Realty Income Corp (O) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Realty Q1 2009 Earnings Conference Call.

During today's presentation, all parties will be in a listen-only mode.

Following the presentation, the conference will be opened for questions.

(Operator instructions)

This conference is being recorded today April 30, 2009.

I will now turn the conference over to Mr.

Tom Lewis, CEO of Realty Income.

Please go ahead, sir.

Good afternoon, everybody.

Thank you for joining us late in the day.

As always, in the room with me is Gary Malino, our President and Chief Operating Officer; Paul Meurer, our Executive Vice President and Chief Financial Officer; Mike Pfeiffer, our Executive Vice President and General Counsel; and Tere Miller, Vice President of Corporate Communications.

And as I'm obligated to say, that during the call, we will make certain statements.

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 any forward-looking statements.

We will disclose in greater deal on the Company's quarterly and on Form 10-Q the factors that may cause such differences.

And, Paul, why don't we start with an overview of the numbers, and then I'll come back.

Thanks, Tom.

As usual, let me comment on our financial statements, just provide a few highlights of the financial results for the quarter.

And starting with walking through the income statement, total revenue increased 0.2% for the quarter.

Rental revenue for the quarter was approximately $82.1 million.

Same store rental revenue increased only 0.2% for the quarterly period.

However, excluding Buffets, same store rent growth was healthier at 1.2% for the quarter, reflecting the rest of our portfolio.

Other income was $754,000 for the quarter.

On the expense side, depreciation and amortization expense increased by $875,000 in the comparative quarterly period.

Interest expense decreased for the quarter to $21.4 million.

Now, this reduction reflects the retirement of the 120 million of our bonds, which we have retired over the past few months.

We had zero borrowings on our credit facility throughout the entire quarter.

On a related note, our interest coverage ratio increased to 3.5 times, while our fixed charge coverage ratio increased to 2.7 times.

General and administrative, or G&A, expenses in the first quarter were $5.95 million.

This increase of about $400,000 from the same quarter last year was primarily the result of the immediate vesting of some stock, including shares held by our retiring chairman.

We expect G&A expenses in 2009 to remain similar to 2008, and only about 6.5% to 7% of total revenues, or an estimate of about $23 million total for the year.

Property expenses were $2.2 million in the quarter.

These expenses are primarily associated with the taxes, maintenance, and insurance expenses, which we are responsible for on properties available for lease.

These expenses have increased a bit as we have a few more properties available for lease.

In addition, we did record additional bad debt expense in the first quarter of $700,000, which resulted from us being wrong about a few larger accrued receivables.

However, we do not expect bad debt expense to be as high in future quarters.

Our current estimate for property expenses for all of 2009, for the entire year, is about $6.8 million.

Income taxes consist of income taxes paid to various states by the Company.

These taxes totaled $303,000 for the quarterly period.

Income from discontinued operations for the quarter totaled $37,000.

Real estate acquired for resale, of course, refers to the operations of Crest Net Lease, our subsidiary that acquires and resells properties.

Crest did not acquire or sell any properties in the first quarter; however, we did record further impairments on the Crest portfolio of $311,000, reflecting lower projected net sales proceeds.

A reminder that we have a very small remaining Crest portfolio, just five properties in there, held for sale.

Real estate held for investment refers to property sales by Realty Income from our existing core portfolio.

We sold only one property during the first quarter, resulting overall in income of $162,000.

And the usual reminder that we do not include these property sales gains out of the REIT in our funds from operations.

Preferred stock cash dividends remained at $6.1 million for the quarter, net income available to common stockholders was $24 million for the quarter, and funds from operations, or FFO, was approximately $47 million for the quarter, or $0.45 per share.

When we file our 10-Q, we will again provide information you need to compute our adjusted funds from operations, or AFFO, or the actual cash we have available for distribution as dividends.

And our AFFO, or cash available for distribution, is typically higher than our FFO, as our capital expenditures are relatively low and we do not have a lot of straight-line rent in the portfolio.

We increased our monthly dividend again this quarter.

We have increased the dividend 46 consecutive quarters and 53 times overall since we went public over 14.5 years ago.

Our currently monthly dividend is now 14.20625 cents per share, which equates to the current annualized amount of $1.70475 per share.

Now, let's turn to the balance sheet for a moment.

We've continued to maintain our conservative and safe capital structure.

Our debt to total market capitalization today is about 34%, and our preferred stock outstanding represents just 8.5% of our capital structure.

All of these liabilities are fixed-rate obligations.

We continue to have zero borrowings on our new $355 million credit facility.

This facility also has a $100 million accordion expansion feature.

The initial term of this facility runs until May 2011 plus two one-year extension options thereafter.

We have about $10 million cash on hand.

Reminder, we retired the $20 million of bonds that matured in January, so now our next debt maturity is not until 2013.

In summary, we currently have excellent liquidity, and our overall balance sheet remains healthy and safe.

We have no exposure to variable rate debt, and we have no need to raise capital for any balance sheet maturities for the next four years.

Now, let me turn the call back over to Tom, and he'll give you some more background on these results.

Thanks, Paul.

I'll start with the portfolio, which I think is doing pretty well, especially given the state of the world today.

Obviously, it continues to be tough out there in retail, but quite frankly, in the first quarter, the deterioration we saw in the fourth was moderated, and I actually feel decently about pending things in the portfolio today.

We don't see a lot.

With that said, our tenants operate in the same environment as everybody else.

It's challenging out there.

And over the last six to eight months, we are very fortunate, we feel, to have dodged a lot of the bullets in retailers that have had problems.

And in the few cases where we've had properties with them, it's been either just a few that we owned, or we own the more profitable properties they had, which means we were able to keep them leased and keep the rent up.

Now, I think the key for us, as always, is owning those profitable properties and having a high cash flow coverage of rent on a unit basis for the profitability of the units, and that's really where our margin of safety comes from.

As always, if you look at our top 15 tenants, they accounted during the quarter for about 53.8% of revenue, and the average cash flow coverage for those top 15 tenants -- and I'll kind of do this in sequence so it's easier to do -- in the third quarter, the average cash flow coverage or rent on the unit basis was about 2.79 times and ranged from 1.7 to 4.55.

At the end of the fourth quarter, it was 2.4 times, which ranged from 1.22 to 3.75, and while that's still pretty healthy, you can see the erosion at the end of the quarter.

At the end of the first quarter, it was 2.39 and ranged again from 1.22 up into the high 3s.

So, really, not much movement.

We have a couple of the tenants report annually, so those wouldn't go into the numbers, but overall, looking at all of the tenants, there really wasn't that much movement relative to the EBITDA and the cash flows that they had during the fourth quarter, and our cash flow coverages remained fairly high through the first quarter.

And I think that's why the portfolio's done better than some might have suspected and we still have existing a pretty good margin of safety on the portfolio.

The quarter ended at 96.4% occupancy, 84 properties available for lease out of the 2,347.

That's down about 40 basis points from the previous quarter.

And I think we indicated on the fourth quarter call that we thought that would be coming, and it was, although it's a little higher than we thought we'd end the quarter and, really, a function of getting some units back later in the quarter and just a little slower leasing activity because we got the units back later in the quarter, but still very, very healthy.

Paul mentioned same store rents were up 0.2%, and I'm pretty happy that we're seeing positive same-store rents given the environment out there.

So any growth in existing rental flow is nice to see.

And during the first quarter, if you look at kind of the net offset between same store increases, same store decline, which in our case was increases, of the 30 retail industries in the portfolio, there were seven that had declining same store rents.

Restaurants were the vast majority of it.

And when you consider that just under half of our restaurant exposure is fast food, which is actually doing very well right now, the balance came really for the other 12% of the portfolio, which is casual dining.

The other six that were down were very minor in nature, so it really was mostly the Buffets, as Paul mentioned.

There were four industries that had flat same store rents.

19 had same store rent increased, with the biggest increases really coming off automotive tire, convenience store, health and fitness, and the balance again were fairly small.

As we look across the portfolio, what continues to work pretty well is a base of goods and services that you buy on an ongoing basis, low price point kind of value.

And if you look at the portfolio, a little over two-thirds of our revenue base is that type of retail and are all doing, for the most part, pretty good.

And I think the other reason that things have gone so well, if you look on the opposite side, which is kind of durable good apparel, high-end goods, consumer discretionary, or big box, is a smaller part of the portfolio, and that's helped.

Anyway, same store rents were up again in the quarter, and, which given, by the way, a 6% decline in GDP in the fourth quarter, which you could really see the impact of the 6% decline again in the first quarter that we had, we couldn't see so much, at least in our type of retail.

But we continue to be diversified.

We have 2,347 properties, 30 industries, 117 retailers in the portfolios, and still in 49 states.

That's down in property count one from last quarter through the sale that Paul mentioned.

And relative to industry exposure, restaurant continues to be the largest at 21.6.

That's down from about 23.7% a year ago, and we think that will continue to fall hopefully through acquiring other properties and not through rent reductions.

Convenience stores are about 16.5%.

They're doing pretty well.

Theaters at 9.1%, also doing well.

And then you get to childcare at 7.3%, and the industries drop pretty quickly.

So pretty good diversification as to industry.

Our largest tenant is just about a little below 6% of rent.

Next one's at 5%, and then it drops pretty quickly from there.

And as I mentioned, our top 10 tenants do about 40% of the revenue, top 15 about 54%, and when you get to the 15th largest tenant, you're down to only about 2% of our rent, and it goes down fairly quickly.

The average lease term remains healthy at 11.8 years, and that's been primarily responsible lately because we haven't been buying a lot of properties, that it's mostly from releasing expiring leases at the end of their initial term.

Oh, we mentioned in the release that Buffets has emerged from reorganization, obviously, coming out of that with a better balance sheet and we think adequate financing.

They have a smaller number of units but profitable stores, which we're obviously very pleased about.

And I would say that the resolution of the process ended up pretty much just where we thought it would when we first started talking about it a year ago.

And if anybody would like some additional color on that, I can talk about it during the Q&A.

Overall then for the portfolio, at 96.4% occupancy and same store rents still positive, it exhibits pretty good performance given where the world is.

Relative to property acquisitions, again, we've remained inactive, and that's been intentional really since February of '08.

We don't see much in the way of acquisitions in the second quarter, and we continue to believe that anything we'd buy today probably we could buy a little cheaper at higher cap rates later so why not wait.

Also, the liquidity that this has given us over the last year has also, I think, been beneficial relative to what the Company looks like, but it's really been thinking property prices would continue to go down and caps up, which would be good for us.

I would think we may get a bit more acquisitive in the second half of the year.

Cap rates are rising, but transition -- transaction volume has really dropped pretty substantially.

There aren't a lot of transactions out in the marketplace, and the quality of those transactions to date have been such that I think there were some of the marginal people coming out that really needed to raise capital.

My sense is that there's pretty good bid/ask spread out there.

There are a lot of players that are waiting to see if rates get better, if the economy continues to improve, and I think what will happen is cap rates will continue to rise.

You know, one of the things, I mentioned this last quarter, and I wanted to do it one more time to give a historical perspective on cap rates.

If you look over the last four years, the cap rates that we bought at were kind of in the 8.4 to 8.7 range, and I would say the one-off transactions out in the marketplace were down in the 7s and 8 caps, and if you go back before that, it's really just in 2003 and 2004, caps were up in the mid-9s, which is really where we see them today.

And previous to 2004 -- and you can go back pretty much from the time that we came into business in 1969 -- caps really ran from the mid-10s up into the 11s.

So I think that most of the 7 and 8 caps, maybe even the 9 caps that you've seen in the last few years, like on a lot of assets, where really rates that are a function of historically cheap financing, and we think cap rates continuing to move back up is probably what we're looking at, but they're kind of in the mid-9s today.

And my sense is we're starting to see some more opportunities, so maybe in the second half, buying a few more properties.

Relative to dividends, as you all know, that's our priority here at the Company.

We will pay the dividend in cash.

Makes it easier for our 70,000-plus shareholders who tell us they pay their bills with it to pay their bills.

And we would anticipate that the dividend would be higher this year than last year, and hopefully, that's what it will be next year, also.

That's why we're here everyday.

Paul mentioned the balance sheet and paying off the $120 million of debt that was coming due, which leaves us nothing due until 2013, and again, no balance on the line, cash on hand.

We're producing excess cash, and obviously no mortgages or developments or JV or anything off balance sheet.

So it's pretty simple, and the balance sheet's in great shape.

Relative to the guidance, we tweaked it again this quarter just to the topside to 1.83 to 1.87.

That's flat to 2.2% FFO growth, and the previous estimate that we had was based on 0 to 375 million in acquisitions, and we took 125 million off that given we didn't think we'd buy anything in this second quarter.

So the range really anticipates anywhere from zero acquisitions up to 250 million.

And for our modeling purpose, we really put -- in the second half of the year that if we do the 125 million, we put it at the end of the third quarter and the other 125 at the end of the fourth for modeling purposes to try and stay conservative on that.

Relative to the portfolio and what we see there in the guidance, we have built in anything we can see coming as of now, as well as an assumption of a few other things down the road, but we don't know what that would be.

As I mentioned earlier, I think where we sit today, to give you a feel versus looking at the portfolio a quarter ago, we actually feel a bit more positive about it because we think the retailers have not seen a deterioration that they saw in the fourth quarter, and they're thinking -- feeling a little bit better, although I really use that as a current basis comment, not a projection of the future.

To summarize then, portfolio is in good shape, positive same store rent growth, good occupancy, balance sheet's in great shape, and we think there may be some opportunities to buy in the second half of the year.

I'll mention that the best e-mail I got for the week was someone who sent me a picture of a guy slumped over at his desk asleep with a note that said, "I saw your earnings release," which I thought was funny.

But, as I said, at the start, it was pretty much a quiet quarter.

And with that, I think we'll keep with shorter comments this time.

And, Nicole, if you can come back around, maybe we'll have a chance to take some questions.

Thank you, sir.

(Operator instructions)

Our first question comes from the line of Michael Bilerman with Citigroup.

Please go ahead.

Could you talk a bit more about the drivers of the occupancy decline, specifically which tenants gave the units back that you weren't expecting?

Well, let's see.

It was pretty much broad based.

I think about 13, 14 of the 21 were really just lease rollover, which is the normal activity of anywhere from 2% to 4% of the leases that come off at the end of the year.

And then the rest were really kind of one-offs.

There's no grouping by a big tenant.

You know, there are 119 tenants we count.

Those are multiple units, and then there's a lot of others that are just one-offs.

So there was really -- there was no grouping, I think, in the fourth quarter.

It was pretty much spread around.

Was there any grouping for the reason -- for the increase in the bad debt expense?

Yes --

Yes -- no, no, I can comment on that.

The bad debt expense was really driven by one specific situation on a relatively smaller tenant, so not a big number, that was in reorganization.

And we had put in place accounts receivable for some rent then, and we misjudged it.

So it wasn't an accounting error; it was a judgment error in terms of collectibility of that specific rent receivable.

When that reorganization reached its conclusion, then we actually had to reverse that out and charge that as bad debt expense.

I should tell you that as part of that, and it's a process we go through every quarter, we go through all of our receivables every quarter, kind of scrub them, think them through in terms of their collectibility, and in particular, look at any situations like that where you may have a tenant in sort of distress or what have you.

And we don't have any other issues or lack of confidence relative to the remainder at this time of our accounts receivable.

So it was kind of a unique situation.

There was a grouping in that, and it was a large charge associated with one tenant where there was a handful of months aggregated together in that accounts receivable balance.

Okay, thanks.

And then just another one.

How prevalent are rent relief requests from tenants these days?

That's a good question.

I would say in the last month or so, I haven't heard as much about it, but it was very prevalent towards the end of the fourth quarter, and it's interesting because I think what happened is there were a few -- actually, a lot of Chapter 11s in retail, not for us but generically last year.

We keep a chart of them, and it was a big number.

And as part of those, everybody who goes into a Chapter 11 in retail hires the same three or four firms to go and get rent relief, and they'll go to the mall owners or whoever it is that -- their landlord and say, "Gee, things are tough, and we're going to have to renegotiate some rent."

And what typically happens if you're a larger landlord, you're aware of how your units are doing, what the profitability is, and your reaction is, "We own your more profitable units.

There aren't going to be rent reductions."

However, what did work last year for a lot of retailers was going back, and if there were one -- if they had some one-off owners of buildings, particularly when they had mortgage financing on it and saying, "Look, we may have a problem here if you can't cut rents," if they could get some knowledge of what the one-off owner's payments were, I think there was some success in getting that person to do a rent reduction.

And so just like in the REIT industry, when a couple people do something and you go to a NAREIT meeting and everybody hears about it on a panel, I think in retail last year, everybody went to the retail conferences, and three guys from these companies that try and get rent reductions got up in a panel, and then we got a whole bunch of phone calls and basically said, "Our units are profitable.

The answer is no." So I think that was a trend, but it was really a trend towards the end of last year, and it really moderated coming into the first quarter.

And have you granted any concessions?

Not much.

Not that I can think of.

You know, one here, two there, nothing big, no.

Okay, thank you.

Thank you.

Our next question comes from the line of David Fick with Stifel Nicolaus and Company.

Please go ahead.

Good afternoon.

Hi, David.

I had a chance to go through your beautiful glossy annual report the other day, and it's always one of the most interesting reports in our industry.

You try to make it humorous, and you have two facing pages that show the old business plan and the new business plan sort of delineated, and there's virtually no changes in the works from the old plan to the new plan.

Right.

However, I would point out that there's no reference in there to acquisition strategy, and Tom, you've already referenced that you might do some acquisitions later this year.

Just sort of wondering, given your view and we think we agree with it, that there is a continued shift in cap rates, where will you be comfortable, number one?

And, number two, what is going to give you confidence that you will not continue to see a loss in value for anything you'd buy later this year?

Yeah, it's a very good question, a very good comment.

As long as we think that prices will decline and cap rates are up, yes, it is good to step back, and that's why we're doing it.

My sense at some point is, barring your call generally on the economy, is when cap rates get up into the 10, 10-plus range, they're likely to become a bit more stable.

Now, it's always hard to call the future.

Maybe they could get to 11, but looking back historically throughout our history, getting up over 11 happens occasionally, but that's kind of where things have stopped.

And so if we can get up into the 10s, I think I might have some confidence that there wouldn't be a huge amount of erosion above that.

But I would also really say that part of not buying today is two other things.

One is just looking at your cost of capital.

If you look at debt or preferred out there today in the market, I don't think you can find a way to issue either one and make it accretive on an upfront basis to go out and buy properties.

And we really need 100, 140, 150 basis point spread upfront before you want to take on the risk of an acquisition and lock that in upfront.

And so you really have to start looking at equity, and if you start looking at equity and its pricing, I think today we closed around 23.5, and I think if you took the midline, which was about 1.85, and you divided that by the price of the stock, you'd end up somewhere in about the 8.2 range.

And if you grossed that up for offering costs, if you divided by about 0.95, you'd probably end up around 8.6 as kind of a nominal cost of equity.

And so you're really looking at 10 at 140-basis-point spread before it's going to be accretive to buy something, and I think that's really kind of where you want to be out there today before you start considering it.

We've done 14 equity offerings since we went public, and each one, we'd like to look at and say, "Look, there was good accretive spread above that," and we'd really want that situation.

And I also think today, David, where we used to go out and put 100, 150 million on the line and then assume the financing would be there, that's probably not a good idea, and you want to be able to fund with equity on a current basis.

So we'd be having a couple transactions that were big enough closing at the right time where the cost of equity got some confidence in and a spread that was big enough.

But the third thing, which is of the transactions that have been coming through, which the volume's really been lighter to date, the credit quality has been such that we just couldn't get there on a comfort basis.

It seems to be that people that have been coming out are those that really have a problem right now.

What's surprising to me could continue, but at some point, knowing when debt maturities for various companies are and where credit spreads are currently, I think at some point, there are people who are just continuing to wait and say, "Gee, I hope things get better by the fall, when I've got some debt coming due."

So our best guess right now is [moderately] acquisitive maybe in the third quarter, and then in the fourth quarter, some of the better stuff coming out, and then it will all be on spreads.

But that's using your crystal ball, which is always a little murky.

Great.

Thank you.

And then my last question is the Buffets question.

Last year when everybody got caught by surprise on that bankruptcy, you declined to make any comments, and it sounds like you're a little bit more willing to discuss both the accountability question we had at the time and sort of the way this thing played out and where you ended up in terms of old versus new rent.

Sure.

I'll kind of run through it.

I think most people are familiar with it, but if not, they did their 11 -- went into 11 15 months ago.

It was our largest tenant.

It was about a little over 7% of rent.

And, obviously, they've now completed the process, have a better balance sheet, new financing, and they're out and operating with a smaller group of stores.

And we were on the creditors' committee throughout it, so worked very closely with it, and I do think it's instructive.

When we originally did the transaction, it was back in November of 2006, and it was Hometown Buffet, which is a buffet chain out of Minnesota.

They had a footprint that kind of went the Northern part of the country out to here and then one in the Southeast, which was [Ryan].

And Hometown Buffet bought Ryan's.

Together, they had 672 restaurants.

Hometown Buffet paid about $870 million for the company and financed it really through a recap of the whole organization.

So kind of the recap doesn't equal the purchase price.

But the financing was unsecured bonds or debt of about 300 million.

It was secured bank debt of about 530 million, which was some old rolling and some new.

There was a sale-leaseback on a lot of the property that the Company owned that was $566 million, of which we were involved in about $350 million of for 146 properties.

We took 30 of those for sale in Crest and have just a couple left.

So those were sold.

And that left us really at the time of filing with 116 properties that we had paid $285 million for, and they merged the two companies, took the footprint down to about 625 stores, and the Company then had about $169 million of EBITDA.

So it was -- there was a lot of cash flow behind it all, and essentially then, I really think that you've got a tsunami, kind of a perfect storm, at least from our vantage point of having looked at a whole lot of these.

Pretty quickly, the top line got hit much quicker than other retailers got hit really from increasing gas prices, and if you look at the consumer that Buffets had, a lot of these are Wal-Mart and Lowe's [out pads], and I think those consumers were kind of the poster child for the people that got hit, and the consumer spending in that group dropped off, and it hit their top line.

At the same time, although we don't kind of remember it now that we're into 2009 and 2007, the middle line really got hit with higher food prices, and the food costs really got out of control.

And at the same time that the top line really suffered by a lot and the middle line got hit, they were going through their integration, and I think it would be kind to say that the integration did not go as well as they thought it would from a management standpoint.

So you ended up with kind of the holy trinity of the top line, middle line, and integration.

And in the long and short -- and we're familiar with restaurant.

We've been in it since 1969 and this type of operation, it is the biggest meltdown of EBITDA that we've seen in a relatively short period of time.

EBITDA starting out when they did the merger was about $169 million, and the EBITDA, by the time of filing, which was about 15 months later, was about $98 million.

So EBITDA dropped about 42%, which obviously for a levered company is not good and really is an extraordinary drop.

So they went in and they filed for reorganization.

That was last January, and it's 15 months later.

And kind of if you look at the resolution, I think it's interesting relative to the parties involved and what happened.

It's indicative of kind of how these work, and again, this one was with a lot -- with a top line, middle line, bottom line.

The equity, essentially, that had been placed into the Company, which was a combination of the equity from the original purchase of Hometown Buffet, was basically wiped out, and there was no recovery, which is pretty typical of these.

The unsecured bondholders, which had put up about $300 million, ended up at the end with about 4.5% of the new equity in the private company, which is worth about $5 million.

So the $300 million of unsecured bondholders recovered about 1.7% of their capital.

The secured bank debt, of which there was originally $530 million that had grown by filing to about $580 million with original draws, and it's a big convoluted, but if you work through it, the bank debt got about 94% of the new equity in the Company that is worth about $111 million.

They also rolled $140 million of their prefiling debt forward that is on the books today.

And if you put those together, that's about $251 million.

So for the secured bank debt, it's about a 43% recovery.

Relative to our position -- and I don't know the other landlords or won't comment -- we had 116 properties at the time of filing that we had paid $285 million for.

We still own all 116 properties, so we are [not] trying to recover any principal.

We still own all of them.

Twelve we got back when they filed, four of those had been leased, and the other eight are out for lease.

So as we sit here, we also had 104 of the properties accepted and are under lease today, and the rent that we negotiated was about 87.9% of prefiling rent.

And we also were able to put in to some of the leases a provision if sales go back up so we could recapture part of that.

So kind of the net-net from it, I know that their EBITDA, they right-sized during the filing process, and it brought store count and EBITDA down a bit.

But as they come out today, the equity has no recovery, the unsecured bondholders, about 1.7, the secured bank debt, about 43%, and then we have, obviously, all of our assets in about 86%, 87% of rev, somewhere in that ballpark.

And we'll see what the future holds in terms of recapturing that.

I think it's kind of interesting to view this because in a company that even though it has had a significant decline in EBITDA that has a lot of EBITDA, you can see what happens to kind of the unsecured debt, the secured debt, and then the landlord relative to their position, but that is really predicated on the landlord owning the profitable properties.

And if you do, you generally do pretty good, or okay, at least.

We ended up pretty much the way we thought it would work out.

They're out now doing pretty well, have some good flexibility.

I know for us, I went back and checked the numbers today, David, and this was the 22nd reorganization that we have done in the last 12 years, and if you take those in that 12-year period, at the time each one hit and take their percentage of rent and you add it up, it was about 33% of our rent, and we really view it, while not fun, part of the business, and we try and underwrite for it.

And if you look at it, the recapture of rent on the 22 is about 90%.

You know, as we look back, and we've done probably 15 postmortems in the underwriting here, and we sat around for about six months saying, "I don't think we'd underwrite this at all differently," and I think today the two comments we've come up with, it's size -- when you get up to about 7% of rents, then that's getting a little uncomfortable, so we'd like it to be smaller.

The second one out of this -- and I'll just comment very briefly -- is in going through it, when we calculate cash flow coverages and look at what we're doing, we probably have a little greater sensitivity in the underwritings today relative to trying to do an allocation that's appropriate of corporate overhead on top of that to the EBITDAR down on the unit basis.

But that's a really interesting event that we've learned a lot about.

But outside of that, it's hard to not look at it and say we wouldn't underwrite something like this today.

That's essentially what we do for a living.

Well, thank you for your thorough response.

Just one brief follow-up on that.

I think Paul said that your minimum rent coverage now is 1.7.

Is that across the board?

I assume you must have units that are below that.

That's at the corporate level, and would that be for Buffets, or can you tell us where Buffets stand there?

Yes, Buffets is higher than that, and I don't want to go much more than that because as we reduced the rent, one of the things you want to do is make sure that they have some room to operate those properties properly [inaudible] out, just as you do as you right-size debt unsecured, secured, or whatever.

For the portfolio, it runs 1, 2, 2, up into the high 3s.

If we were looking at underwriting a transaction today, generally in the past, we wanted to be north of 2, and it's really industry-specific, closer to 2.5, with a minimum maybe on a few units in a transaction down towards 1.5.

I would say the other lesson out of that, which I should've brought up, at least in light of where the economy is today, and maybe permanently, is we probably want to be up closer into the mid to high 2s generally, and the left side of the Bell curve kind of at a minimum of 1.75.

But it's really industry specific because everybody's got different operating margins.

Okay.

Thanks a lot.

Thank you.

Our next question comes from the line of Jeff Donnelly with Wachovia Securities.

Please go ahead.

Good afternoon, guys.

Hey, Jeff.

As a follow-up to that, I guess what percentage of your retailers or your leases are operating at, say, below 1-1 or 1-2 coverage?

I don't know out of the 2,358, but I would say there's not a -- there's a very small number under the 1-0.

When I get to the 1-2, you're really dropping down big for one particular tenant and one particular industry, and there's a smattering throughout the portfolio, Jeff, but I really don't think it's a big number.

As we've gone back and looked through the tenants and getting through the top 25, there's always going to be one or two with a tenant that something happens in an area, but I don't think it's a very large number.

And then I guess I think one of your tenants -- and I'm positive you addressed this earlier.

I got on a little late -- but I think it's Big 10 Tires recently filed.

What's your exposure there, and I guess what do you see as the outcome of their issue?

Yes, that's -- Big 10 is in 11.

It's only about a little over 2% of rents for us.

We have 50 properties with them.

Two were rejected when they did the bankruptcy.

This will all sound familiar to you.

This was a fairly leveraged transaction from a balance sheet standpoint, and we think the primary issue for them is debt, and we believe we generally -- they're profitable properties, and as such, will do pretty well.

And I think we have a good handle on the operations of their units.

By the way, we did build that, kind of seeing it coming, and it's small, into the guidance that we did last quarter.

And it's in this quarter's guidance.

And beyond that, once again, and again, this will sound familiar, we are again on the creditors' committee.

In fact, I think in this year -- this one, we're chairing it.

And as such, under confidentiality agreement, we'll work through it, and I think it will look like most of the others that this is for us.

But given the size of the tenant to us, I don't think it's meaningful.

I guess the other thing to say, in our top 25, which gets you down to about 1% of rent, this is the only tenant in that situation, and I know I've been asked a couple times when we demur on tenant names, "Are you in this one, this one, this one, this one?" But when you do our top 25 and it gets down to 1% of rent, this is the only tenant in that situation, and we'll watch it transpire.

Have you added or removed any retailers from your -- I guess, let's say, from your guidance that you now gave in this most recent release either because of threats that you think have gone away or threats that are on the landscape?

It's exactly what it was three months ago.

And just the last question, I guess, on the tenant's side, at least, do you have any details on the percentage of your revenues that are exposed to, I guess I'll call it, private equity or LBO type situations like you saw with Buffets and some of these other companies?

Because there's certainly a lot of activity.

With the other retail REITs, probably 5% to 6% of their revenues out there are in the hands of [inaudible] Capital and some of the other firms that have seen a lot of bankruptcies of late.

Yes, I mean I think that'd be the case for us.

We've obviously dodged a huge amount of it, but we did a lot of private equity, but we really underwrote an understanding where that balance sheet sat at the time we did it and what the properties needed to have for cash flow coverage.

So I have not done a calculation for private equity, but there's a fair amount of it in there, like everybody else, Jeff.

And I don't want to leave Paul out, but many of your peers are out there in the REIT space, they're raising capital, some at prices which are, I guess I'd say, attractive versus -- or vis--vis their NAV.

What's your thought on accessing the equity markets at this point to perhaps build up some dry powder in anticipation of either retailers needing some capital or maybe some of these private equity firms who are looking to restructure ownership of their store base?

Well, I can't comment in general, Jeff, on the industry; I can only comment on the situation we're in, which is that our balance sheet's in great shape.

We have low leverage, cash on hand, a new line we put in place a year ago that runs for a couple more years and has no borrowings on it.

So we have liquidity and don't have any need to refinance.

And in particular, no debt maturing until 2013, and even then, it's only $100 million.

We've got nothing in '14 and only $150 million in '15.

So we don't have any near-term issues, call it, for the next six years, let's call it.

So it would really be dependent upon acquisitions.

In general, the way I answer your question is we tend to think of equity issuance as something that we view as needing to be accretive when we do it in terms of adding to the bottom line, growing our earnings, and then ultimately allowing us to thus grow the dividends of the company and pay steady and increasing dividends over time, which has always been what our mission is.

So it really will go back to what Tom described earlier is the acquisition environment, cap rates, are they at numbers that are accretive relative to the stock price and where our equity cost of capital is, and kind of what Tom was describing earlier, and is it something we can pursue in an accretive manner.

And perhaps that's a thought that hasn't been talked about in a while, but that's still how we continue to view equity capital and our need to access the capital markets.

Yes, Jeff, and if you're going to take any dilution, it better be for a month or two or three or four.

I mean if you're -- unless you need capital for a balance sheet [issue], and that I understand, but I think the history of capital allocation, of raising a bunch of money then doing something that's not accretive in the hope that it comes accretive, it's tough to handle.

In the net lease business, it's just [expletive] impossible because you've got to be contracting for it and get your spread upfront, and I don't have the visibility relative to a transaction where we do that.

If all of a sudden I knew there was 200 million that we thought we were getting very close on or 100 million and it would be very accretive to where the stock was today and I thought I was closing in 30 days and I was certain of it -- or 60 days, then I'd start talking, but to build a war chest for something that may come down and take $0.20, $0.30 out today, when you put that war chest to work, as I run the numbers, you're only going to get the $0.20, $0.30 anyway, so it becomes hard to do.

Now, I recognize our property type is maybe different and there are other people who could buy very cheap and the rents will go up, but I don't really think it's our game.

So I think we'd have to have a lot of visibility coming up pretty close on a transaction we know would be accretive to issue much in the way of equity.

Well, thanks for the refresher, and you could've just said no, too, but --

And the other answer -- Gary, do you have an answer?

Well, you know, Jeff, at the end of --

Gary, do you have an answer?

No, I think you've covered it [inaudible].

It's -- actually, one last question, and I know it's kind of minute, but I guess I haven't asked about it in a while, is [Silverton], and I'm asking only because it's a facility that -- while I know it's just one asset, it's fairly large, and their collection is --

The asset manager job is available there, Jeff, if you'd like [inaudible].

No, thank you.

I think it would be very intensive.

Well, I'm asking because there are a lot of -- my recollection is there's a lot of tenants of that property who are more, I'll call it, small business or mom-and-pop oriented.

Have you seen a lot of turnover or loss there that's of note?

You know, it's a funny property.

Let me give some people some history.

We own one light industrial 400,000-square-foot incubator space-type industrial property in [North Counting] San Diego right next to Miramar Air Base, which for those of you from around the country is where they filmed Top Gun.

And it is something that we bought 20-plus years ago that blew up in our faces, and after much debate, we kept it and got back everything that we lost on it, and then rents went through the roof.

And a couple, three years ago, had a very active debate within our committee here, "Should we sell it?

It's unusual for what we own," and it usually comes up, "It's in our back yard.

It's perfectly placed." And so occupancy was running, what, 95?

Yes, 95, 96.

And today we're at about 90, so there's been a little bit -- you know San Diego pretty well because you were here, and that Miramar market is very, very -- you know, it's tight, and there's not a lot of room to build.

So you have seen a little bit but not a great amount.

But, again, it's not a huge amount of property for us.

Great.

Thank you.

Thank you.

Our next question comes from the line of [Todd Lucasik] with Morningstar.

Please go ahead.

Hi.

Thanks for taking my questions.

Hey, Todd.

Just a question with regards to acquisition finance facility.

If you guys do do the 250 million by the end of the year, is that debt that you can hold on that facility through 2013 with two extensions, or does it have to be taken out earlier?

If we wanted to, we could hold it as a balance on that facility for the length of the facility.

That would not be our approach.

As Tom mentioned earlier, we really wouldn't want to assume a nice spread off of the cost of the facility and kind of carry that variable-rate debt, and that really hasn't been our approach historically.

I think historically if our balance and our facility got to 100, 150, we would do something.

Today, that trigger might even be smaller than that, south of 100 million, where we'd want to take it out with permanent capital.

And in our case, as we described, we're thinking about that as equity permanent capital.

But if we were about to raise equity and we were about to close and we were very comfortable, we'd probably put it on the line for a short period of time and then go issue and issue equity.

And if Mr.

Donnelly, who was on right before you, put a sell on it, so it went down, yes, our backup would be to have a capacity to hold it for a while.

Right, okay.

[Inaudible] Jeff.

We like him.

All right.

And this may be another yes/no question, or at least potentially one.

Is there -- if you were considering the debt, is there a spread between -- would you ever consider secured debt?

I guess is there a spread between secured financing and unsecured debt, at which you might consider mortgages on properties?

Yes, it's -- we've been here for 40 years and have never had a mortgage on a property.

So that --

Okay.

-- say a lot.

However, we've always viewed and never really had this talk about it -- I think I'll talk about it for the first time now.

One of the reasons we use unsecured debt and do long-term fixed-rate debt and keep debt fairly low on the balance sheet is that we have a very conservative investor, most who are retired and can't take a huge amount of risk relative to the balance sheet.

And one of the reasons to become fully unencumbered is if you got into a period of time when the unsecured market was not available for a prolonged period of time.

Obviously, you could go out on a very large portfolio and on a very low, low, low-to-value ratio use secured debt as your emergency chute in the event the markets were closed.

We do not anticipate doing that because we don't have near-term maturities, but that's always been the reason to keep it unencumbered, and it really speaks back to who the investor base is.

I think you always have to have that reserve chute if you've got 70,000 shareholders who are retired.

Right.

Makes sense.

Thanks a lot.

Thanks, Todd.

Thank you.

Our next question comes from the line of [Ryan Levinson] with Private Fund Management.

Please go ahead.

Hey, thanks for taking my questions.

Hey, Ryan.

Hey.

On the same store rents, by my calculation, Buffets was down about 15% year over year.

I'm just wondering if that's the -- kind of the expectation that we should have on sort of your more stressed retailers if they come in for getting some sort of concession?

You know, if they're Chapter 11, I think that's -- you know, it's not a bad number to use, but I would say that it's really tenant specific, and I would say again what I said about Buffets; that's the worst meltdown in EBITDA in 11 I've ever seen.

So we did underwrite it well.

I think generically we have, but that was a pretty big one.

Okay.

And what are the lease spreads coming in on some of the leases that are coming up for renewal naturally?

Generally, lease renewal right now is about flat, and it has been up slightly for the last two, three years.

Lease spreads, when you're speaking about net lease, is a different business than I think a shopping center, where you're really leasing open space.

A lot of net lease properties are very tenant-specific.

They tend to either release the property if it's profitable to them, or they don't if it is not.

If it is, then generally, in most of the leases, there's a bump that it works anywhere from 3 to 5%, and that's a function of just being some extensions on top of a 15 to 20-year base lease.

If they walk away, generally, it's because it was unprofitable to them.

It is a weaker unit, and in that case, your lease [spread] goes negative.

That's been the history.

If you look at lease turning over this year, it's fairly small.

The vast majority of it are properties that have rolled over before where a tenant had it for 20 years or 15 years, and then we signed a new five-year lease because it was profitable to the tenant, and it's rolling over again.

So the vast majority of our leases rolling over this year are secondary leases, which should be profitable, but given the economy, we're guessing a ballpark flat.

You know, Ryan, I would add one thing to that, which is that our annual historic experience with rollover has been that about two-thirds of the leases that roll over get accepted by the existing tenant, which, as Tom described, becomes a positive rent event typically.

That hasn't changed, so that experience, relative to about two-thirds of them being released to the same tenant, so that's been a good trend to watch.

And then on top of that, as Tom described, to the extent that when you look at our expiration schedule and the subsequent expirations, we expect those subsequent ones to be more likely to [re-up] themselves because they've already made that decision once on that existing space.

Answer to the question, flat.

Okay.

Well, Paul, that was actually my next question was that in the first quarter, it looks like if I assume that of the 148 leases that you had expiring this year, if I assume that that's spread evenly over the year, it looks like about two-thirds renewed.

Is that what we should expect for the remainder of the year, as well?

I think it will be higher this year, and I think that's a function -- if you look at the table in the back of the press release, that a high percentage of the rollovers this year are secondary or subsequent expirations.

Okay.

And in any event, though, it looks like that adds close to 200 basis points of vacancy to the portfolio.

I don't -- hmm.

Well, I know that's not what --

[Not an aggregate to that].

Yes, you're right; that's not what we're projecting inside.

So maybe offline, you can share the math with us because we -- I'm not sure we'd get there.

Oh, and we also -- on the ones that don't roll over, we release them.

Yes, and we plan a year ahead of time.

This isn't like moment in time tenant tells us that they stay or go.

We've had dialog leading up six to 12 months beforehand about what their plans are because it's usually not one-off.

It might be somebody who has 8, 10, 12 at that particular time.

So we have a sense, a plan in place.

We're already working on releasing selling a property, that sort of thing.

So you know what I mean?

It's a little bit more active than that.

It's not like it goes blank that day and then we've got to struggle to figure out what to do with it.

Yes, in the portfolio management department, we're pretty close with the tenants, so we'll start anywhere from a year-and-a-half to two years out from the point of rollover talking to the tenant.

We know how profitable the unit is, so we can pretty much, without calling them, get a decent idea of which ones they're going to keep and just move those aside.

And on the ones we think are in question, we're in well over a year ahead of time, and on the ones that they're going to give back, we usually know it six months, eight months ahead of time.

So it tends not to turn into a lot of incremental vacancy.

Plus, we're releasing the existing stuff that is vacant, so properties are coming off of that list, as well.

Okay, okay.

And just last one.

The EBITDAR-to-rent ratio, you said that some of the tenants only disclosed their financials annually.

I was just wondering if the RV dealer, [Camping World], that's at that 1.2 times, 1.22 times at the low end, if they're one of the ones that only discloses annually?

I was just surprised to see that that 1.22 didn't move.

Right.

We do not discuss the individual business of tenants, so I wouldn't comment to that.

Okay.

And we never referred to them as that tenant.

Right.

Have to be specific on that.

But that's -- you said it was an auto dealer and --

I said a dealer, right?

Okay.

Well, I thought I had heard that you said it was an auto dealer.

If I did, I misspoke.

Okay.

All right.

Well, thanks for your time.

You bet.

Thanks.

Thank you.

And there appears to be no further questions in the queue.

I'd like to turn the call back over to management for any closing remarks.

All right.

Thank you all very much.

I know on the East Coast, it's getting late, and they're busy with a lot of calls, and we really appreciate it, and thank you.

Have a good day.

Thank you, ladies and gentlemen.

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