NNN REIT Inc (NNN) 2009 Q1 法說會逐字稿

Greetings and welcome to the National Retail Properties Inc.

First Quarter 2009 Earnings Call.

All participants are in a listen-only mode.

A brief question and answer session will follow the formal presentation.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Craig Macnab, Chairman and CEO for National Retail Properties Inc.

Thank you Mr.

Macnab.

You may begin.

Bob thanks very much and good afternoon to all of you and welcome to our 2009 first quarter earnings release call.

On this call with me is Kevin Habicht, our Chief Financial Officer who will review financial details of what was a relatively quiet first quarter for National Retail Properties, following some opening comments.

In this environment, we continue to be cautious.

And we have been playing a defensive game to ensure that when the economy and the capital markets improve, we will emerge as one of the stronger REITs with a balance sheet that will allow us to take advantage of the high quality net lease retail acquisition opportunities that I expect to be plentiful.

We're really looking forward to this as we anticipate that most of the fragmented competition that we have encountered over the last several years will be out of business as they're unable to access the high amounts of leverage that fueled their operating models.

Let me summarize how we have played defense in the last three months.

Firstly, we've maintained a fortress-like balance sheet.

In the first quarter, we acquired an additional $17 million of our debt at deep discounts while at the same time, slightly reducing our outstanding line of credit.

Secondly, we've done excellent job of maintaining occupancy across our portfolio.

As of the end of the quarter, our fully diversified portfolio was 96.7% leased, which effectively means that our leasing team has successfully leased up as many properties as have come vacant over the last several months.

We currently own just over 1,000 properties, leased to over 200 different national or regional tenants located in 44 states.

A decision to increase our exposure to the convenience store industry over the last several years has proven to be a wise decision.

Our two largest tenants continue to perform very well.

Susser recently pre-released excellent comp store merchandise sales growth of 6% this past quarter.

This number is on top of very strong comps of in excess of 6% for each of the last three years.

Our single largest tenant, the Pantry, this morning announced very good numbers, following their pre-release that they deleveraged by acquiring their own debt at a healthy discount.

Plus, they also announced a meaningful add-on acquisition following a year of focusing on internal operations.

We continue to like the real estate attributes of convenience stores, which are situated on busy streets at signalized intersections with excellent real estate attributes.

Thirdly, as a company we've carefully managed expenses.

In the beginning of this year, we did reduce our workforce by about 15%, which will result in annual savings well in excess of the $731,000 of severance and other related costs that we incurred.

Offensively, we have looked at several acquisition opportunities in the last couple of months but have not as yet identified transactions that meet our rigorous underwriting standards.

Not a lot of portfolio transactions have closed this year, as there are still wide gaps in bid and ask pricing, plus stronger retailers that own their own real estate are not yet fully adjusting to the reality that owning this real estate is not the highest and best use of their precious capital.

In summary, our balance sheet at NNN continues to be very strong.

Our portfolio is performing better than retail is in general.

We plan to continue paying our dividend in cash at the current rate.

And finally, as I mentioned earlier, I'm very encouraged about the acquisition opportunities that we will undoubtedly have in the future at attractive cap rates with less competition than we've historically encountered for what will be quality opportunities.

I'll now hand over to Kevin.

Thanks Craig and I'll start with our Safe Harbor statements that we will make certain statements that may be considered to be forward-looking statements under Federal Securities law.

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

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

With that, as indicated in the press release, we reported first quarter 2009 FFO results totaling $35.1 million or $0.45 per share, which was in line with expectations.

The decline from prior year results was primarily related to a decline in the TRS gain on sale line item from $5.6 million last year to $546,000 this year.

For the first time, our results include the new convertible debt accounting, which we had been talking about, which added $1,448,000 of non-cash interest expense, reducing our FFO by about $0.02 a share.

We included this in our non-cash items disclosure on Page 5 of the press release, which also includes stock-based compensation expense and non-real estate depreciation and amortization.

Notably, if you look at the net sum of these non-cash items on Page 5, it totals $3.2 million for the first quarter, which equates to about $0.04 per share of additional operating cash flow above our reported GAAP earnings and FFO results.

Our balance sheet remains in very good shape as Craig mentioned with no material debt maturities until September, 2011, and $377 million available on our $400 million credit facility.

I want to go quickly through a few details on the first quarter and some comments on 2009 and we'll take questions.

Looking at the income statement, the total revenues for the first quarter increased to $58 million, driven by additional rent from new investments made over the past year.

Some increased tenant expense reimbursements offset somewhat by lower interest and other income.

As expected, there was little new investment in the first quarter, just $7.6 million of development funding in the core portfolio and $2.2 million in the TRS, which is completing a few existing build-to-suit development projects.

Occupancy at March 31, 2009, was 96.7%.

That was flat with the immediately prior quarter, but down 120 basis points from March 2008.

Interest and other income from real estate decreased to $834,000 in the first quarter.

That's largely due to lower outstanding mortgage and notes receivable balances compared to the prior year.

G&A expense was $5.3 million for the first quarter.

That's down meaningfully from $7.6 million last year due to cost cutting and some timing of expenses.

We do see G&A coming in around $22 million for 2009, maybe a little less.

And that'll be about a 12% reduction from 2008.

As Craig alluded, during the past quarter, we did take a $731,000 charge related to reduction in workforce.

Property expenses net of tenant reimbursements were $1,234,000 in the first quarter.

That's up, an increase of about $400,000 from prior year amounts primarily due to increased vacancies and turnover in the portfolio.

Interest expense for the first quarter decreased slightly from prior year amounts to $15.4 million.

During the quarter, we did report the sale of three properties from our core investments portfolio, which was reflected in the investment portfolio disc ops on Page 7.

These sales generated net proceeds of $4.1 million and produced a $1-million gain on sale, which is not included in our FFO.

In the disc ops inventory properties, we sold one property from our TRS with net proceeds of $4.9 million and a pre-tax gain of $546,000.

Looking at the balance sheet, we finished the quarter with total liabilities of $1.063 billion, which is a $17 million decrease from prior quarter amounts.

We have only $26 million of secured debt and 98% of the Company's total assets are unencumbered.

As Craig mentioned, during the first quarter we bought back $17.3 million face amount of our convertible notes, $8.8 million of that was the September 2011 notes and $8.5 million of that was the 2013 notes.

We bought the notes at a discount with an average price of $77 to yield 12.8%.

This repurchase did produce a $2.4 million gain in the first quarter.

Our next material debt maturity is September 2011 and we have reduced that original note balance from $172.5 million to $138.7 million at quarter end.

As of the end of the quarter, total debt to total assets on a gross book basis was 37.9% that's down from 38.5% the prior quarter and that adjusts for some small adjustments for the new convert debt accounting.

We have only $22.9 million outstanding on our $400 million bank line and have begun discussions to extend that May 2010 maturity.

The value obviously of maintaining balance sheet flexibility is always important, but obviously more important in time like these and we believe we're in very good shape.

Interest coverage was 3.3 times for the first quarter.

Fixed charge coverage was 3.0 for the quarter.

Moving on to 2009, we did lower our 2009 FFO per share guidance $0.05 from $1.70 to $1.80 to $1.65 to $1.75 per share.

Both of these amounts include the accounting change for convertible debt, non-cash interest expense.

In addition to our cautious economic outlook, the guidance reduction was driven by a variety of factors involving vacancy and related items of property expenses, releasing spreads, the timing of releasing, lower TRS gains, and a higher restructuring charge.

I also wanted to note that for reporting and comparison purposes, after the convertible debt change, our revised 2008 FFO per share was $1.90 versus the $1.99 that was originally reported.

And similarly for 2007, FFO per share is $1.83 versus the $1.87 that we originally reported.

Just so you have a reference for comparison.

Also I alluded earlier, based on the first quarter non-cash items on Page 5 of the press release, for the 2009 for the year we see approximately $0.15 per share of non-cash items included in our FFO per share guidance, suggesting that in an AFFO type of number that is meaningfully above our FFO.

Closing my comments, 2009 is proceeding about as expected.

And besides working to make this our 20th consecutive year of increases in our annual dividend, the primary focus internally is effectively managing any vacancies, controlling costs, and getting the bank credit facility term extended.

While it's not here yet, eventually we will feel more comfortable being more offensive.

We are not-- just not at that point in the cycle at this point at now.

But looking out beyond the cycle load, we are encouraged about what we believe will be a better environment for NNN than we've had in recent years, which actually were pretty good years for us.

And we will be well positioned to capitalize on those opportunities.

Craig?

Bob, let's open it up with questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Mr.

Jeff Donnelly with Wachovia.

Please proceed with your question.

Good afternoon guys.

Craig, can you talk a little bit and Kevin as well about what's going on with the landscape I guess I'll call it of net lease financing companies given the turmoil insurers and banks have faced?

Specifically whether it's the credit tenant lease business or maybe just outside of that realm, are you seeing some of those more traditional lenders, particularly those who've really gone after the one-off property financings, pull out as they scale back their real estate lending platforms?

Jeff, that's a good question.

And a great deal of that debt currently is coming from smaller regional banks.

So when people are buying single properties, they are getting that from smaller lenders than your large mega bank.

Having said that, there-- it with certain of the big credit tenants type of retailers there are some levels of saturation such that to pick a name for example Walgreen's certain lending institutions are getting close to the types of limits that they might have internally.

So that type of debt was a little more difficult to obtain certainly in the first quarter.

But we're still, in our disposition platform, still doing a good job of finding people to buy these properties.

And I think in the scheme of things, given the volatility in the capital markets, debt and equity, there still are some all-cash buyers out there who are just buying them for yield and the stability that the investment offers.

I guess my thinking is that net lease has always been a fairly highly levered investment, particularly for more the one-off buyers or so the smaller private buyers that to the extent the banks or traditional lenders to that business are scaling back.

You could see on the one hand pricing of those assets markedly move but on the other hand you could face a real shift in your competitive landscape, particularly on smaller transactions to the extent the business sees a lot less lending those competitions.

Jeff, let's just talk about those just a little bit more then please.

There-- on the single property cap rate market, in the first half of 2008 and certainly 2007, we were clearly in an environment that had surreal characteristics.

You could get very, very high levels of debt at phenomenally low interest rates.

And so that's moved cap rates to extraordinary levels.

You know the days of mid-6's for a Walgreen are long since gone.

That price is probably going to normalize in the 7.5% to 7.75% type range.

And of course you're always going to see headlines of the lower pricing than that.

But right now, that's where we figure it's going to be.

Now that's if you take a longer term perspective than just 18 months.

That is very, very low cap rate.

That is very, still very good for our capital recycling and our selling of properties.

On the other hand, when people are buying properties in portfolios such as National Retail Properties, you are-- we are very pleased that going forward we're going to have considerably less competition for the reason you mentioned that the highly leveraged buyer of portfolio properties and there were a number of these, they're absolutely out of business.

The other day Kevin and I were visiting a large regional bank.

And they told us directly that some of the types of people that they would lend money to historically who purchased net lease retail properties, they are no longer advancing credit to.

So going forward, the opportunity in this space is better than what we've come out of.

I'm curious just to switch gears for a moment, to recognize store closings in retail or bankruptcies are just part of the doing business as you will in retail property and it never really subsides.

But do you think-- what's your gut?

I mean do you think we're over the hump if you will on that aspect or that trend in the business or do you think there's as much or more news around retailer difficulties ahead of us here as there has been behind us?

Jeff, I don't think we're out of the woods yet.

Having said that, it's very important which categories you're in.

As it so happens, we have very little exposure to categories such as apparel sales, women's apparel in particular.

Those types of areas are challenged.

Higher end retail, you're still going to see negative comp store sales and some of those higher end retailers might close quite a lot of stores.

Unfortunately those higher end retailers tend to advertise in the types of newspapers you and I probably read, which means their brand names are a little more visible and those will attract headlines.

In terms of an impact on companies like National Retail Properties, we've never done business with them and don't expect to.

So in the necessity retail arena, you know I think the worst is definitely behind.

And you're seeing that in the likes of companies like Dollar General.

Dollar General is planning to open 450 stores this year.

So the lower price points, there's plenty of new store openings and plenty of opportunities.

Just one last question and I'll yield the floor is can you talk about maybe in general terms what sort of position you'd like your portfolio and/or balance sheet to be in say as we enter 2010 or 2011, given the environment that you see ahead?

And I guess what steps you need to take to get it there?

In terms of our balance sheet, right now I mean my prepared remarks I used the word a fortress-like balance sheet.

I think we're absolutely there.

Our balance sheet's very, very strong.

We don't have any debt maturities until the second half of 2011.

We have considerable capacity on our line of credit.

We're in the early stages of talking to banks on those.

But as you've seen some of the shopping center REITs have announced their new credit facilities.

And I'm sure National Retail Properties is going to have the same type of success that those companies have had.

So from a balance sheet standpoint, we have one capacity, and two, our balance sheet's in good shape.

You know I think going forward in terms of building value, we need to get back into the acquisition arena.

But the one-- there weren't many transactions in the past four or five months.

And the ones that came across our desk didn't meet our underwriting standards.

Going forward those opportunities are going to be plentiful because just like cost of capital is expensive for REITs, it is just as expensive for retailers.

Alright, thank you guys.

Thank you.

Our next question comes from RJ Milligan with Raymond James Financial.

Please proceed with your question.

Good afternoon guys.

Hey, RJ.

After maintaining your occupancy over the first quarter, do you guys still expect 400 basis points of occupancy loss?

Yes, you know that's obviously-- and I think the way we look at it is whether it's occupancy or lower rent, we've got some mixed issues that have occurred.

We have some bigger tenants that have vacated space.

You know a big one for example that occurred recently was a Value City that has liquidated and that's a property we have in St.

Louis.

It's a big box at certainly 100,000+ square feet.

And obviously that rental-- I mean that's just one property, so it's 1/1000 but the amount of rent is bigger.

We lost two Circuit City's in the March quarter.

So we've got some mixed issues that creates some problems.

The economic environment is still tough.

Our portfolio of 1,000 different properties is a snapshot of the economy.

And I don't see it getting measurably better in the near term.

I think the worst is clearly behind us.

But we're grinding it out just like everybody else RJ.

So in terms of timing, do you think there's-- you're going to see more of that occupancy loss in the second and third quarters?

And start to see an improvement in the fourth quarter?

Or is there any timing that you envision there?

To be honest, I don't see that improvement in 2009.

And to the extent it occurs in the first couple of months in 2010, we'll be celebrating just like you.

Okay, thanks guys.

Thank you.

Our next question comes from Michael Bilerman with Citigroup Inc.

Please proceed with your question.

And it's Greg Schweitzer here with Michael.

Just following on, on the last question.

Craig, if you could perhaps talk about some of the discussions that you've been having with potential tenants to release the Value City and the Circuit City boxes?

Yes, we've had some quite encouraging discussions Greg.

Just to give you an example, one of our Circuit City's we've already executed a lease and that tenant will be paying rent here in a couple of months time at I believe just a smidgen higher than what we were previously getting.

So in that single case, our leasing team did a really, really good job and I'm proud of them.

In terms of that Value City, we're sort of early into it.

It's a big box.

It's very well located.

It's contiguous to a Target.

It's in a busy area.

The demographics are sort of just below the national median.

There's not a lot of space available.

And if we get a little lucky and I'm certainly holding fingers here, crossing toes as well, we're going to get a credit upgrade with some big national retailers.

But they're doing their market studies right now.

And we've got some work to go.

You know I mean we've got some hurdles to cross before we get there.

So as a sense that is the Value City, and then there's two remaining Circuit City sites?

Three actually.

Three.

Yes.

But you know I mean we've-- we're in-- the first quarter I think we've re-leased and I don't have that page right in front of me, but I think we re-leased nine different properties.

And I think we had eight or so vacancies.

So in the next couple of quarters, that's-- there's going to be some churn in our portfolio.

Our challenge is to re-lease.

Our re-leasing activity in the first quarter was very good but it was primarily small boxes that pay smaller amounts of rent, which are much easier to re-lease.

Now the big Value City, God we've don't like-- 112,000 feet or whatever that number is coming back to us.

And then is there any new tenants or industry that you've added to the watch list looking forward through this year?

Not to speak of.

I mean thank goodness we've stayed away from some of the categories that are absolutely toxic, you know car dealerships.

A couple a years ago we had a big initiative taking a look at that and thank goodness that just didn't meet our underwriting standards.

There are any of a number of car dealerships up for sale right now.

And of course we're not about to step into that mess.

And what about C stores.

You're at around 25%.

Would you be willing to push that up further, you know looking at the Pantry deal or how comfortable are you with that level?

Greg, the performance of our C stores has been fantastic.

Our re-leasing of some vacancies in that area has validated the merit of the real estate attributes.

It's an industry that has consolidated but it's still in the second inning in terms of consolidation.

And the stronger companies are going to continue to take market share.

They tend to be the better managed companies.

They have better operating metrics.

They've got stronger balance sheets.

And I'm not giving a forward-looking statement but certainly we are talking to some of those types of companies not about acquiring their real estate, but building relationships with them.

You know we'll have to see where we come out internally and where our board does.

We pay a lot of attention to diversification.

But if we can get some different tenants perhaps one and two in maybe some different geographic markets while maintaining high-quality real estate, we're certainly going to look at it.

But I-- just to be clear, I'm not committing to it.

Okay thanks.

And then just one more before I log off, 7-11 recently announced that they had hired a broker to evaluate the real estate portfolio.

It's a relatively small tenant in respect to you guys.

But how prevalent are rent relief requests from your tenant base?

What you've seen in any of a number of retailers is the type of success that they have had.

I think Office Depot gave some numbers saying I think maybe as much as 20% success rate.

So almost by definition, if you're a retailer and you're not asking your landlords for rent relief, you've got to ask yourself as a retail management team, what am I missing here?

But that-- the type of people that are giving relief are people that have short lease duration, which is not National Retail Properties or two, people that are maybe have co-tenancy issues.

Again, not a factor in free-standing net lease retail.

And then three, amateur landlords that are scared of having to take on vacancy.

And we again, don't fit into that category.

Having said that, if it is a specific situation where we will one, make a difference in terms of the viability of that retailer and two, don't see any alternatives for that space, we will make some adjustments.

And we have made very modest adjustments, very modest.

But it's-- certainly we have a list that's several pages long of companies that have requested rent relief.

But in terms of the number in which we've granted it, it's one or two rows.

Okay, thanks a lot for taking my questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of David Fick with Stifel Nicolaus.

Please proceed with your question.

Good day gentlemen.

You guys didn't get the memo that cap rates have come down 200 basis points in the last week and all's going to be well?

Hey, we're just looking at a bunch of deals and we're fired up.

Can you walk us through a little bit more on the restructuring costs?

You did mention that you've had a cut, but what specifically did you do there?

And should we see any more?

No Dave, one of the things that we outlined in our shareholder letter, our objectives this year firstly to maximize the value from our existing portfolio; secondly, manage costs; and thirdly, keep a good balance sheet.

But in terms of managing costs, it's any of a number of things.

Early in January we had a reduction in our workforce.

We're down to a fairly lean and mean organization.

About 15% of our people unfortunately lost their jobs in that.

We and that will result in savings greater than the $730,000 odd for-- in the charge in the first quarter.

But having said all of that, every single expense is being evaluated, whether it's service providers, legal expense, every single item.

And our team is doing a good job.

And I think it shows up in lower G&A.

And Kevin gave you the ranges, which will be lower than each of the last several years for this year.

But, you know that's pretty much what you expect to be doing.

You know maybe if we just switch back though.

In terms of the cap rate environment Dave, I-- as a company, I don't really think that National Retail Properties is an ideal candidate for acquiring distressed or properties that are sold in distressed situations.

We like to acquire higher quality locations where we've got retailers that we think are going to be able to pay the rent for the duration, which is not a distressed situation.

There are going to be distressed situations of properties, you know sometimes it's shorter lease term left that are sold at attractive cap rates.

We recently took a look for example at a CVS that you know had about six years of lease term left.

It wasn't quite on the corner.

Sales were okay and you could have purchased it at just better than a 10%.

By the way, that's 10% cap rate but it has no growth in it.

And the option period is no growth either.

That is not a great opportunity for us.

I don't truly see cap rates getting up into the teenager type numbers.

I think that cap rates for us going forward are going to be in the range, pick a number?

9.5% to 10.5% and obviously if we can do better than that, we'll do everything we can and maybe we'll get lucky sometimes.

But I think we're-- at that type of number, depending on what the-- particularly if you can get to purchase the properties at the type of book value that a retailer has in them, those would be awfully attractive opportunities for us.

Okay, speaking of retailers, I'm going to make one more run through this.

Any chance that you're going to start disclosing at least your top ten tenant list?

Look at it, but I don't see it happening in the next 90 days.

Okay.

I won't ask for another 90 days.

The positive straight-line rents in the first quarter, have we just simply crossed over with older leases at this point?

We're almost there David, not quite.

We wrote off a little bit of straight-line rents, which created that positive number for the first quarter.

So that would have been more of like a $400,000, $500,000 negative rather than the positive $91,000 you're looking at on the non-cash items.

But no we're not quite to crossover yet.

So the near-term run rate is $400,000 to $500,000?

Right.

Okay great.

Thanks a lot guys.

Thanks Dave.

Thank you.

Our next question comes from the line of Tayo Okusanya with USB or UBS.

Please proceed with your question.

That's actually with UBS.

Good afternoon gentlemen.

Just a couple of questions.

You gave us a good overview of how you feel about C stores at this point.

Could you also give us a sense of full-service restaurants and also the automotive service lines of trade since you guys have meaningful exposure to those sectors?

Tayo, thanks very much.

Quick service restaurants are doing very well in this environment as people are trading down.

In terms of full service, for us full service is not a high price point restaurant.

I think for us that's a sit-down chain.

So that includes the likes of Denny's or Perkins Restaurant or something like that.

We only have a small number of Perkins, but we do have 58 Denny's I think.

Those types of chains are doing fine with modest comp store sales numbers.

I think what's quite interesting if you take a look at a lot of those lower price point casual dining restaurants, certainly in the last-- certainly this year, it's staggering to see that their stock prices have doubled albeit off very, very low levels.

But the restaurant industry has generally done quite well in the last 90 days, helped by lower commodity prices, so their margins expanded quite considerably.

And if you look at the bellwether, that's sector dining.

I think their stock price has performed very, very well and they had very good earnings, Dine Equity formally called IHOP, similar types of numbers.

So in the restaurant space, that's doing okay and frankly doing quite well.

As a company, we did not purchase much restaurants in the last several years.

So we don't have much exposure to the leveraged restaurant transactions that occurred.

But going forward, I do believe there are going to be opportunities in the restaurant space, particularly if GE is not an active participant in that market.

They were very active in 2008, 2007 and before that at cap rates that we just didn't think made sense.

In terms of auto parts and so forth, in theory that category should enjoy greater sales productivity as people keep their cars on the road for longer.

Pep Boys did announce results and to be honest, they were mediocre.

Got it.

And then tenants when they do ask for rent relief of any sorts, in general what-- like what's the size of the relief they tend to ask for?

Is it sort of like an average number or does it really vary by lines of trade?

I think it varies by store Tayo.

I mean it's-- you know they'll take a look at what their occupancy cost is in a particular location, number one; number two, what market rents are there.

So in other words, if they own a store that's got weak or declining sales and rent is a high-cost item, they're going to be coming after you.

If they have many years left on their lease, we're-- I'm kind of deaf about those types of things.

Could you give us a sense of kind of the range you've kind of seen in regards to their requests?

Tayo I really-- I mean I-- it is all over the lot.

To be honest, I just don't even think about it that way.

It's just a function of specifically in that location.

So we're just-- with one of our particular public company tenants right now, we internally completed a review of the six properties they have.

And the retailer was looking for across-the-board rent reductions.

We think that our stores are well located, number one; and number two, we got a better than even shot at re-leasing those properties at a higher rent if we have to.

So as a result, we appreciate their inquiry, but thanks but no thanks.

So it's slightly different now in the last year or so in terms of rent reduction is that retailers have generally engaged consultants, intermediaries to do this on their behalf.

There are a couple of specialist firms that do it.

There are a couple of big four accounting firms that sell their consulting services.

So that tells you that it has been gaining traction.

Right.

Thank you very much.

Thank you Tayo.

Thank you.

Our next question comes from the line of Stephanie Krewson with Janney Montgomery Scott.

Please proceed with your question.

Hey guys.

I joined the call a little late.

So I apologize if you've already answered these questions.

Just a few small points.

What was the cap rate on your asset sales in the quarter, just average?

Stephanie, there were only really 3 properties but I think by the time you bundled it all up together, pick a 7.75 cap rate.

Okay.

And similarly, did you have any lease termination fees that you recognized in the first quarter?

Yes we did.

There was about $2.7 million of lease term fees.

Any expected in the second quarter from sort of spillover?

Probably.

I mean we don't have any guidance or projection on that yet, but we've-- over the years, we've had 3, $4 million of lease term fees every year, you know year after year.

So we'll-- there's always opportunities in this kind of environment.

There seems to be more opportunities.

But we don't have any projection on that.

Right.

And what sort of properties are you still developing or-- are they free-standing drugstores or just what's-- of your development pipeline?

Those are-- the funds that we invested this quarter are primarily deals where the retailer is developing the store themselves and we are reimbursing them for their costs as they develop the store.

So when they identified the location that they want to open a new store and we've purchased the dirt and they're building the store and we're reimbursing them for that.

And we have a modest number of those.

You know the type of dollars that we've spent this quarter, we've still got about that much left to spend in the second quarter to finish out these projects which will obviously then be paying full rent.

In terms of our development activity, we did finish up and sell a Walgreen's in the first quarter.

We no longer have any drugstores under development.

We have a variety of odds and ends there.

And just let me add one other comment, in our taxable REIT subsidiary we do own a number of properties.

And as Kevin and I have mentioned in the past, most of these or the vast majority of them are properties that we'd be happy to own in the REIT.

We currently own them in the taxable REIT subsidiary.

To the extent we sell them, that's swell.

To the extent we don't, they're paying rent and we're just as happy to keep them in the taxable REIT subsidiary.

And right now I don't see much change in the invest that the aggregate amount of dollars in the TRS, certainly for the next couple of quarters.

Okay, two more small questions.

Acquisition opportunities, do you anticipate that you'll see large portfolio opportunities or a bunch of one-offs or a combo?

Just what are you seeing in the acquisition opportunity coming down the pike?

For us to continue seeing opportunities to purchase at wholesale pricing, they need to be portfolio transactions.

So certainly we have a number of relationships that we do buy one properties one by one.

But that's generally a one property after purchasing another eight or ten properties in the last couple of years.

So we are looking at portfolio transactions in-- and the size is all over the lot.

I mean we just recently finished underwriting a-- I think it was a $17 million potential acquisition that we passed on.

But that would be illustrative.

Right.

I think this is my last question, looking at your base rents per occupied square foot running around $20.25.

Of the 400 basis points of additional vacancy you expect this year, what sort of an average rent per occupied square foot should we apply to that vacancy?

Is it above your average rent?

Is it below?

In terms of modeling, average would be the number.

And it gets a little difficult when you think about per square foot numbers for our portfolio because the disparity between a small property call it convenience store or free-standing restaurant of 3,000 square feet versus a larger property, Best Buy, it's-- you know Barnes & Noble, Office Max of 20,000 or 30,000 square feet, the rent per square foot of building gets to be a little convoluted.

So but the way we were thinking about it was really based on the average.

And so 400 basis points of decline on our total rent if you will versus square footage.

Okay thanks.

And actually I do have one more question.

You don't usually have so many adjustments each quarter.

And this quarter could you just clarify again why did you lower the midpoint of your guidance by a $0.05?

I just want to make sure I understand?

Well I think it was like I say really revolved around just vacancy and the costs around vacancies including property expenses; timing of re-leasing; re-leasing rates etc.; the restructuring charge, which we've talked a little bit about; lower TRS gains than we probably would have thought at the beginning of the year, which we didn't have a whole lot budgeted.

But it's going to be less than that so really a variety of things.

Okay, so you pretty much kitchen-sinked it now?

We feel pretty comfortable where the guidance is yes.

Okay, great.

Thank you gentlemen.

Thank you Stephanie.

Thank you.

There are no further questions at this time.

I would now like to turn the floor back over to management for closing comments.

Bob thanks very much.

We appreciate all of your interest.

We're going to see a number of you at May REIT in June.

We look forward to that.

And if you're out there in Las Vegas, please stop by our booth.

Bob, we appreciate it.

We'll be talking to you all in 90 days.

Thanks very much.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.