ESCONDIDO, California (TheStreet) -- Recently I had an opportunity to catch up with Tom Lewis, Vice Chairman and CEO, of Realty Income Corp. (O). The Escondido-based REIT just cranked out another consistent quarter of exceptional earnings results.Highlights of the last quarter include a 17.9% revenue increase and a 6.9% increase in common stock funds from operations (FFO). Occupancy held steady at 96.6% and the dividends paid per common share increased 0.9% (the current dividend yield is 4.5%). Consistent dividends remain the power behind the monthly dividend company® as the triple-net REIT announced that is has declared its 503 consecutive common stock monthly dividend. Throughout Realty Income's 43-year operating history, the dividend increased 65 times since listing on the New York Stock Exchange in 1994. The monthly dividend is supported by the cash flow from over 2,600 properties owned under long-term lease agreements with regional and national retail chains and other commercial enterprises.
Q: Realty Income closed over $1 billion in assets last year and you recently increased 2012 acquisition guidance to $650 million. Is this demand correlated to investor demand for your products? A: I don't think the two are necessarily correlated but similar factors may be it work involved in the demand for income and a greater pipeline of sale-leaseback opportunities. Investors are certainly seeking reliable income for their portfolios right now. There are two reasons for this demand. The first is the very low interest rate environment we are in with income oriented investors bearing the brunt of the government's monetary policy stimulus to get the economy moving. The second factor is the overall increase in the number of income oriented investors as more and more baby boomers retire. The primary driver behind the increase in our acquisitions as of late I think is threefold. First, our acquisitions team has been very successful recently in developing additional relationships with corporations and other institutions that have come to view a sale-leaseback transaction as a viable and useful form of capital. Secondly, the recent financial crisis has convinced many corporations of the need to develop additional sources of capital so more companies are looking at sale-leaseback transactions to achieve this. Once again, the low interest rate environment also makes this an attractive time to enter the market to access this permanent form of capital. Q: How would you define the "margin of safety" in your overall portfolio? A: Margin of safety can be achieved in a net lease portfolio in several ways. The first, particularly when buying retail properties, is to make sure the profit the retailer is making in the store you own is significantly higher than the rent they are paying to you. Even if the retailer's sales decline your property is still likely to be the one they view necessary to their business. This has been a primary driver of our underwriting for many years now. The second, is to not overpay for your property. One way to measure this is to keep you purchase relatively close to the replacement cost for the property. In the event you property goes vacant you have a better opportunity to replicate the rent you were receiving in the open market. Finally, working with higher credit tenants can add to your margin of safety. In recent years more of our acquisitions have fallen into this category.
Q: You have been at Realty Income since 1987 so you have seen a few cycles of recovery. What is different about the recovery today? A: There is a phrase that has been used to describe some of the changes and trends that have emerged since the end of the "Great Recession." It is the "new normal." This refers to the observations or beliefs that: the economy is likely to grow at a slower rate; personal income growth is likely to be more muted in the future; that businesses, consumers and governments will need to work their way out of debt; that Baby Boomers will move toward retirement and spend less; and that this combination of factors would have a significant impact on the retail industry. I think that the end result could be more moderate retail spending growth and a somewhat less attractive retail environment. This is why we have taken the time to analyze our existing real estate portfolio and are in the process of strategically selling properties to tenants in industries that will not be a focus for us going forward. It is also why we are widening our investment net a bit to invest in properties that are critical to the operations of tenants outside of retail. Our goal is to move up the credit curve a bit and position our real estate portfolio for this "new normal" investment environment. Q: I read a blog this week proclaiming that "even cavemen learned to innovate or die." How has innovation impacted the Realty Income brand? A:I'm a strong believer in remaining nimble and flexible in order to navigate a dynamic economic environment. At the same time, I think it's imperative that a company maintain its focus on why it's in business in the first place. So within these boundaries, at Realty Income, we've always looked three, five and ten years ahead to determine where we'd like to be in the future, while also working within the current economic and marketing landscape to capitalize on opportunities that arise. This approach has allowed us to make needed changes in our investment based on changes in our markets, has helped us hone our acquisition strategy as competition increased in recent years, and has allowed us to successfully navigate varying economic cycles throughout the past 43 years. Q: Realty Income has a trademark brand of being called "The Monthly Dividend Company®". What does that mean to a retiree (a "retired schoolteacher") today? A: Our muse is "Ida Mae" from Dubuque, Iowa, a retired schoolteacher. She is the motivation for the decisions that we make, as a management team, with respect to new investments, our operations and the monthly dividend. Our company was formed back in 1969 to provide monthly dividends to its owners. When the company started, our founders felt that as long as they were receiving rent from their tenants every month, it would probably be convenient for their investors to receive dividends every month. So the focus on monthly dividends has been in place for many years. Our shareholders regularly email and send us letters commenting how thankful they are to receive either a check in the mail or see their dividends show up in their account each month. For them dividends are a necessity, not a luxury. Realty Income closed at $39.29 per share and the 52-week high was $39.82 per share. The market cap is 5.25 billion and the current dividend yield is 4.5%.
Disclosure: At the time of publication, Brad Thomas held no positions in securities mentioned in this article.