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Lewis

ESCONDIDO, CA—Realty Income Corp. purchased three properties for $10.7 million during the third quarter, its first acquisition in nearly two years.

“After 20-plus months of not buying property and waiting to see if prices would adjust and cap rates get a little better, we have started acquiring again, pretty much on a modest basis,” said Tom Lewis, CEO of the Escondido, CA-based REIT, during its quarterly earnings call last Thursday.

The new additions to Realty Income’s portfolio were purchased at a cap rate of more than 10%, from what is a new tenant for the company. The tenant is a chain in the health and fitness industry, Lewis said, and is a good company that had some capital needs a sale-leaseback took care of.

“That transaction was one where a tenant had some immediate cash needs, and we were able to go in and help them solve their problem at a pretty good rate of return, and was really us getting started again in acquisitions,” Lewis said.

As a percentage of rental revenues health and fitness tenants accounted for 6% of Realty Income’s portfolio at the end of the third quarter; its largest tenant in that industry segment is L.A. Fitness. Health and fitness was also among the industry segments that saw an increase in same-store rents during the third quarter, Lewis said during the company’s quarterly call.

Lewis said the company “wouldn’t mind at all” if health and fitness accounted for an even larger share of the REIT’s portfolio, noting that the baby boomer demographic is helping drive demand for the industry and further noting that between 1991 and 2009 the compound annual growth rate for the industry has been close to 9%. “It has been a growth industry and continues to grow,” he said. “We think it’s a great industry.”

Realty Income’s new acquisitions came during a quarter that saw a rise in transaction volume for the single-tenant retail sector, according to new third quarter reports released by Real Capital Analytics earlier this week. RCA tracked sales of $300 million of single-tenant retail properties during Q3. That’s not a huge number, to be sure, and it’s half of the $600 million of such transactions RCA tracked for the third quarter of 2008—but it is also clearly an increase over the $180 million RCA reports for Q2 of this year and the $130 million it reports for Q1.

Realty Income continues to look at potential transactions, and Lewis said he expects to close on more property acquisitions during the fourth quarter. Cap rates for portfolio transactions seem to have stabilized in the 9% to 10% range, he added, and an only modest increase in transactions in the marketplace has been matched by few buyers out there to compete with.

“Of the transactions that you do see out there now, I think a number of them still are some people coming to market with some immediate financing needs that might not meet the quality of some of the portfolio acquisitions we would want to make. However, we are starting to see some people tiptoe back into the market with some larger transactions, and I’d say bite-size, $10 million to $15 million range, is what we’re seeing out there,” Lewis said. As corporations increasingly need to overcome balance sheet and refinancing obstacles, Lewis said he expects “that will accelerate the number of transactions we see out in the market, but it’s still pretty modest to date.”