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ESCONDIDO, CA-Is the virtual stalemate in the net lease market—as least as far as retail properties are concerned—close to coming to an end?

Realty Income Corp., which hasn’t purchased a single property during the first half of the year, is beginning to dip its toes back into the acquisitions waters. Chief executive officer Tom Lewis, speaking on the Escondido, CA-based REIT’s July 30 second quarter earnings call, notes that the company has been “waiting for property prices to adjust downward and cap rates up. I think it’s been about 20 months since we put out an LOI on a property.”

But, “I know there will be some modest acquisitions in the third quarter, and I’ll define that as a trickle, and we’ll see where it goes from there,” Lewis says. “We are out looking at transactions and buying again.”

Lewis reported seeing a narrowing of the bid-ask spread in the market, with seller expectations becoming “more realistic,” and adds that he believes this “will probably lead to some opportunities in the second half of the year.”

“At this point property prices have come down a fair bit, cap rates have come up as we expected, and we’re really now starting to see a number of transactions come through the door that are starting to get up to the cap rate expectations, up in the area around the 10 cap range, where we start to become interested,” Lewis says. For historical perspective, Lewis noted that the company was buying properties in the 8.4% to 8.7% cap rate range in the 2004 to 2008 period; around 9.5% cap rates in the 2003 to 2004 period; 10% to 11% cap rates between 1994, when the company went public, and 2003: and at approximately 11% cap rates prior to 1994.

Realty Income’s portfolio saw some rental revenue decline during the quarter due to dispositions; it sold nine properties for a combined $5.3 billion during the quarter. But it reported a small, 0.5% increase in same-store sales for its portfolio. While restaurants and motor vehicle dealerships accounted for the majority of same-store sales declines, and apparel, book stores and office supplies retailers were generally flat, convenience stores, healthy and fitness and tire stores accounted for the largest increases in same store sales, according to Lewis.

“Given the economy and what’s going on in retail, when you look at same-store growth I think it will continue to be positive but I also it will be muted this year,” Lewis says, adding that any growth today “is a big positive.”

He also noted that the kinds of retailers selling basic goods and services at a low price points have been the best performing retailers of late, which has been a similar theme for at least a few quarters at Orlando-based National Retail Properties Inc., which also is focused on single-tenant retail assets. In fact, that REIT’s CEO, Craig Macnab, made a point of noting during its August 3 quarterly earnings call that “we have very few retailers selling luxury items.”

National Retail Properties likewise made no new acquisitions during the second quarter, but its management is looking and remains optimistic about the future. “In the last several months we have underwritten a couple of potential acquisition opportunities,” Macnab says, explaining that they continue to be very selective about potential purchases. “I am enthused about the multi-year opportunity that we have ahead of us to cherry pick quality acquisition opportunities.”

Both net lease retail REITs have experience isolated cases of troubled tenants in recent quarters, but their occupancy rates remain high. At the end of the second quarter, National Retail Properties’ portfolio was 96.7% occupied, while Realty Income’s was 96.6%. Both companies typically buy their properties in portfolio sale-leasebacks with the occupants.

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