By Darlene Bremer

Realty Income Corporation (NYSE: O) was founded in 1969 by William Clark and his wife, Joan, to be a fiduciary for retired investors who required a growing monthly dividend. The couple chose retail properties because under long-term leases to large retailers, these types of properties pay an incredibly stable cash flow.

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AGE: 51 EDUCATION: Bachelor of Arts in business management and marketing from Chaminade University, Honolulu, Hawaii. HOBBIES: Golf. Favorite course: Royal Troon in Ayrshire, Scotland. "I'm proud to say I play enough golf to have a 3.3 handicap." BOOKS: "I guess you could say reading is my other hobby. Non-fiction in particular. I recently finished ‘In an Uncertain World' by Robert Rubin and ‘Bull!' by Maggie Mahar." COMMUNITY ACTIVITIES: "I have been primarily involved in my children's schools and supporting their efforts in sports and drama. My daughter is still in high school, but my son is now a senior at the University of California in Santa Barbara." RECENT VACATION: "Of course I go home every year to Hawaii to visit family. This August, though, we also went on a week-long cruise to Alaska through the Inland Passage."

Thomas A. Lewis has been the chief executive officer of Realty Income since 1997 and in the real estate industry since 1979. The company acquires single-tenant, free-standing retail, triple net lease properties and leases them to regional and national retail chains. The company owns 1,513 properties, totaling 11.6 million square feet, in 48 states and leases them to 88 chains from 29 different retail industries. As of August 2004, Realty Income had an equity market capitalization of $1.6 billion in comparison with $1.35 billion for the same time last year.

Prior to joining the company in 1987, Lewis was an executive with Johnstown Capital, a real estate investment company, an investment specialist with Sutro & Co., and was in marketing at Procter & Gamble. He became CFO of Realty Income in 1992 and helped take it public in 1994. The company's initial offering was $16.00 a share and the company paid a monthly dividend of $1.80, which was the start of a long string of monthly payouts to shareholders. Lewis spoke with Portfolio about his company's business strategy and why they enjoy being one of the few REITs to pay its dividend monthly.

Portfolio: Realty Income has trademarked the phrase "The Monthly Dividend Company." Why is that?
Lewis: Because Realty Income was formed to be a fiduciary for retirees, it has always been the company's mission to pay a monthly dividend. It's more than a motto; it encapsulates who we are and defines what the company is trying to provide to its shareholders. Through August 2004, we have paid 409 consecutive monthly dividends, and we have raised the dividend amount 30 times since going public in 1994. In the past year alone, the monthly dividend has increased from $2.37 to $2.61.

Portfolio: Why do you think more REITs, which are mainly owned for their yield, do not offer a monthly dividend?
Lewis: Historically, most public companies pay quarterly dividends and REITs are generally advised by their bankers when they go public to stay with that tradition. In addition, most REITs focus their investor relations efforts on courting institutional investors, most of whom would not find any incremental benefit to receiving monthly dividends. Most institutional investors view dividends as just one component of their overall return and not as a generator of income as retirees do. Plus, paying dividends monthly does have an incremental cost to a company.

Portfolio: The company recently redeemed more than 2 million shares of outstanding Class B preferred stock. How did that move benefit your shareholders?
Lewis: Those shares were being financed at a rate of 9.38 percent, while the Class C preferred stock that we redeemed a couple of months later was being financed at 9.5 percent. The redemption of those shares and the subsequent issuance of $100 million worth of Class D preferred stock financed at 7.38 percent has allowed us to save $2 million a year and increase earnings to the holders of common stock by 5.6 cents per share. It was really similar to refinancing.

Portfolio: What other steps have the company taken to increase shareholder value?
Lewis: In 1997, we dramatically increased the size of our research staff and the number of acquisition officers who call on retailers. At that time, we made $40 million to $50 million worth of acquisitions per year. The effectiveness of the changes we made has been demonstrated by the fact that between 1998 and 2002 we bought close to $200 million worth of property a year. In 2003, we began providing real estate investment banking services for private equity firms and retailers, which has allowed us to further accelerate our acquisitions to the tune of 302 properties for $371 million in 2003.

Portfolio: What has been the secret to your company's historic ability to maintain growth and consistently provide shareholder dividends?
Lewis: It's really no secret at all. We keep our portfolio diversified and no single retail chain accounts for more than 10 percent of the total. Also, our properties are in every state except for Hawaii and Maine. Florida accounts for about 11 percent of our revenue, Texas occupies 10 percent, and California has about 9 percent.

Portfolio: So the current decrease in retailer sales has not negatively affected the company?
Lewis: Retail sales need to fall off much more than they have before there would be a significant acceleration in retailer bankruptcies, which would in turn affect mall-type properties. A further decline in retail sales would still not negatively affect Realty Income because our tenants primarily serve basic human needs and sell goods and services that have low price points that consumers must buy frequently, such as convenience stores, child-care facilities, tire and automotive stores, and health and fitness centers. Our occupancy rate is still over 98 percent and has never dropped below 97 percent.

Portfolio: With the significant moves made by leading retail REITs like Simon Property Group (NYSE: SPG), Westfield Group (ASX: WDC) and General Growth Properties (NYSE: GGP) have we reached a point where scale is critical to a company's success in the retail sector?
Lewis: Increased size can generate both benefits and detriments to the operations and returns of a retail REIT. Increased size can generate the ability to undertake larger transactions and financings that can be beneficial to the business. In addition, having quality retail locations on a national level can give retail REITs additional negotiating strength with national retailers that want to open new stores in good locations.

On the other hand, the larger you are, the harder it is to generate incremental growth in earnings from acquisitions on an annual basis. As a company grows, it needs to add on a larger number of additional assets each year, bought on an accretive basis, to impact the bottom line. For that reason, the additional size generated by acquisitions needs to be significantly accretive to earnings now, or in the near future, to significantly benefit a retail REIT; otherwise the increased size is unlikely to generate good returns for shareholders.

Portfolio: What are your plans to continue to increase value to your company's shareholders in the future?
Lewis: We will continue to focus on providing retail chains with the capital they need to grow their businesses through our sale-leaseback program, which allows retailers to get their money out of real estate and put their capital back into their core retail business. Basically, Realty Income buys the free-standing property from the chain and then rents it back to them. The retail chain gets the cash and a highly efficient form of expansion capital. Realty Income gets an excellent property with a 20-year lease and a steady income.

To make the transaction beneficial for everyone, however, you have to pick the right retail chain and the right property. So we focus our efforts and research in three areas. The first step is ensuring that we completely understand the retailer's specific business and credit profile. We also make certain that we understand the characteristics of the individual location being purchased and the retail market in the area. Finally, we closely examine the profitability of the retailer by a particular store. Careful research, prudent acquisition, sound financial judgment, and maintaining a monthly, growing dividend will continue to drive us into the future.