Realty Income Seeks Diversification Through Acquisition
12/12/2012 | by Matthew Bechard

Tom Lewis, CEO of Realty Income Corp. (NYSE: O), joined REIT.com for a CEO Spotlight video interview at REITWorld 2012: NAREIT's Annual Convention for All Things REIT at the Manchester Grand Hyatt in San Diego.

Realty Income recently struck a deal to acquire American Realty Capital Trust. Lewis said the deal is on track to be completed by the end of 2012. He discussed how he thinks the transaction will benefit shareholders.

"One is size. We'll add about 507 properties to the portfolio, and it will move us to about an $11.5 billion market cap," Lewis said. "Most important is the quality of the cash flow. About 75 percent of the revenue that will come in from these properties is from investment-grade tenants. It also really grosses up to about 135 properties and diversifies the portfolio by industry, by tenant and by geography."

Lewis said the transaction is expected to raise the company's earnings by roughly 20 cents per share, enabling Realty Income to raise its dividend by approximately 13 cents per share.

Lewis also talked about Realty Income's efforts to adequately diversify its business.

"Diversification is very important. The only reason to invest is to get a return, but it needs to be risk-adjusted," Lewis said. "Diversifying your cash flows is one way to diversify risk. With the close of this transaction, about 3,500 properties leased to 150 tenants in 50 different industries really allow us to be diversified."

Currently, 85 percent of Realty Income's revenue comes from retail properties. The remaining 15 percent come from industrial assets leased to large companies. The American Realty transaction will bring the portfolio's composition down to roughly 77 percent retail properties, according to Lewis.

"Diversification is the primary area that we are looking for. If we can do that and build the cash flows, then we normally think it's a good transaction if we've paid the right price," he said.

Lewis said consumers are "stressed" in the current economic environment. As such, as they're spending primarily on non-discretionary items. Tenants that rely on discretionary spending by middle-income consumers, such as casual dining, are struggling, Lewis said.