Realty Income Corp (O) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the Realty Income's first quarter 2010 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, April 29, 2010.

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

Please go ahead, sir.

Thank you, Alicia, and good afternoon, everyone.

And welcome to our first quarter conference call.

With me in the room today is Paul Meurer, our Executive Vice President and Chief Financial Officer; Mike Pfeiffer, our Executive Vice President and General Counsel; and Terry Miller, our Vice President of Corporate Communications.

And as I am obligated to say is during this conference call, we'll 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.

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

And with that, we'll have Paul review the numbers.

Paul?

Thanks, Tom.

As usual, I'll just briefly walk through our financial statement and provide a few highlights of our financial results for this past quarter starting with the income statement.

Total revenue increased to $83.3 million this quarter versus $82.5 million during the first quarter of 2009.

Rental revenue increased 1% overall, while same-store rents increased 0.8% for the quarterly period.

On the expense side, depreciation and amortization expense increased by $492,000 in the comparative period as depreciation expense increases naturally as our property portfolio does grow.

Interest expense remained flat at around $21.4 million.

We had only $39.9 million of borrowings on our credit facility at quarter-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 first quarter were $6.7 million.

Our current projection for G&A for 2010 is about $26 million or about 7.5% of total revenues.

So this will naturally be impacted by the level of acquisitions during the year.

Our acquisition-related costs are now included in G&A expense as per FAS 141R.

In the first quarter these expenses per FAS 141R totaled $48,000.

Property expenses remained flat at about $2.2 million for the comparative quarter.

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

Income taxes consist of income taxes paid to various states by the Company and they remained at around $300,000 for the quarter.

Income from discontinued operations for the quarter totaled $754,000.

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

Crest did not sell any properties in the quarter, but overall contributed income or FFO of just over $200,000.

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

We did sell three properties during the quarter, resulting overall in income of approximately $548,000.

And these property sales gains are not included in our FFO or in our AFFO calculation.

Preferred stock cash dividends remained at $6.1 million for the quarter.

Net income available to common stockholders was $24.1 million for the quarter.

Funds from operations, or FFO, remained at around $46.7 million for the quarter and FFO per share was again $0.45 per share for the comparative quarter.

Adjusted funds from operations, or AFFO, where the actual cash available for distribution as dividends was higher at $0.46 per share for the quarter.

Our AFFO is usually higher than our FFO each quarter 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 50 consecutive quarters and 57 times over all since we went public over 15 years ago.

Now let's turn to the balance sheet.

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

Our debt to total market capitalization is only 28%, and our preferred stock outstanding represents just 7% of our capital structure.

As I mentioned, we only had $39.9 million of borrowings on our $355 million credit facility.

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

The initial term runs until May 2011, but has two one-year extension options thereafter.

Our next bond maturity date isn't until 2013.

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

And now let me turn the call back to Tom, who'll give you a little bit more background.

Thanks, Paul.

And I'll just jump into the portfolio.

Obviously the portfolio did pretty well during the first quarter, very stable.

I think our conversations with tenants generally that they see their business being a little bit better.

That the consumer maybe has opened up their wallet a little bit, even to some of the discretionary type items.

And I won't say everybody's ebullient, but there's a little better tone pretty much across the board with a lot of the tenants, which is nice to see.

At the end of the quarter, our 15 largest tenants comprised about 53% of our business.

And as is the custom, we've owned -- tended to own their more profitable stores and cash flow coverage of EBITA at the store level is still ranging around 2.5 times and a little better than last quarter, but not much movement.

And obviously tending to own the more profitable stores has been something that's worked for us in the past.

We ended the third quarter with 96.7% occupancy, 77 properties available for lease.

That's out of 2,344 and that occupancy was down 10 basis points from the fourth quarter, but up 30 basis points from the same period a year ago and remains fairly high.

Same store rents jumped up a bit for the quarter to 0.8%.

That's slightly higher than the fourth quarter and then compares up versus I think 0.2% a year ago.

So better there.

And to give you an idea where the increases and decreases are coming from, which may point to some trends or may not, six of our 30 industries, and I'd say six in our other category, had rental declines.

Tire stores were about half of it.

And then as many of you know, we own one industrial property in San Diego and its rents were down about 15% over a year ago, but if you take the declines in those kind of seven industries together, it was down about $620,000.

We had four industries that were flat -- apparel, office supplies, equipment rental, and travel plazas.

And then there were about 20 in the portfolio that did see same store rent increases.

The biggest increases, interestingly enough, came from restaurants, convenience stores, and childcare.

And each one of those individually saw rents go up about $250,000.

And then the auto service, theater, health club, some of the other areas that we're invested in, had some modest increases.

And then a handful for the rest of them of fairly small increases.

It is nice to see rents going up on restaurants again.

It's been a while since that's been the case.

But the 20 together had rent increases of about $1.2 million and that got us to the net gain of about $615,000 on same store rent.

We continue to be pretty well diversified.

We have 2,344 properties in the portfolio.

That's up 5 from the end of the year.

Still 30 industries, 118 different chains and in 49 states.

Our largest exposure by an industry standpoint continues to be restaurants.

That was 21.9% at the end of the quarter, which was up a bit from year-end, but we did not buy anything in the restaurant category.

That really just came from the rent increases that I talked about a moment ago.

Convenience stores were up 17%.

That's also a function of rent increases.

We didn't buy any convenience stores during the quarter.

Theater's at 9.1%, it's doing very well.

And then childcare and health and fitness are both about 6.8%.

Our largest tenant is at 6.1%.

That's LA Fitness, which is up due to some additional acquisitions we made in the fourth quarter and also a couple here in the first quarter.

And if you then take the -- going down the list to the 15 top tenants that comprise about 63%, when you get to number 15, you're down to about 2% of revenue, so we continue to be fairly well diversified.

And the lease length continues to have a good term on it where we're sitting just about at 11 years right now.

So the portfolio did pretty good during the quarter, very stable and nice to see the stabilization continue and rates -- occupancy rates remain pretty high.

Let me move on for a moment to property acquisitions.

During the quarter we had a number of opportunities to look at and we bought eight new properties for $28 million.

The acquisitions were with two tenants, one in the automotive service business and then again in the health and fitness business.

All of these had triple net leases, with an average length of 18.2 years.

Starting cash-on-cash cap rates of 9% and then all of them also had opportunities for those lease yields to increase as time goes on.

And obviously pretty good spreads at that rate.

I mentioned we had a lot of things to look at during the quarter and I would say that we continue to see modestly the number of transactions that are out in the marketplace kick up.

And also talking to the people that are kind of in the deal flow that we talk to on a regular basis, there seems to be more discussions with companies and entities about coming out and looking at sale-leaseback.

So we think it will continue to modestly pick up.

Certainly not a flood, but sellers seem to be returning to the market.

I think there are a number of reasons for that.

Just time has gone on and also cap rates are beginning to soften.

And I think that explains some of the sellers coming back because one way to end a bid/ask spread is to have people on each side moderate their expectations.

And with cap rates softening just a bit I think it's bringing more people back.

And we saw that not only in what we bought but in terms of kind of what was out there in the market we either didn't do or was shown to the market.

And I think it's also reflective -- last quarter I talked about looking at bond spreads as kind of a proxy for looking at where pricing and volume could be.

And I was looking at bond spreads for double B&B the other day and it's just absolutely fascinating.

A year ago double B bond spreads in the high-yield market were about 910 basis points.

And when I looked at them the other day I think the average was about 419.

And if you look at single B spreads, a year ago they were up around 1,200 basis points and have come in to about 577.

So I think in almost all areas of the financial markets you've seen yields falling and I think that's reflective of having some impact on cap rates, although cap rates tend to lag.

I think the other thing though obviously is if you look at cap rates come in a bit, our cost of capital has also come in.

Obviously the equity has performed very well and that brings in the cost of issuance.

If you look at debt today, debt's very attractively priced, I think for a lot of REITs.

Certainly it would be for us we're told.

And even preferred is fairly well priced.

So even though there has been some softening in cap rates, I think spreads are very, very attractive for acquisitions out there in the market.

I think every quarter we kind of try and give a feel for the acquisitions market and what we're trying to see.

And I think maybe a good way to address that is as we look at the business today, just by being out there in the marketplace and obviously being well capitalized, most of the folks in this industry know that we're out buying again.

And I think just by saying we're buying, we can pretty much look at $15 million, $20 million, $30 million that seems to come through the door every quarter in acquisitions, mostly in kind of small transactions or one offs.

And that's kind -- gets us to a run rate really of $100 million or more, and that's kind of where we're running, where we see just enough transactions come in so we're able to do that.

The other thing that then happens, and this is why it gets hard to predict, is each year it seems when we're out and we're active, somewhere between two, or three, or four, or five, or six larger transactions come down the pike that you end up working on.

And the question is whether you close none of them, in which case your run rate's at 100.

One of them, two of them, three of them, at which case you're over $250 million.

Or whether several of those in size hit and then acquisitions are much bigger than you thought.

And that's really where we are today.

I can tell you during the first quarter we worked on a couple larger transactions, didn't do them.

We continue to work on a couple here, but as to whether they'll come to fruition or not, we really don't know, so it does make I think trying to predict a little harder, but I'll tell you it's definitely a better flow of the larger ones that are coming down the pike to work on.

And my experience is that does lead you to most often having one or more of those come through.

But again we don't know.

But we are seeing more of the larger ones.

I also mentioned in the press release the hiring of John Case as our new EVP and Chief Investment Officer.

We think John's leadership will have good impact on that department and on our acquisition efforts over time.

He's just joined the Company this week.

But I also think that we're going to probably add another acquisition officer or two.

We've just gone through a recruiting class for associates out on campus and adding a few people there, and we've also made an addition in research.

So this year I think we're going to add additional staff to kind of ramp up our efforts here and hopefully down the road that that'll pay some dividends for us.

But I would look for additional acquisition activity this year.

Relative to guidance for 2010, we're staying with the $1.86 to $1.92 or 1.1% to a little over 4% FFO growth.

And that assumes relative stability in the portfolio, which is what we've seen lately.

And at this point, I think $100 million to $250 million of acquisitions.

Notwithstanding the comments I just made in terms of larger transactions, but it's also important relative to the 2010 numbers, when those acquisitions come in in the quarter our experience is they tend to come in later in the quarter and that heavily impacts the impact to this year's numbers.

However obviously for next year's numbers, all acquisitions we get this year really, regardless of where they are, are going to impact the numbers next year.

I'd also say that I think on guidance that to hit the middle or upper end of our guiding range, I think it'll take more of a contribution from acquisitions and to do that over the next couple of quarters here in 2010.

I think that's due primarily to some additional G&A, most of it on the staffing side.

And we estimate that G&A is going to climb a bit this year.

We've been running for the last couple of years down in the 6% of revenues with G&A, but this year adding I think probably five or six people, our sense is the G&A's going to run about 7.5% of revenues, which is obviously higher.

I still think it puts us in pretty good stead for other people in our business.

But as you'll recall, late in 2007 we made a number of decisions to kind of stop acquisition and liquidate Crest, raise capital.

And at that time we reduced staff a bit and kind of battened down the hatches, and we ran the business very lean.

And I think looking now with things beginning to open up it's time that we ramp up some people and some staff and try and take advantage of the market that we think may be coming out there.

And that's what leads us to have the higher G&A.

The balance sheet remains in good shape.

As Paul mentioned we only have about $40 million on the line.

And no debt coming due, no mortgages, so pretty simple balance sheet and pretty liquid.

And access to capital I think is clearly available for the Company out there at very good prices.

As to dividends, obviously we think dividends will be higher this year than last year.

And that's our plan for next year also is to have them go up.

So I'll just summarize by saying a stable portfolio, balance sheet in good shape, and we're going to try and make some headway this year in the acquisitions, and see if we can't access some capital later on in the year when we do that, and grow the business.

And with that, Alicia, I'll open it up to questions.

(Operator instructions) We do have a question from the line of Greg Schweitzer.

Please go ahead.

Michael Bilerman's on as well.

Okay.

Hi, guys.

Hi, Greg.

Tom, you talked about deals modestly picking up and (inaudible) on the larger ones.

We've heard this for a couple of months now.

In your view, how will the deal environment have evolved say a year from now?

How far do you think we are from a tighter spread then.

And more of the buyouts type product emerging and 1031 demand picking up?

Yes, it's hard to know, obviously, when you're looking into the future.

The one thing I've been kind of surprised at is more M&A talk be that private equity or one individual buying another.

And so as you look at the kind of the larger transactions we've seen come by, I think a bunch of them are a little more M&A oriented, which had pretty much gone away.

And so I think if the economy continues to get a little bit better and if the capital markets are open, you're probably going to see it generated from that.

And then secondarily, there's just been some companies come out, and I wouldn't say these are people that really have balance sheet problems, but folks who are saying I'd like to take advantage of this market now and do something.

And but I still haven't seen the flood that was called for of the people that really are kind of desperate to do some refinance.

And I think as long as the capital markets stay open here, that might be slowed a little bit by their access to capital in other areas, but I hope that they would do what a lot of people in the REIT world did, but take advantage of it to get the right size of the balance sheet.

So my sense is I don't know where the future is.

You've kind of got to look at scenarios and this moving along slowly.

And with a lot of liquidity out there I think will keep cap rates moderating a bit and I think cause volume to increase.

But it's not the big flood.

If rates should jump back up and spreads tighten, I actually think you might get maybe deal flow moderated a little bit, but you might get a lot higher rates.

Okay.

And could you provide a little detail on what you're seeing with respect to demand across credit type for the deals that are in the market today?

Maybe where the most competition is and how wide their cap rate spread is between decent deals across credit -- across the credit spectrum?

Yes, it's interesting.

Last year what was happening is that the bid/ask spread just got really big and the volume went down, and you saw cap rates moving to 10%.

And today they're coming back in.

And it's funny, even though you've seen spreads come in pretty dramatically in the bond markets, cap rates tend to lag that.

And I think cap rates tend to bunch up a bit more than you see credit spreads.

They've been a little bit flat.

So I'd have to characterize the business as kind of in the 8% to 9.5% range depending on quality today.

And if you look, the double B and single B, you're up at 9% plus, but that is moving down as there's some demand that returns to the market.

Okay.

And the last one.

How comfortable are you pushing your C-store industry exposure up?

I'm -- I'd be comfortable doing that, but we just kind of feel generically that getting much over 20% you really want to at some point say I'm going to stop this.

And so whether you go right to 20%, you go to 21%, 21.5%, or whatever the number is, I would be comfortable adding in that area, but when you get much over 20%, I think just generically we want to stop, same as we did in restaurants.

Okay, thanks a lot.

We do have a question from the line of Chris Lucas.

Please go ahead.

Good afternoon, guys.

Hi, Chris.

Hey, just Tom, following up on that comment that you just made about the compressing cap rates.

Is Crest Net Lease getting ready to kind of reheat itself here?

Good question.

While I'd say we're a little more confident relative to the volume and cap rates, I don't think we're ready to say we're back to a world that has stasis in it and there's not going to be volatility yet because that business is so heavily dependent on at least flat to lowering cap rates to make money.

And there's generally a period of anywhere three, six, nine months a year to cycle the property.

And I'm going to have to get quite a bit more comfortable before we use Crest again.

Or I'm going to have to be in a situation where the cap rate that were able to buy at really was wholesale and very high.

And we think the market cap rate is substantially below.

And that we can do something fairly quick.

So I'm not positive enough to bring Crest back into the equation again.

And most of the transactions we've talked on, again while there's more coming to market and cap rates are down a bit, it doesn't look like it did in 2007 where you're going to have to buy a large portfolio and sell part of it.

So I would say for now we have no plans at all to use Crest.

Okay.

And then just what's the competitive landscape look like right now?

I mean are -- is this an environment -- I mean it's -- your cost of capital's phenomenal.

The spreads sound terrific.

There's not much volume, right?

So is that a function of -- is the market competitive or there's just no deal flow right now?

Given the dynamics that you have right now.

It's really interesting because the volume has picked up.

I'm not sure quarter-to-quarter the quoting numbers on deal flow and what we looked at, they tend to be very messy.

We -- I normally do them at the end of the year because you have transactions you worked on in one quarter that go away, but they come back.

And so that messes up the numbers quarter-to-quarter.

But to give you an idea, we worked on 16, 17 different transactions.

There was about $475 million that we looked at.

And one of the things I was looking at before I got on the call is we keep a little piece to the right of it, and it -- reason why we didn't do the deal.

And it's kind of like a credit issue, proceeds issue, seller withdrew it because he didn't like the rate, credit issue, proceeds issue, cap rate, real estate issue.

Didn't like the real estate.

Two more, seller withdrew it because he didn't rates.

A couple were more -- they wanted more for the real estate than it was worth.

And if you go through, that's kind of what's going on for us.

And then as I mentioned earlier, kind of this run rate of 20, 30, 40 in a quarter isn't going to be that unusual.

And there's just going to be a question of one of these that matched up with proceeds, cap rates, underwriting, and we liked it, and you do a larger transaction.

And that's pretty much what it was in 2005, 2006, 2007.

And during that period, if I -- when I go back and look at it, there really only was $20 million, $30 million, $40 million a quarter, and then all of a sudden there were three or four big transactions of $50 million to $250 million and that's how you got to the larger numbers.

Okay.

And then just a -- Paul, a quick question on the G&A spike for the first quarter relative to fourth quarter.

I mean was there anything unique in the quarter?

You didn't have -- I don't think you have the new hires in place yet, so what was going on there?

When you have -- in a sense new hires do impact that number because you need to accrue for them on a monthly basis what you expect kind of comp to be at the end of the year.

So it kind of takes that into account as you add people on.

So January, February, March accrued comp is impacted by that.

And that's a true expense.

In addition, we had a higher stock price.

So as the stock vested you actually had an impact of a higher expense based on a higher stock price with the stock divested in January for a lot of people.

Okay, perfect.

Great.

Thanks a lot, guys.

And the next question's from the line of Jeff Donnelly.

Please go ahead.

Tom, how do you think about the cushion between your AFFO and the cash dividend?

It's obviously narrowed in the last few years.

I think from something about like 20% of your AFFO down to about 5%.

Is it your goal to restore that cushion?

Or I guess leave it where it is?

I'm just curious how you think about it.

Sure.

Kind of dividend history.

As you know, Jeff, before we were public we paid out 100% and it kind of bobbed up and down.

And when we went public, we wanted to get the payout ratio down a bit until we had really diversified out the portfolio.

And then we wanted to raise it.

And we're probably comfortable around the 90% level of AFFO plus or minus.

We're around 93% now, I think.

But I would think if FFO picks up over the next two, three years, we'll continue to grow the dividend, but maybe grow it at a little lower rate than the growth of FFO is what I'd like to do.

But I wouldn't want it to sink too far below 85% and I think closer to 90% is long term what we're comfortable about.

We're in the business to pay dividends to people and that's really what we're all about.

And then secondarily the business tends to be pretty stable.

The other thing too is to look -- we've continued with small dividend raises.

Let me kind of digress and kind of walk through what really went on the last few years.

It's interesting because while our FFO's been relatively flat, kind of 2000 to 2010, we raised the dividend, but in smaller rates.

And if you take a look at the earnings the last three years, and you take Crest out, and you know we never calculated Crest when we were looking with our payout ratios.

So the payout ratio looked artificially lower than it was because they were anywhere from $0.06 to $0.10 a share in Crest.

So we were really looking at the core earnings and trying to pay out closer to 90.

So whatever that movement of payout ratio looks like, it's actually less.

And we closed Crest down and then if you look at the last few years, not doing much acquisitions for the last three, you're really down to our core FFO coming off the portfolio.

And we were very fortunate in that it most of the acquisitions that we really did 2002 to 2007 we -- one of the things we didn't talk a lot about, but we were really centering in on is trying to build higher lease accelerators into those transactions that we did.

And when we got to 2007 and 2008, we really started seeing those kick in.

Now that went right into the recession and so the interesting thing was is even though there was some rent erosion off the core portfolios, we dealt with about six filings and a couple of other tenants that needed rent reductions that the revenue line and the FFO line stayed fairly flat.

But that was also a function of these overages starting to kick in.

And so the modest dividend increases really were a function of wanting to continue to increase the dividend and having stability but also seeing some of that erosion.

And there was probably in run rate about $0.09 in erosion that was made up for by these accelerators.

And so as we kind of look forward right now, my sense is if you don't get a double dip from here and watching our watch list, which is thinning out, I would think that kind of that erosion would probably end towards the end of the year.

And when that happens, I think you're going to see the run rate on same store rents go up.

And when we see the run rate on same store rents go up and when we see that erosion stop, that's when we're going to get a comfort level for the core earnings going up.

And really that'd be the first time I'd think of much more in dividend increases above the four times kind of we've done the last few years.

Very helpful.

Thanks.

Actually since you touched on it a little bit, I think considering your outlook for the economy, I think last quarter you gave us a view -- a forward view as a backdrop for how you were going to manage Realty Income that was somewhere between, I guess I'd call it bad and neutral.

Has your view shifted at all as you've seen some of these glimmers of strength return to various segments of the economy?

If I was standing looking over my left shoulder to bad and standing looking over my right shoulder to neutral, maybe I'd just adjust myself to look a little more to neutral for now.

But I'm a skeptic.

Okay.

Does that sort of imply that you'd look to maybe delever the Company further?

Or do you think it's sort of fine the way it is?

Frankly I think the leverage is fine the way it is.

We're right around 29%, 30% leverage if you do it that way.

And that's kind of what we targeted.

The long-term policy I think we put together in 1984 was we wanted to keep it below 35% and if we ran from 20% to 32%, 33%, that was great.

And given we're at 30% right now, we're just fine, but if we could use equity for our growth in the future, we don't think that would hurt because with all of this money that's sloshed into the system, you kind of -- you're kind of making a bifurcated bet.

One is that okay, we grow slow, it's going to be a long time before rates go up and there's not much inflation, in which case you'd say, yes, let's leave leverage where it is or even increase it.

But the corollary to that is if you do get down the line and there is some traction in the economy, that maybe you'll see some inflation.

In that case, rates would go up and delivering modestly would be a very warm and comfortable position to be in at that time.

So I think a little bias for deleveraging, but it's not a major program.

And just a last question was -- I don't want to leave Paul out of this.

What's going to be the -- I guess the annualized run rate of increase in G&A, not only for just the one or two people you just hired, but I think you mentioned there might be some additional hires beyond that.

So if we look at it, I guess on a full-year basis as we go into 2011.

And I guess the second part of that is there a level of acquisition volume that you need to see to justify the added costs?

Yes, G&A for this year -- well first of all, let's do it this way.

2009 was about $21 million or 6.4% of total revenues, which is a metric we always kind of glance at.

This year we expect it to be about $26 million or about 7.5% of total revenues.

That assumes that the $100 million to $250 million of acquisitions, kind of in that level.

So to the extent that acquisitions would accelerate beyond that for some reason, G&A could be a little bit higher to the extent it's on the $100 million level, then it would be a little bit lower.

But at 7.5% total revenues, I think that still puts us in pretty good stead.

And pretty good stead historically in terms of not only where we sit as a percentage of total revenues, but where we sit on a comp basis, I think relative to some of our peers and what have you.

And I'll just say that I think the acquisition guys wouldn't say there's a certain level of acquisitions to justify the guys.

I would say there's a certain level of guys needed to get the acquisitions.

There's going to be a lag effect, right?

I mean that's something Tom touched on was how we kind of battened down the hatches a bit.

'07, '08 you saw G&A go down a little bit, '09 as well.

And now you're going to have a lag effect here where we're ramping up G&A a little bit in advance of what we see as some opportunities on the acquisition side that we think will justify those new hires.

And I don't mean to advocate that you now have to be off on a tear that jeopardizes the Company, but on the other hand, if you are ramping that back up, I'm assuming it's to do more than $100 million a year.

Yes, we'd most certainly would like to.

That's a fair assessment.

But again I don't want to get too far out in projecting the future, because if we just run back to a year ago, you look at those credit spreads that I talked about and you looked about what was going on, it was a very different world.

So we all feel a lot better here 12 months later, but let's also remember what we went through and be disciplined in terms of how we're allocating capital on the buy side or issuing.

And if I'm going to take a little risk, I'll do it on some personnel and G&A, and hopefully it'll work out well.

And we don't have any more positions in research if that's really what you're getting at here, Jeff.

No, I want to be the caddy.

Thanks.

Thanks, guys.

Thanks.

The next question is from the line of Rich Moore.

Please go ahead.

Yes, hello guys.

On the Movie Gallerys that you talked about last quarter, I think you were thinking you were going to get back 12 out of the 24.

And it looked like you only had two more vacancies total this quarter, I think up to around 77.

Is anything happened with that?

Yes, we got a couple back, but I really can't comment on it because it's -- we're in full swing and we're on the committee.

Okay.

And -- but we will when we can.

Let me just reiterate what we mentioned before, Rich, that might be helpful.

We used to have 34 locations, we got 11 back in '07.

So in theory those 11 were of lesser quality than the 23 that we kept at that time.

And that -- the experience with that 11 has been decent.

We had seven of those released at 70% of prior rent.

So that might be a helpful metric as you look at what might happen to the remaining 23 that we have now.

Okay, I got you.

Good, thanks.

And you can't go any further than that I take it.

Yes.

And as far as -- yes, great.

And as far as other bankruptcies, you said your watch list was kind of thinning out.

Did you have any others this quarter?

And when you say thinning out, I mean usually I think of the first quarter as kind of bankruptcy season, so it sounds like they're thinning out.

We're probably looking pretty good for the rest of the year.

I think we are thinning out.

The issue, and this is why I was talking earlier about okay, if things are starting to thin out here, when does occupancy kind of bottom?

And when does same store rent, the erosion come off it?

And there's a lag effect, so I really -- I've gone down to portfolio management and sit down and said, okay, let's take a look at everything out there.

What you're working on.

What we see coming.

And you end up with kind of an absent nothing else of major proportion.

You probably look fourth quarter, first quarter next year to see same store rent increasing.

But there has been a slowdown in things popping up on the watch list.

You never know.

Okay, and I was going to say nothing this quarter, Tom?

No, nothing this quarter.

Okay, great.

And then the lease expirations coming up.

I mean how do you feel about those?

I guess a little bit more positive given the economy?

Yes, relative to lease rollover, we've done I think -- we're off to a good start for the year.

I think we've done 26 in the first quarter and 25 went back to the same tenant.

And we actually saw some increases where it's been modest decreases the last few years.

It's a fairly small schedule this year.

I think there are 118 left.

But if -- that's about 3% of revenue, but if you look at it, two-thirds of those are rolls that have rolled before.

And typically when they go through rollover the first time, if there's something weak you get it back and it hits you.

The second rollovers are a little better, so our guess for the year right now is we've gotten the cash flows a little bit of a decline off there of a few 100 basis points, but not a lot.

Okay, good thanks.

And then I think you said the new properties you acquired were auto services and health and fitness.

Were any of those existing tenants?

Yes, LA Fitness, which is one of the reasons that you see that pop up a bit.

Right, good point.

And then -- okay, so just them.

And then would there be more with either category?

Either of those?

I hope so, but LA Fitness is our largest tenant.

At some point we'll make a decision.

Generally 10% is our absolute maximum but they're up at 6.1% so we want to watch that.

And they've been a very good Company relative to performance they've done extremely well and they've -- we've done good business with them, so we may do a little more.

But at some point it'll need to moderate.

Okay, and the auto services guy, there's not something sitting behind this initial purchase?

No, not that I'm aware of.

He was new, we talked to him for some time and were able to do a transaction.

And they're our clients, so if he has something come up we hope we get the call.

Got you.

And then last thing, I think I had notes last quarter that tire was one of the better same store rental increases.

And then this quarter it was one of the worst.

Is that right?

Yes, it is.

And let me bifurcate that.

We had one tenant that went through a Chapter 11 last year.

And I think we talked about him in the last call, Big 10 Tires.

And there were some rent reductions.

And this is the first quarter that they kind of hit the same store rent numbers.

And last quarter we had increases from our other tire people, so part of that is timing.

Okay, very good.

Got you.

Thanks, guys.

Thanks, Rich.

And this completes the question and answer session.

I will now turn the call back over to Mr.

Lewis for any concluding remarks.

Okay.

Thank you very much, everybody, for taking the time.

And enjoy the rest of earnings season and look forward to talking to you soon.

Thank you.

Ladies and gentlemen, this concludes the Realty Income's first quarter 2010 earnings conference call.

If you'd like listen to a replay of today's conference, please dial 1-800-406-7325 or 1-303-590-3030 and enter in the access code of 4283815.

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