NNN REIT Inc (NNN) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Commercial Net Lease Realty Inc. first-quarter 2005 earnings release conference call.

Today's conference is being recorded.

For opening remarks and introductions, I would like to turn the call over to Chief Executive Officer and President Mr. Craig Macnab.

Please go ahead, sir.

Wanda, thank you.

Good morning and welcome to our first-quarter 2005 earnings release call.

I have with me on this call Kevin Habicht, our Chief Financial Officer, who will report on our first-quarter financial results after certain brief comments from me.

We are very pleased with our financial performance in the first quarter.

Our team was productive in securing acquisitions, several of which were negotiated transactions with little or no competition.

Also, we're delighted with this morning's announcement about exercising our option to acquire 79% of Orange Avenue Mortgage Investments.

This is a relatively small transaction, but we believe that it will create significant value for our shareholders.

As a reminder, as we execute on our business plan for 2005, all of us at Commercial Net Lease Realty are focused on the retail marketplace.

Our focus on net leased retail real estate properties is consistent with our core competencies and the expertise of our experienced associates.

As evidenced by the excellent results in the quarter, particularly before the two impairment charges, our single-minded focus is paying off.

In the most recent quarter, we acquired 21 properties for $47 million for our investment portfolio at a weighted average cap rate of approximately 9%.

Our portfolio continues to be in excellent shape with occupancy at 97.5% and with very few lease renewals in both 2005 and 2006.

We're looking forward to closing the previously announced National Properties acquisition which will close in mid-June.

This sole source transaction will give us approximately $60 million of assets with an initial yield in the mid-nines.

We think that this is an excellent current return for a portfolio of this caliber with an average lease life of approximately 12 years.

Tenants in the portfolio include QuickTrip, Perkins, Academy Sports and Walgreens amongst others.

The largest tenant in the portfolio is QuickTrip, and we are delighted to initiate our entry into the convenience story category with this high-quality operator.

During the first quarter, we took advantage of the shortage of supply of high-quality retail properties and sold four properties from our investment portfolio for total net proceeds of nearly $32 million at a weighted average cap rate of 6.6%.

We're very pleased to redeploy the proceeds from these sales into higher yielding properties.

Previously we talked about capital recycling, and we are very pleased with this execution.

Our development group had a strong quarter.

Taking advantage of the demand for high-quality retail real estate, we successfully sold several of the properties we have developed.

The visibility for that business in 2005 looks promising to us; however, as previously discussed, the quarterly progression of these gains is difficult to project.

In summary we're very pleased with the financial performance and the progress we have made on setting the stage for the balance of the year.

I will now hand over to Kevin whose remarks will include additional detail on the Orange Avenue Mortgage Investments transaction.

Thanks, Craig, and I will start by following through some more of the details on the first-quarter press release.

But I will start first by saying we will make certain statements that may be considered to be forward-looking statements under federal securities laws.

The Company's actual future results may differ significantly from the matters discussed in any of these forward-looking statements, and we may not release revisions to these forward-looking statements to reflect changes after we have made the statements.

Factors and risks that could cause actual results to differ militarily from expectations are disclosed from time to time in greater detail in our filings with the SEC and in this morning's press release.

With that, as indicated in the press release, FFO was $19,596,000 or $0.37 per share for the first quarter of 2005.

That compares with $0.36 for the same period last year.

That is in line with consensus estimates and our budget.

Looking at some of the income statement line items, total revenues for the first quarter were $33.1 million.

That represents a $3.5 million increase from a year ago.

The increase in total revenues is primarily a result of the increased rental revenues which increased 13% or $3.4 million primarily due to the acquisitions we had made in 2004.

Additionally we have received lease termination fees of $1.6 million in the first quarter of '05 on a property we subsequently sold, and that compares with no lease termination fees in the first quarter of '04.

Occupancy in the first product, as Craig mentioned, was 97.5%.

That is up 10 basis points from the immediately prior quarter and up 70 basis points from a year ago.

Real estate expense reimbursements were flat with prior year and prior quarter amounts.

In our revenue section, we reported a $469,000 gain on the sale -- from the sale of one of our properties in our taxable REIT subsidiary.

The reason this sale shows up in continuing operations rather than discontinued operations, like most of our dispositions, is that we had not started collecting rent at the time of the sale.

So GAAP requires us that we report this on continuing ops.

Interest income and other income from real estate transactions decreased $407,000 to 1 million 308, largely due to the payoff of $20.9 million of mezzanine loans in mid-December 2004.

G&A expense was $4.8 million for the quarter.

That is down from 5.9 in the year ago period.

This decrease is attributable really to a number of expense line items, including dead deal costs and some compensation line items, but some of these were onetime items or just a timing issue.

We expect G&A to average approximately $6 million per quarter for the remainder of the year.

Property expenses were $2.8 million, which was fairly flat compared with prior year and prior quarter amounts.

In the first quarter, as Craig alluded to, we recorded an impairment related to two assets, one in continuing operations and one in discontinued operations total impairment of of $1,990,000.

In other expenses and revenues, interest and other income declined $600,000 to 467,000 as a result of lower outstanding loan balance to one of our taxable subsidiaries and some onetime other income items in the prior year amount.

Interest expense increased slightly from year ago levels to $7.9 million.

That is as a result of modestly higher outstanding debt balances and less short-term floating-rate debt.

At March 31, '05, only $33 million or 6% of our 554 million of total liabilities was floating-rate, and that 6% compares with 12% floating-rate debt a year ago.

Floating-rate debt as a percent of total gross assets, which I believe actually is a more meaningful metric, is down to 2.4%.

As a result, increases in short-term rates should not have a significant effect on our income statement.

The equity and earnings from unconsolidated entities was $1,081,000, which was down somewhat from the prior year.

With our taxable subsidiary REIT consolidated into our income statement since the beginning of '04, this line now just represents primarily two things.

One, interest income from mortgage security investments we have made that are held in LLCs which are capitalized with 100% equity and our 25% equity interest in our headquarters office building.

In discontinued ops for the investment portfolio portion, we sold four properties from our core portfolio as Craig mentioned.

Total GLA of 340,000 square feet at an average sales cap rate of 6.6%.

These included three targets and one CompUSA, and we sold these primarily because we felt like we were getting premium pricing and so a limited upside for many years.

So we would take this opportunity and redeploy that capital.

The gain in the operating results of these properties are included in the supplemental information section labeled "Discontinued Ops/Investment Portfolio."

In the discontinued ops inventory properties section, we sold a total of five properties from our taxable sub, one of which I mentioned just previously in my comments on the revenue section.

Two of the properties sold from our development unit generated a gain of $1.4 million and a disposition cap of 7.1%, and three of the properties were sold out of our 1031 exchange unit and generated a gain of $1.1 million with net proceeds of 9.3 million and representing a 6.6% cap rate.

As we have indicated, there will be choppiness in this number from quarter to quarter depending on the timing of the sale.

With regard to FFO guidance, we are slightly revising our guidance to $1.49 to $1.52 per share for 2005.

That increases the bottom end of the range by about a penny.

We do see the second half of 2005 being a little bit stronger than the first half based on the way we see things shaping up at this point.

We feel like 2005 is starting off fairly well, and the visibility for the balance of the year is shaping up well.

The acquisition environment still is a challenge, but we are making reasonable progress there.

The market for disposition of properties that we have developed or acquired for sale continues to be very robust, and we expect to continue good gains for the balance of the year.

And as always, the projections are based on a number of factors and uncertainties discussed in our public filings.

Moving to the balance sheet, there was little change in the capital structure during the quarter.

We finished the fourth quarter with total -- first quarter with total liabilities of $554 million.

That is up $13 million from the fourth quarter of 2004 and up $38 million from prior year amounts.

Of this total debt, 155 million was mortgage debt.

Approximately 22% of our assets are encumbered by mortgages leaving 78% of the assets unencumbered.

Total debt over total assets on a gross book basis was 39.6%, which is up slightly from 39.3 last quarter.

On a market cap basis, leverage was 35% even.

Coverages.

Interest coverage for the first quarter of 2005 was 3.85 times, flat with last quarter.

Fixed charge coverage was 30.0 for the first quarter of 2005.

Again, that is flat with the prior quarter.

In summary, we feel like the first quarter was in line with our plan, while the acquisition environment is not exactly what we would like we believe.

We're focused on working to improve the long-term operating performance and bottom-line results.

The Company is in very good financial position, and the core portfolio is performing well.

We have a very solid portfolio of properties and equally solid capital structure.

Our challenge really now is to grow the bottom line, and we are optimistic we are going to be able to deliver on that in 2005.

Shifting gears a bit, we also announced this morning an investment that while it fits within our mezzanine investment bucket and it is clearly modest in size, we did want to provide some additional detail on the release since it is a little unique.

As indicated, we made a $9.4 million investment to purchase approximately a 79% interest in Orange Avenue Mortgage Investments Inc.

Previously Orange Avenue was an operating company which originated warehouse, securitized and serviced commercial real estate loans.

Last December it sold its business and the vast majority of its assets to a major investment banking firm.

As can be seen in our press release, what is now left in Orange Avenue is primarily cash and residual interest in loan securitizations that they securitize from 2001 to 2003.

And just a little history.

In 2000 we provided a $15 million line of credit to Orange Avenue, and we were granted an option to purchase an equity interest.

From 2001 to 2003, Orange Avenue executed six loan securitization.

The loans underlying the securitizations are secured by commercial real estate and are generally personally guaranteed.

Average loan size is a little under $800,000 with a 72% loan to value ratio.

Over the years, Orange Avenue retained the residual interest in each of the six securitizations that they executed, and in connection with each of these securitizations, NNN, we purchased a senior minority interests in five of those six residual interests.

And by exercising our option today, we will be purchasing 79% of the portion of those residuals we do not already own.

These residuals have performed very well and have produced a return of approximately 15% for NNN.

With the exercise of this option, we will be consolidating Orange Avenue's balance sheet going forward beginning in the second quarter.

As can be seen by the press release, we're paying $9.4 million to purchase 79% of Orange Avenue's $37.3 million of equity.

So our share pencils down to almost $30 million.

Accordingly, we see this as a very compelling investment for us.

We're still working on some of the tax planning related to this, but plan to convert Orange Avenue to a REIT.

Due to the midyear option exercise and tax strategies we have yet to implement and some anticipated onetime expenses, we anticipate this investment may add $0.01 to $0.02 for 2005 FFO per-share.

And beginning next year in 2006, we believe the accretion could amount to $0.03 to $0.04 per share per year for the next three or four years when the amortizations of the loans start to diminish the accretion to $0.01 or $0.02 fairly quickly.

We believe this is a very compelling investment for us given our very attractive purchase price and the significant amount of cash and equity on the Orange Avenue balance sheet.

We will provide additional color on this investment in subsequent quarters.

That is all I have in terms of prepared remarks.

Do you want to go to questions?

Wanda, we would like to open it up for questions, please.

(OPERATOR INSTRUCTIONS).

Michael Billerman, Smith Barney.

I just had some quick questions.

There was effectively I guess $2.5 million of gains that hit FFO, offset about $1.9 million of impairments such as FFO?

That is -- I mean yes as well as there was -- I mean we would look at there was a lease termination fee as well of 1.6.

And where was your lease termination fee booked?

In rent.

In rent?

Yes.

How much lease termination fee did you earn all last year?

I don't have that number in front of me.

I can circle back to you on that.

Do you have a sense of how much you put into your guidance originally?

The lease term fee?

Yes.

We really did not have much put in.

We also did not have the impairments in our guidance either.

So in some sense, they have come kind of close to offsetting.

And in terms of gains from either selling the development or the assets you hold for resale, how much was embedded into '05 guidance and how much of it stays?

All of what we reported in the first quarter is embedded in our guidance, and for the year I mean we see gains of -- this is before overhead and etc., which that all gets netted down against a gross gain of about $12 million.

And then what would be the net number?

Net would be after-tax we think we will net about 3 to $4 million.

Of which 2.5 hit the first quarter?

That is a pretax number you are looking at there, yes.

All right.

And that is pretax and that is pre-overhead, that is just gain.

If that makes any sense. (multiple speakers)

In terms of the development inventory portfolio, it says you invested 19 million, including acquiring three properties.

How much of that was investing in the pipeline versus the acquisition of property?

In the build a suit development operation, we had acquired two -- actually check that -- make that three land parcels for approximately $12 million, and we had about $6 million in work in process.

And where are those land parcels, and how much acreage is there?

The total acreage, I don't have that number handy, but it is --

The total acreage is about 30 acres, Michael.

30 acres?

Yes.

What are you planning on building on those?

It just seems high for three land parcels.

Well, let me just talk a little bit about our entire portfolio on the development side.

Most of our portfolio on the development side are freestanding single-tenant properties.

We have a fairly healthy development pipeline of drugstore developments with increasingly more Walgreens than Eckerd and CVS.

And just we are working on about 15 different Walgreens projects in various stages.

About two-thirds of those will be completed during the course of this year.

In addition to that, we have a small number of multitenant development projects, and one of the parcels that we purchased in the first quarter is for a multitenant development here in the state of Florida.

And that particular land purchase was 25 acres pursuant to your question.

25 acres and the value I was assume was the majority of the 12 million?

I did not hear that, Michael.

The majority of that, how much of the cost steadied up?

Probably 9 of the 12, yes.

Okay.

Kevin, you referred to the payoff of the mezz, the 21 million in the fourth quarter.

How much of those notes do you have on the books today?

We are left with a total of $24.5 million of mezzanine debt.

And have those holders triggered their rights to prepay?

Sorry, check that. 25.4 transposed (multiple speakers).

Say that again?

Michael, the answer is they have not, but it is hard to say.

They had success in selling a building in 2004, and in this strong environment for selling assets, I suspect they will try to find a way to take advantage of that in the second half of 2005.

Who did you buy the Orange Avenue investment from?

It was from the existing shareholders.

We had an option to purchase the 79% interest from the folks who own -- which has consisted largely of senior management of Orange Avenue.

Those were their shares.

Was there any executives at CNL that held those shares?

There is two of them.

Jim Seneff and myself were among the group of shareholders of Orange Avenue.

And how much do yourself and James had owned of it?

I owned a nominal amount.

Jim Seneff owned the majority of Orange Avenue prior to this exercise.

And the price that you paid was a pre-agreed price, so there was effectively no negotiation?

Correct.

It was pre-agreed in 2000, and it was set at really their cost, which increased 10% a year.

But I think, Michael, just to add a little bit more color on it, you're focusing on related party transaction.

What this does for us is it does three things.

One, we think it will create significant value over the next several years, number one.

Number two, it monetizes what was previously an option.

And thirdly, it essentially eliminates another related party transaction because Kevin's ownership and Jim's ownership was previously disclosed by exercising this option.

We're taking control of our destiny, monetizing it and creating value for our shareholders.

Eric Rothman, Wachovia Securities.

A number of my questions have been asked and answered, but I was curious on I guess it's a related topic, the acquisition of the services and the taxable REIT subsidiary, the 1.3% interest that was mentioned in the 10-K as subsequent events that you acquired from Jim, Gary and I guess yourself, Kevin, was that an accretive event for shareholders?

Well, we think it was probably neutral.

We had engaged a third-party valuation to determine what the value was.

What we had in services was a number of projects and some other items, and it was based on that valuation.

But I don't think it is accretive or dilutive.

I think it was about a push.

And what did the REIT pay for that?

It paid the $829,000 that was disclosed in the K.

I guess maybe I missed that.

And then I guess the question would be why bother buying that in?

Well, I mean again the cleanup as many of you are aware back in the old days, this was how taxable REIT subs in the REIT world operated where because of the tax laws at the time the REIT could not own the voting control of that subsidiary.

So they placed a small amount of voting -- small amount of stock, all of which was 100% of the voting stock in the subsidiary in management's hands, so that they could operate this taxable unit.

As you are aware, the taxables subsequently changed, and for us we think it is prudent to clean it up and again eliminate another related part, ongoing related party transaction.

Eric, just to add to that, we are very pleased with the score that we got from ISS on the corporate governance of 99.6.

It is absolutely in the highest 99.6% of companies.

We are focused on good corporate governance and cleaning up everyone of these little details.

We are knocking them off one by one, and we have made a lot of progress in the last 120 days.

Sure.

How many other related party transactions are out there, do you think?

There really is not that much at this point.

As we discussed previously, we own 25% of this building, so that's probably the biggest one.

But we have eliminated -- nearly all of them in terms of any services that would have been provided by an entity affiliated with Jim Seneff, so that has all gone by the wayside at this point.

There are a handful of three or four bold legacy mortgages on properties that we hold at about $5 million.

It is fully disclosed.

Those are amortizing often and will go away with time.

They are fairly modest, and as I mentioned, they are fully disclosed in the 10-Ks and Qs.

With respect to Orange Avenue and the personal guarantees, was any compensation that was offered for Orange Avenue in exchange for those personal guarantees which I would assume were personal guarantees from Jim or no?

No, the personal guarantees I was referring to are really on the loan underlying the loan securitizations that Orange Avenue performed.

So when they went out and put a 72% mortgage on a property, they would also secure the personal guarantee of the borrower.

So really it is just additional security for those loans, somewhat unique.

We obviously think it's a great part of the security.

So the personal guarantees are not related to the management team or at the corporate level.

It is really at the loan origination borrower level.

Sure and those guarantees remain in place.

How will this flow through the income statement?

Does this just show up as a I guess once it is rolled in --?

It will flow through interest income basically.

Just as a follow-on to the question that Michael Billerman asked that I am sure you are following up on, in terms of our original guidance and projections, we originally had this exercising this option a little earlier in the year in our internal projections.

So that amount has been in there and continues to be in our guidance.

Okay.

So the $9 million or so, the 9.4 million that you spent on this was included in the guidance, as well as the expected $0.01 to $0.02 of accretion from it.

Is that right?

Correct.

Right.

Okay, just changing topics very quickly.

A couple more details on those acquisitions.

The 9.0% cap rate that you mentioned for the 21 properties, is that a forward cap rate or an in place cap rate?

In place.

And then what type of properties were those?

Just 21 different retail properties in a variety of different states, probably a little more concentration in Texas than anywhere else.

A couple of them were follow-ups from transactions that we had initiated in 2004 that had closing details to resolve that spilled over into 2005.

Traditional retail properties, nothing that you were kind of pushing the envelope on as you mentioned you might do in prior quarters?

I'm sorry, I did not hear that.

The properties themselves are just kind of bread and butter triple net freestanding retail, not these potentially different retail properties that you have talked about maybe going into?

Yes, I think these run straight down the middle retail operations, Main Street, well located good properties at obviously fairly small dollar increments for each property which we like.

What is the average lease term on those?

I don't have that number right in front of me, but I would guess that it is 15 years.

I think eight of them as I recall had 20-year lease lives.

Do you ever envision going after properties with shorter lease terms, hopefully to boost yield as typically properties are (multiple speakers)

We are looking at those.

What we have found is that particularly for high credit properties, we have not found opportunities where we thought the reward compensated for the risk.

However, for our acquisition offices, that is a category where we can properties underwrite the real estate and the opportunities for it.

And I think our focus on underwriting real estate allows us to consider that without feeling too exposed to risk.

Great.

And then I guess just a very last question.

With respect to the development property that we spoke of earlier, the multitenant, I assume it is just a traditional shopping center?

It is indeed, anchored by one of the nation's largest discount retailers.

Do you envision holding that, or will you flip that?

The anchor tenant is going to purchase the land from us, although that deal is not completed yet.

Thank you very much.

I will yield the floor.

Thank you for all your time.

(OPERATOR INSTRUCTIONS).

Dave Fick, Legg Mason.

The Orange Avenue investment, I know you feel like this is beating it to death, and I think by the way it's a very good transaction just looking at the balance sheet of Orange Avenue, are you taking on an employees associated with this?

No, there will be no employees and very little additional G&A.

We're not the servicer of these loans, so there is no business operations if you will.

Are there any fees being paid to a CNL-related entity?

None.

Okay.

Why wasn't the related party issue and the holder of the shares being purchased disclosed in the press release?

No particular reason. (multiple speakers)

Probably just an omission.

It seems like sort of the most material fact.

It is disclosed in our prior Ks and Qs regarding this investment.

But it is not in the press release.

I assume that Seneff's departure from the board is along the same lines of the cleanup activities you referred to, Craig?

You know, I think the way I take it is we are very pleased with his vote of confidence that management is going to do a good job for his continuing investment in Commercial Net Lease Realty.

Okay.

You're not changing your guidance in terms of acquisitions for the balance of this year.

Can you just comment on how you are seeing the acquisition environment and sort of the forward two to three-year growth strategy for the Company overall?

Where are you going to be?

How big do you see yourselves a couple of years out?

I think that starting with the former question about the acquisition environment, there are obviously plenty of competitors out there, particularly when financial institutions are extending very high loans to value for leveraged buyers of freestanding retail real estate with good credit.

In terms of the cap rates, I don't see much relief even in a rising interest rate environment.

We're simply not building our business plan around cap rates returning to the levels of a couple of years ago.

Having said that, by a single-minded focus on retail real estate, we are doing a good job, and our acquisition offices deserve all the credit of identifying and sourcing opportunities which will build value for our shareholders.

We are focused in terms of sort of -- for $150 million, which is our guidance for this year -- we started off and had a very good first quarter helped by the National Properties acquisition of $60 million, which should close in mid-June.

By the end of the first half of this year, we will have closed on in the range of two-thirds of that number.

Having said that, we are working on a number of different transactions to meet but preferably exceed our $150 million objective.

However, we are only working on them.

We have a good inventory, a good pipeline, but there is a long way between working on them and closing them.

In terms of the size, I think that there are a number of different ways to build value for shareholders, which is the focus.

We're not -- one of our strategies does not include bulking up in size and very tight, very thin margins.

So we are focusing on each individual piece of real estate that we look at based on the real estate fundamentals and the risks and the reward from it.

Okay.

If you cannot be a buyer of the kind of asset that you're currently holding in your core portfolio, then why not be a more aggressive seller?

I think in the first quarter we took pretty good advantage of a couple of opportunities to sell assets that generally had flat leases.

A couple of those properties had lease renewals coming up in less than 10 years.

The store sales are good, and the tenant is absolutely going to exercise their option to extend the lease.

However, the bumps are slim or none at all.

So we took advantage of this environment, sold those properties, reinvested the proceeds at very nice spreads.

Where we have opportunities to do that, we would like to continue to find them.

In terms of the types of properties that we purchase, just to give you a little bit of flavor for it, we did purchase, for example, five tire retailers with a credit tenant where an existing buyer had an opportunity to close on these properties.

They had already delayed once.

They got into a second extension, and they still did not have their financing or actually an exchange in that particular case, and the seller said to them, we're not going to give you time.

So in very short order, we underwrote and acquired these properties at something slightly better than where we think the market rate for these properties.

Where I say slightly better, I'm talking a spread of at least 100 basis points.

We chose to keep that in our portfolio, rather than selling it for a onetime gain.

So that strategy is no different to buying short lease life high-quality assets.

So we are scrapping out there in the field every day, David, and we're finding pretty good opportunities.

Thank you.

Keep up the good work.

I'm sorry, just to say one more thing, in terms of this quarter as managers, we were very pleased with the financial performance, particularly if you take a look at what the number would have been before the two impairment charges that we took.

Wanda, are there any more questions?

Stephanie Krewson, BB&T Capital Markets.

Very good quarter.

I have a bunch of questions.

I apologize for nitpicking, but it is better just to get these out sooner rather than later.

First of all, what is your CIP at the end of the quarter within your balance sheet?

Construction in progress?

Yes, one second.

Go onto your next one.

I will read that while you're talking.

The second one would be, could you please provide the square footage for the lease expiration schedule from 2005 to 2009?

Yes, one second.

Because you know I ask for that every quarter, so now I'm going to start asking it on your calls.

Hint, hint.

You know how subtle I am.

Square footage for 2005 is 102,000 square feet.

It is about $0.5 million or $500,000 of base rent.

Okay.

And I will just get the schedule for through 2009 from you after the call?

Oh, I'm sorry.

I just need the square footage, Kevin.

I can get it after the call.

Okay.

Next year 2006 is 143,000 square feet, and I will give you the remainder of years after the call.

Okay, thanks.

Moving right along, in terms of your mezz investment in the Orange Avenue, I know a lot of questions have been asked, but I have a few more.

The first is, who owns the remaining 21% that you don't own?

It is part of the same group that we bought the 79% from.

So it's really the senior management of Orange Avenue.

You know the existing shareholders, and by our exercising our option, we essentially diluted them by our 79%.

Okay.

So does -- Kevin, for example, do you still own some of it?

Yes, I still own -- yes, a minor amount.

So you, Jim and Gary?

Well, you know, a dozen plus other people is directly related to Orange Avenue.

Primarily the employees of Orange Avenue, Jim Seneff, Gary and Kevin.

Right.

And what is the maturity of that investment?

Well, these are residual interests in loan securitization, and so that will be driven obviously by how fast the underlying loan is amortized.

The original loan amortization of the loans is 25 years.

So it could go on for a number of years meaning 15 plus, but obviously as loans pay off and prepay, the maturity will diminish.

Sure.

The last question I have on Orange Avenue would be, why didn't you buy 100%?

I do applaud you for having cleaned up a lot of your related party interest.

You know that that always vexed me piecing them together from your Ks and Qs, but why not just by 100% and clean this up completely?

I mean, we could have I guess.

It was easiest to proceed with this purchase because the purchase price was spelled out five years ago when the option was granted.

So it was formulaic and very clean and a very attractive price.

We feel like we are probably acquiring the 79% at well below market as I think if you look at the numbers you can kind of see that.

So the other 21% would not carry that same kind of pricing is my guess.

And so --

Presumably the pricing on the other 21% would have been efficient.

In other words, we would have had to pay full value with various assumptions for the payoff of the underlying mortgages.

That is not our core competency, and the pricing would have been something that would have been at best neutral to our shareholders.

I appreciate kind of the sentiment is that we could have totally cleaned up this related party transaction.

I think at this point a), we have control of the entity, and b), it really is a fairly passive owner of securities.

There is not going to be a lot of management, if you will, related to the remaining assets.

But I understand the sentiment.

From an ongoing risk perspective, and I know it is a small number, but who is the servicer?

It is a very large major investment banking firm.

Okay.

That is comforting since, as you say, it is not your core competency.

That makes me feel better.

Just to circle back on your first question, work and construction in progress is $24.4 million.

24.4 million.

Last, a clarification on the cap rates that you gave on acquisitions.

I might have misheard, the four investment properties that you sold for 31.8 million, that was an exit cap of 6.6 because then you said that on the three exchange properties your exit cap was 6.6.

Correct.

So it was 6.6 across the board on all properties?

Yes.

Well, on the development properties, I think we said 7.1.

That does it for me, gentlemen.

Great quarter.

Gentlemen, at this time, there appears to be no further questions.

Wanda, thanks very much, and just as a reminder, I will repeat what I said earlier.

We thought it was an excellent quarter, particularly if you take a look at our FFO per share prior to the two impairment charges.

Thank you very much, and we look forward to talking to you next quarter.

A replay of today's conference will be available today at 1:30 PM Eastern Standard time and running until midnight, May 6.

To access the replay, please dial 1-888-203-1112 and enter the confirmation code of 4815167.

The replay is also available on the Company's website at www.nnnreit.com.

We would like to thank you for your patients.

That does conclude today's conference.

May you all have a nice day.