Realty Income Corp (O) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Realty Income fourth quarter 2009 earnings conference call.

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

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

(Operator Instructions).

This conference is being recorded today, Thursday, February 11, 2010.

I would now like to turn the conference over to Tom Lewis, CEO of Realty Income.

Please go ahead, sir.

You bet.

Thank you, Douglas.

Good afternoon, everyone, and thanks for joining us today.

In the room with me, as usual, is Gary Malino, our President; and Paul Meurer, our CFO; Mike Pfeiffer, our General Counsel; and Terry Miller, who is Vice President of Corporate Communications.

And as we always do, we'll say that during this conference call, we will make certain statements that may be considered to be forward-looking statements under federal securities law, and the Company's actual future results may differ significantly from the matters discussed in any forward-looking statements.

And we'll disclose in greater detail on the Company's quarterly and on the Form 10-K, the factors that could cause such differences.

And we'll start with Paul, going through the numbers.

Paul?

Thanks, Tom.

As usual, I'm just going to comment on our financial statements with a few brief highlights of the results for the quarter.

And starting with the income statement.

Total revenue remained flat at around $82 million, and that's primarily because we now own 2,339 properties as compared to 2,348 properties a year ago.

Furthermore, all of our acquisitions this past quarter are currently in the year, in December, so they didn't have a major impact on the 2009 revenue.

Same-store rental revenue increased 0.7% for the quarterly period.

On the expense side, depreciation and amortization expense increased by $190,000 in the comparative quarterly period.

Interest expense decreased for the quarter to $21.4 million; and of course, this reduction reflects the retirement of $120 million of our bonds over the past year.

We had only $4.6 million of borrowings on our $355 million credit facility at year-end.

And on a related note, our coverage ratios remain strong, with interest coverage at 3.5 times and fixed charge coverage at 2.7 times.

General and administrative or G&A expenses in the fourth quarter were $5.1 million.

For the year, G&A expenses were $20.9 million or lower than 2008 by almost $700,000, finishing the year at about 6.4% of total revenues.

I also want to point out that our acquisition-related costs are now included in the G&A expense line.

As per FAS 141R, we are now expensing rather than capitalizing these acquisition costs.

In 2009, this totaled $62,000 for the 16 properties we acquired.

Property expenses decreased by $214,000 to about $1.4 million for the quarter, as these expenses have continually decreased since the beginning of the year.

And of course, these are the expenses primarily associated with the taxes, maintenance and insurance, which we are responsible for on properties that are available for lease.

Our current estimate for property expenses for 2010 is approximately $6 million or a run rate of about $1.5 million per quarter.

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

These taxes were actually negative $7,000 for the quarterly period, reflecting tax refunds from some states.

Overall for the year, income taxes were $677,000 in 2009 as compared to $1.2 million in 2008, again reflecting tax refunds we're receiving from various states.

Income from discontinued operations for the quarter totaled $4,293,000.

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 any new properties, but Crest did sell two properties in the quarter; and overall, Crest contributed income or FFO of $649,000 in the quarter.

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

We did sell eight properties during the quarter, resulting overall in income of approximately $3.6 million.

These property sales gains are not included in our funds from operations.

Preferred stock cash dividends remained at $6.1 million for the quarter and net income available to common stockholders was $29.3 million for the quarter.

Funds from operations, or FFO, was approximately $48.4 million for the quarter and $190.4 million for the year.

FFO per share was $0.47 per share for the quarter, an increase of 2.2% in the comparative quarterly period.

FFO per share for the year came in at $1.84 versus $1.83 in 2008, an increase of 0.5%.

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

Our AFFO, or the actual cash we generate, which is available to pay out as dividends is, as usual, higher this quarter than our FFO.

And this is typical, because our capital expenditures are very low and we have very minimal straight-line rent in our portfolio.

We increased our cash monthly dividend again this quarter.

We have increased the dividend 49 consecutive quarters and 56 times over all since we went public over 15 years ago.

Our dividend payout ratio for the quarter was only 91% of our funds from operations, and as I've mentioned, lower on an AFFO basis.

Now let's turn to the balance sheet briefly.

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

Our debt to total market capitalization today is 29%, and our preferred stock outstanding represents just 7.5% of our capital structure.

And all of these liabilities are fixed rate obligations.

We only had $4.6 million of borrowings on our $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 $10 million of cash on-hand, and as you know, our next debt maturity isn't until 2013.

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

And let me turn the call back over to Tom, who will give you a few more background pieces of information on these results.

Thanks, Paul.

And as usual, I'll run through kind of the key areas of operations for the Company.

And let me start with the portfolio.

The portfolio continued to do really quite well in the fourth quarter, given the state of retail.

I think, generally, our tenants have continued to see their business stabilize a bit in recent quarters.

And I'd say over the last, oh, couple of months or so, generally, their mood has improved.

And that means either they're getting used to the economy slower or things are indeed getting a bit better in their businesses overall.

During the fourth quarter, all 118 retail chains in the portfolio paid full rent and we had no tenants in reorganization.

At the end of the quarter, if you take a look at our top 15 tenants, which comprised about 53% of our revenue, generally, the cash flow coverage at the store level, or the EBITDA they have compared to the rent they pay, generally was about 2.5 times the rent they paid.

So, we had a little improvement there and they continue to be well-covered rents in the key tenants.

And obviously, owning the more profitable stores, as we are used to talking about, is what has kept, I think, the portfolio occupancy high.

Ended the third quarter at 96.8% occupancy.

That's 75 properties available for lease and 2,339 in the portfolio.

That's the same percentage that we ended with at the end of the third quarter, and just about 20 BIPS -- basis points from where we were the same period a year ago.

So, given the state of retail in the last year and a lot of activity in the portfolio, we're pleased with that result.

Same-store rents on the portfolio increased 0.7% during the quarter; 0.4% for the year, so up a bit.

Our sense right now looking forward is that same-store rent growth should be positive in the coming quarters.

We anticipate that, again, for the year, I think it will be modest, but I think there will be good same-store rent increases during this year.

And I find this interesting to do and I'll share with you kind of where we saw the increases, decreases and flat in terms of same-store rent.

Of the 30 different retail industries in the portfolio, six had declining same-store rents during the year.

Restaurants were about half of that.

The balance mostly came from motor vehicle dealerships, sporting goods, consumer electronics, and bookstores.

I think that's just about what you would expect coming out of those segments of retail today.

And the declines in the seven industries were about $2.7 million in rent for the year.

Two of our industries had flat same-store rent, which was apparel and office supplies.

And then there were 22 industries that saw same-store rents increase, with the biggest increases really coming out of convenience stores, which were some good increases over the years.

And then pretty good increases also out of our tire stores, childcare, health and fitness, and home improvement.

The 21 industries together had a total increase in same-store rent of about $4 million.

And if you net that out against the declines, that's a net gain of about $1.3 million.

That's for the year.

For the quarter, the percentage increase was a little higher.

We actually had an increase on some of our restaurant properties, which was a bit surprising; but interesting to see where it came from.

And along with same-store rent, if you looked in net-net with about a 20 basis point decline in occupancy for the year and the same-store rent increases, that netted us a small increase for 2009 you see in the rental revenue in the income statement.

I think we continue to be pretty well-diversified.

As I mentioned, 2,339 properties at the end of the quarter.

That's up five net from last quarter -- still 30 industry; still 118 tenants in 49 states.

By industry, our largest exposure continues to be to the restaurant industry, with about 21.3% of revenue.

That's down a bit from a year ago, and we will continue to work that down and maybe a little faster now, as we see acquisitions over the course of the year.

Convenience stores are 17%.

That's up a bit, but really due to kind of across-the-board rent increases coming out of our C-stores.

Theaters at 9.3% doing pretty well and childcare now down to about 6.7%.

As you can see in the press release, the largest tenant is about 6% of rent.

The next one is 5.3% -- it goes down to there.

And when you get really to our 16th largest tenant, you drop below [1% -- 2%] of revenue in the portfolio.

So, it remains fairly well-diversified.

Also, I think, with good lease length, with about 11.2 years remaining lease on average in the portfolio.

Subsequent to the end of the quarter, we did have one of our tenants that went into reorganization here in the first quarter.

That was Movie Gallery or Hollywood Video.

They filed an 11 last week.

And I think since they also filed in 2007, that'd be a Chapter 22 then.

The properties that we have with them have been in the portfolio for about 11 or 12 years.

I think for the last four years, we've been trying to reduce the exposure to that industry.

And today, Movie Gallery represents less than 1% of revenue going into this, on the 23 properties that we have with them.

Our sense is, looking at them and their business model, that we're probably going to get back about 12 of those, and we plan on releasing those units.

We actually have released a number of Hollywood's to other tenants over the last couple of years.

And these were some weaker locations that we got back in the 2007 reorganization that they went through.

And so we've got some good comps to go by, because all of those leases were signed in 2008 and 2009.

So it's helpful to take a look at those.

Generally, there are about 7,000 square-foot boxes on about one acre of land.

We've leased them to the auto parts retailers, some consumer electronics, pet supplies, furniture rental, and then some local tenants.

And a lot of them are outpads to grocery-anchored centers, and so they're pretty good to lease, yet in this environment, it's interesting.

If you take the seven that we leased last year and the year before, generally, we retained about 70% of pre-filing rent on those units.

So, if you kind of want to do a back of the hand, if the revenue is under 1% and we get about half of them back, and we get about 70% of that, the impact overall to the revenue stream this year should be fairly small.

The other thing is, is that we have accounted for that in our guidance and it's included in that.

So I don't think there's a major impact.

The other thing on this, as has been extremely useful to us when these events happen, which is a normal course of business item, we are on the Creditors Committee for this reorganization.

So we're actively involved with the discussion and pretty well-informed in terms of what's going on.

Obviously, as always, that requires a confidentiality agreement with the Court, so that will be kind of my comments on Movie Gallery for now.

As that progresses over the next six to 12 months, and as is appropriate, then we'll kind of walk through the impact, which, again, is, I don't think, substantial.

All of the rest of the 117 tenants today are current with their rent and paying on time.

And we anticipate that the rent they are paying should modestly increase the balance of 2010, as it did in 2009.

Anyway, relative to the portfolio, to sum things up, positive same-store rent; good occupancy; and I think pretty good performance, from what we're hearing from the tenants.

Moving on to property acquisitions, as most of you know, at the end of the third quarter, we began starting to acquire properties again.

And I'll tell you, the volumes of transactions we evaluated in Committee upticked pretty substantially in the end of the third quarter in September, and then on into October and November.

And that really resulted in the fourth quarter with some good opportunities.

As you see, we bought 13 properties for $46 million.

The acquisitions were with two tenants.

One was an existing tenant; one a new tenant to us that we've been trying to get their business for years.

One in the convenience store business and then one in health and fitness.

They were bought subject to long-term triple net leases, average lease length is about 18 years.

Cash on cash yields or cap rates starting out were 9.6% of the assets that we bought in the quarter.

So pretty good spreads and yields off those.

For the year, that gave us just under $58 million of acquisitions on 16 properties, and again, about 9.7% caps.

It's kind of been the tradition every year on this call to do the fourth quarter, to kind of talk about during the year what we worked on in Investment Committee, and then what we ended up buying, to give everybody a feeling for transaction flow.

And I'll just do those numbers if you want to take notes on these.

During 2009, which was in the third and fourth quarter, we worked on 56 separate transactions in Committee.

It involved 698 properties; had a estimated value of about $1.5 billion.

And the average cost of the property then we were looking at was about $2.1 million.

The cap rates that we were discussing on these generally were in the high 9's.

And again, it's 56 transactions, 698 properties, about $1.5 billion' $2.1 million average unit cost and cap rates in the high 9's.

Out of that, we participated and did four transactions with 16 properties and that was the $58 million.

The average cost of the property was $3.6 million; average cap rate, 9.7%.

If you run the math, that works out to -- we bought about 4% of what went through the Committee in the third and fourth quarter.

If you look back over the last 10 years or so, I think the average is to do about 13% of what gets into the underwriting process.

Four is low and that may be skewed a little bit because of starting late in the year, but I think was also reflective of the quality of some of the transactions that we had to evaluate, particularly as we were looking in the third quarter.

You saw some people coming to market with transactions, where I'm not sure that the transaction was going to fix their overall problem or the proceeds they were looking for was high.

So I think that's the reason there was a little lower hit rate.

And I think as we look now, we continue to look at transactions here pretty actively in the first quarter, and I think it's likely we'll be buying properties in the first quarter.

And what's going on is, recently, the flow of larger transactions has picked up quite a bit over the last 90 days or so.

The other thing I'll notice is, lately, the quality of kind of what's coming through the door is better; so my sense is, is the hit rate will increase a little bit as we go on here.

While there's not been -- I wouldn't want to describe it as a deluge of transactions that come to market; we definitely do see the volume increasing that is coming across we can look at.

So we're looking at opportunities and cautiously optimistic that we're going to be able to add some very nice property acquisitions to the portfolio this year.

And with the progress in the fourth quarter, it's nice to be working on revenue growing again and adding to the top line.

I think it served us well to be out of the acquisition business for awhile, but I think that we will be able to make some progress this year.

Cap rates in the marketplace on the things that we've been looking at, I think have generally come in a bit over the last 90 days or so.

The retail one-off cap rate for the type of properties we've been buying is probably around 8%; though, with low volumes in the one-off market today, every transaction is a little different.

So as we're trying to figure out where the one-off market is, I think some of the rates that you see trading are a bit anecdotal and you've got to add up a bunch of them.

I think the wholesale transactions are larger ones like we do directly with owners and retailers.

I think you're looking in the nine-plus -- mid to high nine range, and coming in a little bit, as I said, over the last 90 days or so.

Looking at the type of transactions, it's to some degree what I said last quarter, which is there's not too much of a theme relative to industries that we're seeing coming -- the opportunities coming in.

A lot of it seems to be balance sheet-generated, where a few of the sellers are now saying, okay, I've got some upcoming obligations and I'm going to need to act on those; and let's see what I can do from a sale leaseback standpoint.

The one difference, though, is we are starting to see some M&A transactions where the real estate can be used to finance the purchase.

As you know, that was -- there was a lot of that in '05, '06 and '07, and I've been a little surprised to start seeing not huge ones, but some smaller M&A-type transactions coming in over the transom.

So I think maybe there's a little more of that going on.

The other thing to be said in the net lease market today, there are just a lot of properties that have been developed in the last couple of years, where the developers have not been able to sell the assets.

And so there is a lot of that inventory out there to be bought.

I don't think it fits us.

As you know, generally, we want to buy existing units with stabilized cash flows, so we can calculate the cash flow coverages.

And it's been our sense that we have better long-term results relative to occupancy if we do that.

But there are a lot of developers that have built properties and are now looking to sell them.

And then, secondarily, I think a lot of them are trying to figure out if there is going to be some new development in retail, which we're starting to see pick up a little bit.

Trying to figure out how they're going to finance that, and that's a big question mark out there -- not an opportunity for us, but is something we've been noticing in the market.

There's some, I think, good traction here in the fourth quarter in acquisitions, and I think it will be fun to see how this turns out over the course of the year.

But so far, the acquisition activity has been picking up.

Moving on to dividends.

Obviously, cash dividends are the priority.

We'd anticipate dividends this year will be higher than last year, and it is our goal to have them higher in 2011 than where they are in 2010.

I think that while some modest progress will be made in portfolio operations in general -- generating revenue on the top line, I think most of the growth in this year would come from acquisitions.

And that would be helpful relative to FFO and dividends.

Paul commented on the balance sheet.

We continue to be in a very liquid position with a little bit of cash on-hand and the vast majority of the line available.

No debt due; obviously, no mortgage debt, and really, not a lot going on where we've committed to developments or other things, which is our custom.

So, access to capital is good out there and I think that's true of equity preferred or debt.

And should we be able to meaningfully add to the acquisitions this year, the capital markets for now look like they are available to us.

As to FFO for 2009 and then looking at guidance, it came in pretty much as we expected, with some modest FFO growth.

And as Paul said, while we did the $58 million in acquisitions, very little of it was done except at the end of the year, so it didn't add meaningfully to FFO.

And it's probably the last time I'll be able to do this, but it's kind of interesting to note that, if you look at 2009, we didn't buy a lot of property except at the end of the year.

We sold a few properties.

Crest was essentially shut down for the entire year.

While operating expenses declined, it literally wasn't a program; it's reflective of less activity in acquisitions.

And so what we've really been looking at in the portfolio is kind of the core operations pretty deep into a tough recession, and we were able to get through it with some modest growth in rental income and FFO.

Very pleased with the way it held up to date.

I don't think -- I'm not in the camp that the economy is suddenly going to get radically better, so I think there's a lot of work to be done in portfolio management over the course of the year as there was last year; but, I think maybe modestly better.

Guidance for 2010 remains unchanged at 1.1% to about 4.3% FFO growth.

That assumes relative stability in the portfolio.

It also includes the impact that we see from Movie Gallery or Hollywood Video, and $50 million to $250 million of acquisitions is the number that we're using right now, with little or no contribution really from Crest.

And we do not have any plans to start acquiring in Crest and open that business back up.

To summarize, then, a pretty good quarter.

And we look forward to making some headway on the revenue side as we start buying again.

And with that, Douglas, if we could open up to questions?

I think it'd be a good time to do that.

Thank you, sir.

We will now begin the question-and-answer session.

(Operator Instructions).

Greg Schweitzer, Citigroup.

Hi.

Michael Bilerman is on as well.

Tom, you mentioned cap rates have come in a bit.

How sticky do you think that the mid-9's average rate that you saw for the bigger deals will be as this year progresses?

You know, it's hard to tell.

I should have really said they came in a bit and I think they continue to come in a bit.

So the discussions we're having now are most definitely in the 9's, but we do see them coming in.

And it wouldn't surprise me if -- even without any stronger recovering in the economy, if interest rates stay low, then you probably see them in the low 9's for the year; so they could come in a bit more.

But we're still thinking in the 9% to 10% range and for now, using 9.5% as kind of our planning.

Okay.

And then outside of the C-stores and the gyms that you acquired, what types of other industries showed up in the deals that you looked at in the quarter, and expect to see through this year?

Is there any trend or is it -- is this pretty spread out?

You know, there were -- it was pretty spread out.

There were some theater transactions that we worked on; a couple of those that came through the door.

There was a fair amount of C-store.

There was health and fitness.

There were a lot of restaurant properties that we just don't even include in the numbers we looked at, because we're not doing that right now.

So, it's interesting -- as long as I've been in this business, there were always a lot of restaurants, that's true.

In the last 10 years, it's become we're a lot of volume C-store, that's true.

Movie theaters, I think were the theme for the quarter.

And then the other theme was just a lot of -- people were showing us a lot of newly developed properties, which we're just kind of not spending any time on.

But other than that, no real industry theme that I can think of.

Okay, great.

And then just one more.

Any new insight or changes that you've seen that you could share from a tenant or industry standpoint?

Any tenants that you perhaps have more comfort over or any new ones you've started to watch?

Yes, it's -- the list relative to industries remain the same.

The top of it is, obviously, the RV business because it's a big ticket, consumer durable, needs to be financed.

And that was an industry that really got hit the last two years.

It's unusual for us to have this type of industry in the portfolio.

And I'm just pleased the tenant held up through this.

There is some good news.

But if you look at what happened to the RV business, I was looking up the numbers earlier and trying to get the forecast for this year -- and in 2008, I think there were about 239,000 RVs shipped in the US.

That was down 33% from 2007.

In 2009, it looks like it's going to be about 159,000 that were shipped, which is down another 33%.

But interestingly, the fourth quarter, the run rate was back up over 200,000.

And they're projecting that it will be over 200,000 in 2010, so there's some very strong movement in the fourth quarter.

The other thing I saw as a good example is that Thor Industries, which is one of the major manufacturers, was talking about in their most recent quarter that shipments of RVs out of their stores were up about 148% for the year-over period.

So there's been some help come out of the government on that end of the industry, with some tax advantages for buying a new RV.

And that industry did have a turnaround in the fourth quarter and we noticed the cash flow coverages that we have there moved up pretty dramatically in the fourth quarter.

Now they had gone down pretty dramatically, but there was some comfort there.

The second area really is in restaurants.

That's still a very tough business.

Casual dining, as we all know, has gotten hit.

And I don't think it's rebounded substantially, but I think it's -- the bleeding has slowed a little bit.

The high-end restaurants, obviously, it's not good, but we don't have a lot in that.

The one that was interesting in the fourth quarter is, if you look at the fast food restaurant side, that it really benefited from people trading down and had great same-store sales over the last couple of years.

They kind of got hit in the fourth quarter.

So, restaurant continues to be an area that's tough.

But I think generally, the tenants we have there have hung in there and the cash flow coverages we have are decent; but it bears us continuing to watch.

The other industry that's been kind of surprising this time around is the child day care.

Traditionally, that has been extremely -- held up extremely good in recessions.

We've been in that business for well over 25 years.

And we've been through recessions and some deep down-turns on a regional basis, and it's really held up.

I think what's going on there this time around is in the last 10, 15 years, the amount of revenue that comes into those organizations from government programs paying for childcare has grown.

And as municipal and state budgets get squeezed, I think there's been a little squeezing on their side of the business.

So that's been tougher this time.

And I'm glad we have some older units with low rents that continue to have pretty good coverages.

But that's kind of the watched list.

The RV was the one that we really were watching very carefully and really nice to see the fourth quarter intact.

And then restaurant and childcare continue to be tough areas but stabilized a little.

Okay, thank you.

Look forward to seeing you guys in a few weeks in Florida.

Jeffrey Donnelly, Wells Fargo.

It's nice of you to make it in with all the snow hitting the Coast.

So, actually, Tom, I guess I'll start with you.

You mentioned in your comments that you're not expecting a radically better economy.

So this is an easy question to start off -- I guess, what is your view for the economy and interest rates, as you look forward two or three years?

And what implications does that hold for your decision to maybe recycle capital a bit more aggressively, through sales and acquisitions and then, and even your leverage policy?

Sure.

You know, it's funny, we run scenario planning on the economy and read everything everybody publishes.

And if you go back two, three years ago, we had -- our scenario for things getting very rough, we felt very strongly about, and took a lot of action on it.

And it served us well.

And as we sit around and talk today, you kind of sit there and go, okay, what can happen?

The whole economy can come back.

The great moderation will continue and things are going to be just peachy; but we don't have much of a weighting at all on that one.

You can say, okay, moderate growth over time and we come back and, okay, we'll weight that one-third; and then you get kind of the things don't pick up but don't get meaningful worse -- a la Japan, the lost decade; give that one-third.

And then we double-dip and it doesn't get great, and we give that one-third.

So it's a long-winded way of saying we don't have a lot of conviction of thinking we know right now.

And the thoughts on acquisitions is that cap rates have moved up.

The spreads over cost of capital are good.

And there's opportunity because there's few people out -- fewer people out there with capital than there has been in the past.

And we would stop acquiring on a dime if at some point the spreads weren't there, or we didn't like the quality of it.

But our sense is, is that we can add to revenue now on assets that we're going to want to hold a long time with substantial cash flow coverages.

And it's a good time to do go do that.

And so that really laid it out there.

And then in terms of the capital that we would use, lately, as you've witnessed in the REIT industry, obviously debt has been extremely attractively priced.

It's moderated a little bit but it still is well-priced.

The preferred market has come back and debt on our balance sheet is only about 29%; preferreds down in the mid-single digits, so both of those could be added to the balance sheet comfortably.

And then, as you know, there's been a prejudice for equity and the equity has traded pretty well.

Given we don't have a really strong [conviction] of a snapback, I don't think I'd want to add dramatic leverage to the portfolio.

We're laddered-out pretty good with our debt now and I wouldn't want to do anything short-term; but we haven't made really a decision, but we think as long as capital is available at good prices, we'll keep acquiring and we'll try and keep leverage low.

Do you think this increases your desire to maybe sell assets and use that as a source of proceeds?

You know, that's something we've been talking about and it looks really good.

And as you model it out, though, it cuts into FFO a fair amount.

But I think if we were able to achieve FFO growth up above the 2%, 3%, 4% range over the next year or so because of acquisitions or the portfolio does well, we might take the opportunity to bring that back down a little bit, and use it as an opportunity to sell some assets, and move into some things where we either like the cash flow coverages better or we like the industry better.

And then also, where we think that in our lease structures that we can get a little more inflation protection, because that's one of the risks out in the future, given money supply growth if the economy does snap back.

And you sounded a little more -- I guess I'll say optimistic on the acquisition front.

What are the odds that you maybe meet your 2010 acquisition goal in the first half of the year?

Oh, you know, I don't think I'll go there with you.

But I am -- I think there's a greater chance of it substantially than I felt 90 days ago, just by the number of transactions coming over, in that some of them have some pretty good quality.

But it is -- I don't know about the first six months; it's going to ebb and flow.

You'll be sitting here for a month and you'll have some things to work on, and then five things come in the door and you think, man, here comes the deluge.

And then three weeks will go by, you don't see another.

So, I don't know how it's going to come.

In our modeling, we're keeping it at the end of each quarter and pretty equally distributed among the four quarters.

And I'll have a little better feel as we go.

But it's hard to say, but I do feel much better than I did 90 days ago about the volume.

And then just a quick question or two for Paul.

It might not be a meaningful enough change to really make a material difference, but since you do have a lot of assets in your portfolio that are probably of fairly low book value, to the extent you guys do begin to recycle your asset base a little bit more, and you're effectively buying at today's prices and you're selling assets that have a low book value, does that benefit your credit metrics from the standpoint of lenders when they begin to look at you guys?

Because your sort of book-based leverage metrics [would] obviously be improving.

Is that encouraging to them?

Or is that really not a significant focus right now?

I think if you do the technical math on that, you could make an argument that there might be a slight benefit as it relates to some of those ratios that, as you know, were built into some of the agreements.

But the reality is, I don't think we -- we can't foresee a scenario where we would uptick that sort of activity to a point where it would make a material difference.

I mean, if you look back to 2002, just to give you a couple of statistics, we've sold anywhere from 10 to 43 properties a year, ranging from $7 million to $35 million a year.

As the 10-K comes out, you'll see we make a prediction in there of a general range of $10 million to $35 million of sales for 2010.

That's really our best guess.

Even if we're on the high end of that, or even if we enter a strategy where we agree with you and say, gee, let's recycle some more capital, you're not talking about that much where it would have that much of a material impact on what you're describing.

So if you're talking about $35 million, let's say, plus of sales, it really wouldn't affect it that much.

The other thing, Jeff, is, is one of the nuances of the net leased small property businesses, when we buy properties, we tend to buy them in bulk in transactions.

But when you sell them, you tend to sell them one by one.

So, the operational difficulty of a large number of sales in the portfolio is, A, expensive, and B, takes a lot of manpower to execute.

So it is a little different than some other industries.

And that's why it does, I think, hit the FFO a little harder just to go through those transactions.

Just wanted to be sure you weren't thinking about something more dramatic.

Just last question, really more of a nitpicky one, but I think your occupancy has traditionally been calculated on a -- I guess I'll call it a percentage of properties vacant basis.

But I don't expect it would, but would it vary much if you looked at it on either a square footage or even a percentage of -- I guess I'll call it revenue potential?

You know, I look at that about once a year just to make sure it's not getting too far away.

And it's amazing to me how close it stays, where if you looked at it on a revenue basis or whether you looked at it on a number of properties, or square footage.

It can vary a little bit quarter-to-quarter, but it's been unusual if it's been more than 10 or 20 BIPS away, no matter how you calculate it.

Okay, thanks, guys.

Chris Lucas, Robert W.

Baird.

Just a quick technical question.

What's the inventory for Crest at this point?

It's a grand total of three properties with a cost of --

$3.8 million in book value.

And those are three Ryan's Steakhouses properties.

Yes, that we have all impaired down to that value also.

We did that a little over a year ago.

That's down from about $138 million of inventory two years ago.

Very good.

And then, Tom, you were talking about the cap rates coming down a little bit here.

That sounds to me like it's getting more competitive.

Is that the case?

And if you could maybe give some color as to maybe who your competitors are right now in the marketplace.

Yes, there aren't a lot of competitors.

There's really just a couple that you see out there any more.

And obviously one's another public REIT.

And then there's a private REIT.

And then you'll -- as always, there's a couple of other guys that show up that you don't know really who they are, and they buy something occasionally.

But I think it's more reflective of financing costs have come in generally for our tenants.

So if you look at the spreads on less investment grade bonds, they've really tightened.

And that means that the debt side of the balance sheet for them is attractive.

And they're looking at relative financing costs.

So I think more than competition, which there's very little of right now, compared to a few years ago, it's really financing costs coming in.

And when you see them come in, you can assume that there'll be some lagging cap rate movement in.

And when you see them gap out, then there's probably some lagging cap rate moving up in the net lease business, maybe unlike some -- maybe a little more than some of the other real estate categories.

I guess -- just kind of thinking about maybe -- I'm not sure you really answered Jeff's question on your expectations for interest rate.

Does it give you pause, given where rates are and the tremendous compression we've seen in corporate bond rates?

And just generally across the board, in terms of how you're proceeding at this point, given maybe your outlook for the out-years on rates?

Yes, you know, it does give me pause and I'm surprised how quickly spreads came back in.

And that's pretty much not just on real estate but for all companies.

And I think there's -- people got excited here.

I'm very surprised they came in as much as they did, and I think the potential to have them gap out is there.

So one of the things I think you really want to do is be careful.

We're fortunate right now with cash on-hand and the line's unused, so essentially what we bought was bought with cash on-hand.

But I think I would let large substantial amounts of money build up on short-term credit lines as a very good strategy.

I think you want to very quickly put the permanent capital onto the permanent cap rate in this environment.

You know the Fed -- everybody watches and they're starting to talk about how they do it when they do it.

But at some point, absent a double dip, it wouldn't surprise me to see rates go up.

So we're going to want to finance fairly quickly if we start seeing some bulk transactions come through that we want to act on.

I think it would be risky in this environment to hold a lot on the line.

It's short-term very accretive, but it's financing a long-term asset with short-term variable rate financing.

And you know what's interesting, Chris, about this is that while our cost of capital could increase a little bit, we do feel like there's plenty of room there to maintain a pretty healthy spread relative to lease yields and what we're doing.

To the extent that high yield debt spreads gapped out a bit, that would be wonderful.

So, while the investment grade bond market, which we all follow on the REIT sector, spreads have come in significantly.

To some extent, it's been almost more surprising to watch high yield debt spreads contract so much.

And that, if you will, is one of our competitors out there.

So, beyond just the other equity net lease providers, it's really the high yield debt product and the type of retailer that we're doing business with considering that financing product.

And so, in a rising interest rate environment, while our current cost of capital on our balance sheet for the debt piece of what we do may go up a bit, I actually think that on the acquisition side, we could actually benefit a little bit, to the extent that the high yield debt becomes a little bit more expensive out there.

A widening credit spread is very good for us.

Very good.

And then my last question -- I'm trying to understand -- Kerasotes is one of your larger tenants.

They sold, I guess, a large portfolio to AMC.

How does that impact, if at all, your view to their credit at this point?

It is a positive.

They are now, as part of AMC, AMC already is the second largest theater company in the United States.

And so we will have a larger, more varied tenant; less Midwest geographic exposure.

And I believe S&P put Kerasote's debt on a CreditWatch positive and so that's kind of how we view it, as a positive.

We know AMC; we haven't done business with them before, but we've talked to them over the years and they're a good operator.

So, we view it as a net small positive.

Okay, thanks a lot, guys.

Thank you.

This concludes today's conference call.

I will now turn the call over to management for concluding remarks.

Well, thank you very much, everybody.

A good quarter.

I'll tell you, though, here in the first quarter, I want everybody to know there's been a lot of work to do in portfolio management and leasing.

And this is in an environment we're all going to watch where the economy goes.

But it's nice to be acquiring again.

That makes things a little easier than just relying on the portfolio as it sits there.

So we hope the spreads hold up.

Thank you very much for your time in a busy earnings season.

And thank you, Douglas.

Thank you, sir.

Ladies and gentlemen, this concludes the Realty Income fourth quarter 2009 earnings conference call.

ACT would like to thank you for your participation and you may now disconnect.