the only one of the top 15 real estate investment trusts in the country based on revenues that finds itself in such a position.

Simon Property Group, (NYSE: SPG), in comparison, reportedly the nation's largest REIT, has more than $8.59 billion in debt maturities between now and 2011.

"And we have no mortgages on any of our properties," said Thomas Lewis, Realty Income CEO.

Lewis added that in 2008, when most REITS were cutting or eliminating their dividends, his firm raised its dividend five times, "and once this year."

"Our properties are also generating $2.40 for every dollar that's paid us in rent," Lewis added.

This during a time when property acquisitions have been put on hold until the economy improves.

While about 20 percent of the of the REIT's 2,348 retail properties are restaurants. most are of the fast food variety -- a segment that tends to keep faring well right through downturns.

Realty Income's sit-down restaurants haven't been quite as successful, but even when Buffet Holdings Inc. filed Chapter 11 a couple of years ago, most of the eateries, which include HomeTown Buffet and other restaurants, were alright.

"We had 116 HomeTown Buffets in our portfolio. Of those, the keys were only handed back in 12 of the cases," Lewis said. "All the rest were profitable."

Incidentally, Buffet Holdings announced Tuesday that it had successfully emerged from Chapter 11.

Lewis added that in an effort to shift away from vulnerabilities, Realty Income sold about $29 million worth of restaurants last year.

Lewis said he did have to reduce some of the rents on the HomeTown Buffets, but added that his firm will still receive 87 cents on the dollar off these rents.

Convenience stores such as 7-Eleven, which like fast food restaurants, have also tended to fare better during downturns than many other retailers, amount to 16.4 percent of the portfolio.

This is not to say that Realty Income is immune if things in the restaurant industry and convenience store sector go bad for a long period.

"A downturn in either of these industries, whether nationwide or limited to specific sectors of the United States, could adversely affect our tenants in these industries, which in turn could have a material adverse affect on our financial position, results of operations and our ability to pay the principal of and interest on our debt securities and other indebtedness and to make distributions on our common stock and preferred stock," the company said in a release.

Theaters, which account for 9.1 percent of Realty Income's total portfolio, also could be vulnerable in the downturn if people rent movies or otherwise stay home instead.

Lewis doesn't seem too worried, however, given that most of the firm's other assets are in goods and services that people must have.

Child care facilities, which have been a main staple since Realty Income was founded a generation ago, still account for 7.5 percent of the total. This is an example of a service that is hard to do without.

Not every sector is a favored asset class. For example, automobile dealerships make up 3.1 percent of the portfolio, but here again, Lewis suggests other retailers should pick up the slack.

People may not be buying automobiles, but they will need new tires at some point. This segment accounts for 6.8 percent of the total, and automotive service adds another 4.7 percent.

"We have 30 different retail concepts," Lewis said.

This scattershot formula seems to have worked. In 40 years of existence, Realty Income claims it has never ended a year with an overall occupancy of worse than 97 percent.

The firm finished the first quarter with an average occupancy that was slightly lower than that at 96.4 percent.

Along with high occupancies, the company also has had good timing. The firm locked in a $355 million Wells Fargo/Bank of America credit facility in the middle of last year, only a couple of months before the economy went into a tailspin.

The company was founded in 1969 and has been publicly traded since 1994.

Realty Income's stock price, which has traded between a high of 34.86 and a low of 14.25 during the past 52 weeks, has been trading around the $22 level in recent days.

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