While Orlando-based National Retail Properties Inc. had record operating results for the last quarter of 2008, CEO Craig Macnab noted during the company's Q4 conference call earlier this month that "clearly we are operating in a different economic environment this year."

"As a landlord to retailers, we are clearly seeing stress in our portfolio," Macnab added. As a result, a big part of National Retail Properties' strategy for 2009 is to maximize the value of its existing assets by re-leasing and renewing tenants. But the CEO said he anticipates the company's overall occupancy to deteriorate further. It is already handling vacancies such as four Circuit City stores, and fully expects there will be other properties and tenants to contend with in 2009.

The portfolio of Realty Income Corp., based in Escondido, CA, is holding up well, with occupancy actually up 10 basis points at the end of 2008, chief executive officer Tom Lewis reported during his company's Q4 conference call on February 12. Same-store rents were up as well, albeit by less than in recent quarters. Given the economic environment, Lewis said he expects same-store rent growth will be "muted," though he pointed out that at least it's still growth. With all the retailer bankruptcies out there, he said, "We've dodged a lot of bullets."

Basic goods and services and value-oriented retailers are holding up best, both Macnab and Lewis noted. While overall restaurants saw the largest same-store rent decline in Realty Income's portfolio, Lewis noted that the fast food segment has in fact been doing quite well. Child care, convenience stores and automotive/tire service retailers are areas still seeing same-store rent growth, he added. "Basic goods and services that you buy on an ongoing basis, that have good price points," said Lewis, are the retail segments holding up much better than other areas of discretionary spending.

Likewise, Macnab noted that c stores—which represent the biggest chunk of his REIT's rental income—had a strong 2008. "Our portfolio is in relatively good shape vis-a-vis retail," said Macnab, adding that the REIT's tenants tend to be "value-oriented—which is where you want to be in this market."

Movie theaters are performing well, too, according to Kansas City, MO-based Entertainment Properties Trust president and chief executive officer David Brain. Multiplex theater properties represent the REIT's primary asset class with 80 properties totaling about 6.6 million square feet. Recent box office numbers were up almost 20%, said Brain during EPR's Q4 call on February 24. "I don't know what other industries are saying that," he added.

All three REITs have been putting considerable focus on maintaining liquidity and strong balance sheets. Entertainment Properties Trust delivered during 2008 and as 2009 got underway, raising equity to fortify its liquidity, Brain noted. Among moves made by National Retail Properties was the repurchase, at a discount, of $25 million of convertible senior notes for $19.2 million, executive vice president and CFO Kevin Habicht noted. Having cash and liquidity is an attractive position to be in today, said Realty Income's Lewis.

Despite those healthy balance sheets, the challenging environment is increasingly resulting in lesser appetite and increased caution as far as new property acquisitions are concerned. Lewis, for one, noted his company's relative inactivity in new acquisitions for several quarters in a row. Realty Income purchased $189 million of properties during 2008, at an average cap rate of 8.7%, compared to $553.7 million of acquisitions during 2007. The REIT's 2009 guidance is based on a number of factors, including new property acquisitions ranging from zero to $375 million.

"Cap rates are rising and anything we could buy, we could buy cheaper later," is the belief that Lewis says has been serving the company well. While cap rates are adjusting up they have not moved enough, Lewis added, and deals will continue to stall until cap rates move up more. When that happens the market will see more deals--"whenever the heck that is," he said.

Macnab is similarly cautious in his outlook, saying the expectation for a challenging 2009 is resulting in conservative investment plans. National Retail Properties acquired $355.1 million of properties in 2008 (at an average cap rate of about 9%), roughly half of the $696.7 million of acquisitions it made in 2007. And the company has revised its guidance for 2009 to reflect a reduction in anticipated acquisitions, from $200 million down to $60 million. That means in 2009 the REIT might be buying less than one-tenth of what it did just two years earlier.

Next week GlobeSt.com's Net Lease Focus will look at fourth quarter results and management comments from net lease REITs focused on office and industrial assets.