Realty Income Corp (O) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the Realty Income second-quarter 2010 earnings conference call.

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, Thursday, July 29th of 2010.

I'd now like to turn the conference over to Mr.

Tom Lewis, CEO of Realty Income.

Please go ahead, sir.

Thank you, Alisa.

Good afternoon, everyone.

Welcome to the conference call where we'll review our operations and results for the second quarter.

.

And as I always am, joined by some people in the room here -- Paul Meurer, our Executive Vice President and Chief Financial Officer; Mike Pfeiffer, our EVP and General Counsel; John Case, our EVP and Chief Investment Officer; and Terry Miller, our Vice President of Corporate Communications.

And as I always do also, I'll say that during this call we will make certain statements that may be considered to be forward-looking statements under federal securities law.

The Company's actual future results may differ significantly from the matters discussed in any forward-looking statements.

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

And Paul will start by reviewing the numbers of the

Thanks, Tom.

As usual, let me walk through the financial statements briefly and provide a few highlights of our results for the quarter, beginning with the income statement.

Total revenue increased to $83.5 million this quarter versus $81.3 million during the second quarter of 2009.

Rental revenue increased 2% overall, reflecting new acquisitions over the past year and some positive same-store rent increased for the quarterly period.

On the expense side, depreciation and amortization expense increased by $742,000 in the comparative quarterly period as depreciation expense naturally increases as our property portfolio continues to grow.

Interest expense remained flat at around $21.5 million.

We had only $26.9 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 second quarter were $6.65 million, up from last year, but flat from the first quarter of this year.

As we mentioned last quarter, due largely to recent hiring in our acquisitions and research departments, our current projection for G&A for 2010 is about $26 million, or about 7.5% of total revenues.

Naturally, this will be impacted a bit by the level of acquisitions during the course of the year.

Property expenses decreased to under $1.7 million in the comparative quarter.

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

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

Income from discontinued operations for the quarter totaled approximately $1.3 million.

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

However, Crest did not sell any properties in the quarter, but overall contributed income or FFO of $158,000.

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

We sold seven properties during the second quarter, resulting overall in income of approximately $1.1 million.

And a reminder, of course, that these property sales gains are not included in our FFO or in the calculation of our AFFO.

Preferred stock cash dividends remained at $6.1 million for the quarter and net income available to common stockholders was approximately $25 million for the quarter.

Funds from operations, or FFO, was $46.8 million for the quarter, and FFO per share was $0.45 per share for the quarter.

Our adjusted funds from operations, or AFFO, or the actual cash that we have 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 and we've increased the dividend 51 consecutive quarters and 58 times overall since we went public over 15 years ago.

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 cap is only 30% and our preferred stock outstanding represents just 6% of our capital structure.

We were very pleased to immediately match fund the Diageo acquisition last month with $250 million of 5.75% unsecured bonds due in 2021.

Thus, we were left with only $26.9 million of borrowings on our $355 million facility at the end of the quarter.

This facility also has $100 million accordion expansion feature.

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

Our next bond maturity isn't until 2013.

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

Now let me turn the call back over to Tom who will give you some more background.

Thank you, Paul.

Let me just start with the portfolio and run through the business.

The portfolio continued to do pretty well on the second quarter.

Generally we're hearing from tenants that their businesses have stabilized a bit and we're not hearing much about problems from the tenants relative to the portfolio.

At the end of the quarter the 15 largest tenants did about 54% of revenue.

As you know, we focus on trying to own the more profitable properties of tenants, and in the top 15 tenants the average cash flow or EBITDA at the store level is roughly 2.44 times the rent we're being paid.

And we think that's why occupancy has remained fairly high.

We ended the second quarter with 96.2% occupancy and 90 properties available for lease out of our 2,350 properties.

That occupancy level is down about 50 basis points from the first quarter and about 40 basis points versus the same period of a year ago.

It's primarily due to getting back 14 Hollywood Videos on the last day of the quarter, and then some expiration leases also towards the end of the quarter.

So then we had 24 new vacancies and then had 11 vacant properties that were leased or sold and that's the reason for the slight decline in occupancy.

It's still very high, but off a bit this quarter.

Same-store rents in the portfolio increased 0.1% during the second quarter.

That compares to 0.8% in the first quarter and 0.5% in the same period a year ago, so a little lower in same-store rent also.

And if you kind of look across the different industries we're in relative to where the contribution either declines or increases came from, eight and our "other" category in industries had declining same-store rent.

The tire industry was the primary culprit there, primarily with one tenant that was over half of it.

And then after that the rest of the numbers were fairly small.

But together the nine categories were $476,000 in rent decline.

There were four different industries that had flat rents and then 18 during the quarter that saw same-store rent increases.

There really wasn't any dominant one, but it was pretty broad based with the larger numbers being in the auto service, health and fitness, childcare, convenience stores, and in the theater business.

And the 18 different industries together had a total increase of about $578,000.

So net-net, just about over $100,000 gain for the quarter.

Small increase in same-store rent, but obviously positive.

I think if you look at the portfolio, with occupancy declining a little bit, and fairly modest same-store rent increases, I think what we're seeing in the portfolio right now -- and I'd give the caveat of absent a double dip -- is that we're probably looking this summer at being the trough, really, in this latest cycle of recession in the portfolio.

And then I think looking into the third and fourth quarter, what we're likely to see is same-store rents picking up a bit and also vacancy reducing a little bit of occupancy going up.

In recent years, probably the last two, three, same-store rents have been a little lower than typical.

In most years we'd run 1 to 2% and we've been a bit behind that.

That's been impacted by rent reductions from just a few tenants who have had some issues.

And if you look at the numbers, there are really only two tenants that are in the comp numbers on that.

The big -- the main one is Big 10 Tires, which is a tenant we had some issues with last year.

And they will go out of the comp numbers in the fourth quarter.

The other tenant is a much smaller impact.

They will go out in the second quarter, which means we're likely to see some additional increases in same-store rent going into the third and fourth quarter.

But I think moving into next year, probably back up in the 1 to 2% range in same-store rent growth.

I think also more interesting is we're seeing more, broader-based increases kind of across the portfolio.

On the vacancy front, I mentioned we got back 14 Hollywood Videos literally on the last day of the second quarter.

We have I think just five more and that'll be it for Hollywood, because we had 23 that we will be getting back.

And after that, looking at the watch list again, there's really not that much going on.

So my sense is looking at occupancy we're probably seeing it being flat to up in the third quarter, and then probably up a little bit in the fourth.

And my sense is that we'll probably see a bounce-back on that in the next year that's pretty good.

And if you couple that with the bounce-back in same-store rent increases, then I think we're likely seeing what is probably some good portfolio performance moving into 2011.

And maybe it's good to take a moment and kind of look back over the last three years or so.

And kind of sailed through this in pretty good shape.

Occupancy has remained above 96%.

Same-store rent has been up each of the quarter, yet during the last three years we did have nine tenant events, which were five Chapter 11's, two Chapter 7's, and then two different tenants where we had rent reductions where we participated with some other creditors in making sure that they could move ahead.

And when we add it all up, we lost about $0.11 per share in recurring FFO from these nine events.

Fortunately that was pretty much completely offset by rent increases from other tenants.

And during the period we also did very little acquisition activity.

And when you put that together then, basically through this period flat earnings and I think sailed through, given the depth of what we saw the last year, pretty well.

And now we're positioned where I think this summer would be the bottom hopefully and then 2011 looks pretty good.

And if we can add some acquisitions to it, I think we should be able to grow both the top and bottom lines at a decent clip next year.

Relative to diversification, as I mentioned, there's 2,350 properties in the portfolio.

That's up six from last quarter.

We now have 32 retail industries in the portfolio and 118 different chains and believe we're in 49 states.

Looking at industry concentration, restaurants is the largest industry at 20.8%.

That's down a bit from the end of last year and also from last quarter.

And we will continue to work that down, as we're not looking at acquisitions in that sector.

Convenience stores are at 17.2%.

That's up a bit.

That's due primarily to rent increases.

Theaters are at 9.1%, which is doing very well.

Our major tenant there, Kerasotes Theaters, as you see in the press release, has disappeared from the top 15 tenants as they were acquired during the quarter by AMC Theaters, which we think is a net credit positive for us.

Largest tenant is about 5.9% of rent.

That's LA Fitness.

Again, the 15 largest tenants are about 54% of rent, and when you get to tenant number 15 you're down around 2% of rental income.

And then it moves down pretty quickly after that.

I would note that this quarter from a geographic standpoint, with the Diageo transaction, California in the next quarter will become our largest state, at about 11.7% of our revenue.

And it's interesting; normally you would say, I mean, okay, the Company has a larger exposure to the California economy.

But I think, given the Diageo transaction, the majority of their revenue is generated on a national basis rather than state basis.

So I think it's a bit different than if we had bought a bunch of stores in California.

It's going to be a bigger percentage, but relative to the exposure to the California economy, I don't -- it's not quite a symmetrical impact.

But that number will go up next quarter.

Anyway, we remain fairly well diversified and the average lease length in the portfolio is 11.4 years.

So we're pleased, given what's going on with the performance of the portfolio.

Moving on to acquisitions, obviously during the second quarter we completed the majority of the Diageo acquisition.

We also did a couple other properties, so it was 13 properties for $261 million, at average going-in yields of 7.5%.

As Paul mentioned, we simultaneously financed the majority of it with a $250 million 10-year note at around 5.8, which allowed us to lock in some pretty attractive spreads, about 170 basis points up front, and that should accelerate as the leases all have increases in them.

With this transaction we obviously worked up the credit curve with Diageo, so we had a lower initial rate.

But given where the credit markets were we were able to step in and I think put some pretty good spreads together.

For the first six months, then, that gave us $289 million of acquisitions.

We have one more piece of about $11 million that will close in the third quarter in the Diageo transaction.

That puts us at about $300 million for the year.

So it looks like we're growing at a nice clip here.

Relative to the market overall, we continue to see a pretty good volume of transactions in the marketplace, and that includes larger transactions to work on.

Obviously, we have the vast majority of the line available and the capital markets remain open.

So we think we have the capital and this is a pretty good opportunity to go out and acquire.

Relative to cap rates, I think they've continued to soften a little bit, which to some extent explains why some of the sellers are coming back into the market, and obviously likely a reflection of where the credit markets are and low rates out there.

Our guess is most transactions probably be in the 8 to 9% cap rate range, which is just a little bit lower.

But, again, with cost of capital being cheaper than it was, I think spreads have been maintained and a pretty good time to acquire out there, even if cap rates have come off a little bit.

So we're very positive relative to the opportunity to do some acquisitions here.

On guidance, for 2010 we'll stay with the $1.84 - $1.86.

That's obviously flat to up about 1% in FFO.

And as the acquisitions have started to grow here, the top line again is moving up.

And as Paul mentioned, to date that has not hit the bottom line, primarily to the additional G&A and primarily on the staff side.

And we think that will be the case going through the balance of the year.

We have added a number of people.

We'll probably add a few more, not a lot, and then see G&A likely stabilize as we get to the end of the year.

And hopefully with the acquisitions that we're doing and we'll continue to do, we'll have that top-line growth go to the bottom line over the next year or so.

For 2011, then, we're estimating FFO at $1.96 to $2.00 per share.

That's 5 to 8% growth for next year and, again, what I said earlier relative to we think occupancy will come back a bit and same-store rent.

And if we're able to add in some acquisitions that should give us some good growth.

Paul mentioned the balance sheet's in good shape.

We're very liquid.

So overall I think good stability in the portfolio and a little more optimistic about growth going forward.

And with that, if we can Alisa, we'll go ahead and open it up to questions at this point.

(Operator instructions.) Jeffrey Donnelly; Wells Fargo.

I forget if you get quarterly sales, financials, from your tenants.

But to the extent you do, what's been the progression in unit level cash flow coverages over the past year or so?

Have you seen a bottom or an inflection in that metric?

It's been pretty stable throughout the last couple years, but it's not the way you want to see stability.

What had happened is we were up around a 2.7 for cash flow coverage on the top 15 if you go back three years ago.

And it was dropping down into the 2.3's, 2.2's.

And if you look at the nine tenants that had credit events, one of the things that we did with them is adjust rents.

And the rents were adjusted down to get the cash flow coverages back up to a good level.

At the same time, though, we were able to put in the majority of the leases some type of a recapture clause, so if the business increases we can get part of that.

So I think what you would have seen, Jeff, is kind of 2.74 down into the 2.2's and 2.3's, but with the adjustments it took it back up into kind of the 2.4 level.

And that's kind of where they sit today, is 2.44.

So we saw the real downdraft going back over 18 to 24 months, but really over the last -- I think starting in the third quarter last year we started to see them flatten out.

And a few saw their EBITDA continuing to slide a bit, but that was offset by the ones going up.

And if I could switch gears and ask you a few questions on Diageo.

By my math it sort of strikes me as one of the first deals where you guys have done where the operating income of the actual assets, the property rent if you will, isn't enough to justify the rent that is paid to you guys, which certainly makes you more reliant on the credit of the entity.

Fortunately that's strong in this case.

Does the catalyst for this deal imply that you're just not seeing attractive pricing elsewhere in the traditional net lease business and that's why you guys went after it?

Or --

No.

There are transactions out there, and I think -- we had looked at the wine business a number of years ago and as we did our due diligence we ended up thinking that there were relatively few opportunities because of kind of how we have to underwrite the business.

And I'll go into detail if you want me to.

But the long and short of it is, when this came up, given the work that we had done a few years ago and kind of the criteria we had come up and said there's only going to be a couple, three players that we would probably want to do something with in this industry.

We identified -- and again, this is a few years ago -- kind of constellation brands, Diageo and Fortune Brands.

And then Fortune Brands sold their business to someone else.

And when this came up with Diageo we knew who they were.

We absolutely knew the assets, both the wineries and the vineyards, ahead of time.

And given where spreads are and where we thought we could work, we thought it'd be a nice addition.

But it really does rely, to a great extent, on the credit.

In the due diligence, as you know, we're normally looking, which you related to, that EBITDA on the real estate that we're buying is generated for the tenant, that they have to have the real estate to do it.

And typically if you look at this business, you can tie EBITDA to a winery and the wine they produce and sell.

But it's harder to do with the vineyards, because a lot of the grape juice really is grown -- or is bought rather than grown.

So hypothetically, in a Chapter 11 if you had a winery with some vineyards what they could do is they -- if the vineyards weren't extremely important to their wine brand, is they could reject the vineyards in the bankruptcy, keep the winery and then go third party to buy the grapes.

And so that made it a little more difficult.

That led us to really take a look and say, okay, the vineyards are going to have to be in some very special areas where it's a strong premium brand and they have to label it estate bottled, which means it needs to be grown right there, or Napa, which you can get a premium price for, or some of the appellations in Napa, like Rutherford or Oakville or some of the others.

But if you just took the vineyards and their cash flow coverage you could look at the income that would be provided and you could go, gee, I probably couldn't get comfortable there.

You say, okay, if I believe that the vineyards are then tied to the winery and they need them, I can look at the cash flow coverages for the real estate buy as a function of what they're making on their wines and you can go, okay, I'd get more comfortable.

And then, as you are in this case, if you're looking at a wine company with 15 brands you might say I'd get even more comfortable.

But as we looked at this business and its volatility and the structure of it -- and we did spend quite a bit of time -- we really said, we're going to have to work with a very large player with multiple cash flows or it's not going to make sense for us.

But fortunately, when we kind of predetermined all of that a while back and then walked away from the business, we parked the research.

And when this came up, we very quickly -- I mean, as soon as we saw who it was, we thought we could get there and it turned out we could.

I'm curious, are there provisions in this agreement that are -- require them to maintain certain credit metrics or penalties for failing to do so?

And what was the reaction from the rating agencies?

Because this is a bit of a chunkier deal than you guys normally go after.

Right.

We've done a number of deals of this size, so we're comfortable with that.

But the reaction from the rating agencies was very positive, given who the tenant is and how their business is and given these brands and these assets.

And so I think the reaction was very positive there.

None of our leases that I can remember require the tenant to maintain certain credit statistics.

That is relatively unheard of in the triple net lease business and I think just is kind of a nonstarter.

But in this case, given these particular assets -- and you know, I've spent a great deal of time up in that area.

And if you follow this business, in Napa -- California produces over 90% of the wine in the US.

Napa is one of 16 areas in California and it produces only about 4% of the wine in the US.

But if you look at the prices that they get for the grapes and the wine up there, the average price for a ton of cabernet grapes last year in California was about $1,078.

And it ranged anywhere from $300 a ton at the lowest of the 16 regions up to Napa, where it was $4,777 a ton.

And so, when you start looking up into that area, and you start looking at the growth in new vineyards and Napa has only been about 1% a year because they've put restrictions on it.

And a lot of the premium brands operate up there and there's a limited amount of vineyards for those premium brands to buy.

We got a little more comfortable and I think they did, too, with the particular assets that we bought.

And also, that they'd been in production -- these are the vineyards now for 25 to 100 years.

And I think then coupling it into to those two brands, and one's a 100-year-old brand and the other one's a 40-year-old brand.

And that got them comfortable relative to what we purchased and what we paid.

But then it really -- and this has been said by a lot of people and it's true -- then it really is a credit story, getting a very long-term lease with a very good company.

And then just a last question, and hopefully a quick one -- I suspect I know the answer, but -- maybe this is for Paul.

Did you guys consider buying a long-term hedge on Diageo credit, aside from maybe Tom increasing his consumption of wine?

We did increase the consumption of wine.

And since you wanted a short answer, the answer is no.

Okay.

Thanks.

Tayo Okusanya; Jefferies & Company.

Just a couple of quick questions.

In regards to the different retail categories you're involved in, could you talk a little bit about categories where you thought overall underlying trends with the tenants were particularly strong, and any categories where there was some weakness, even if that stuff is not on your watch list at this point?

Sure.

Let me take a minute and try and do that.

I think if you divide up our portfolio, the majority of it is kind of basic human needs, low price points.

And that's done better than stuff that's at the higher end.

So I'll start with really kind of the negative side.

There's a small component in the portfolio, little over 2% of rents, which is a tenant that is in the RV business.

And that was just a really, really business that got hit terribly hard over the last couple of years, given it's a consumer durable and high ticket.

And if you look at industry volumes, in 2008 the volume of RV sales in the United States went off by about a third, and then it did it again in 2009.

And so that was an area that we were pretty deeply concerned with and we went in and worked with a tenant on some rent relief.

That business has not gotten back up to peaks, but it's stabilized.

Guesses for this year's shipments that were down as low as 159,000 units are going to be up over 200,000.

But that's one we continue to watch.

But we're fortunate that our tenant there kind of has several lines of revenue.

One is the sale of RVs; the other one is that they do sell -- pretty much it's an RV super store that they sell anything to people who RV use.

And then they also have a service component.

But that's one that's been tough.

Restaurant is another obvious one.

That's about 20% of rent.

And if you look at our portfolio, about 8% of the 20%, or almost half, is fast food.

And that has held up relatively well as the consumer traded down.

But now, as the consumer's come back a little bit, their businesses have slowed a little bit.

But the casual dining that is really the other side of that, was hit very, very hard.

And that was evidenced by Buffets and a few other tenants that we worked with.

And it's still not great and we continue to watch that, but it's stabilized a bit.

The other area that typically -- and we've been in this business for 30 years -- has done very well in the recession is the child daycare.

And they've had little more same-store rent declines than they normally would in their business and margin decline.

And I think it's over the years as governments got more and more into their business, now 20%, 25% of the for-pay childcare business is paid for out of government transfer payments.

And I think that some of those people have looked to the budget constraints that you see state and local governments in, and that's been a little bit tougher business.

So those are the three that when we look to are the ones that we worry a little bit more about.

You then look at the convenience store business and it can have some volatility.

It really is a function of gas margins.

And there's been a little bit sales come off a little bit in the store.

But that's a business that's very consistent and holds up.

There's a lot of M&A activity and so there's opportunities there.

And we like that business.

And then if you look at auto service/auto tire, that is one where initially their business softened a bit going into the recession, but now has come back.

Because if they're not buying new cars eventually they have to service or buy new tires.

And those have come back.

So those are kind of the key components.

Theaters have held up real well.

Health and fitness has held up extremely well.

Those are both cheap entertainment.

And then I think you're getting into some pretty small concentrations relative to the portfolio.

That's helpful.

And then with Diageo, I was just kind of, given the cap rate you guys provided for your second-quarter acquisitions, I guess it's safe to assume that deal was done close to a 7.5 cap as well?

Yes.

They were the majority of the acquisitions there.

And it is lower, but again, being able to step in and finance it with the bond offering was very attractive.

And I think the arbitrage between where the long-term debt of the same tenant is trading and where the transaction was done made it pretty attractive.

Okay.

That's helpful.

And then the rent coverage of 2.44, could you talk a little bit about the dispersion of that number at this point?

Is it still pretty much everything -- all the tenants are kind of tight close to that number or has the range kind of broadened out a bit?

That's a pretty good bell curve.

I would say going back two, three years ago the lowest out there was about a 2.0, which is extraordinarily comfortable.

Today we're looking at about a 1.59 on the low side and a 3.53 on the high side.

And there are really only a couple tenants in the top 15 that are down into the 1's.

But you can be somewhat comfortable when you get 1.5 above, because as we've now done over 1,067 rollovers at the end of leases, our experience has been if you've got a 1.5 coverage you have a tenant that is making enough money on that unit where they're going to want it.

And it's -- and that's the bottom tenant is just really right around 1.5.

Is it safe to assume that that's the RV guy or no?

No.

Oh, okay.

And I can't discuss their financials and EBITDA or they won't give them to me.

All right.

That's it for me.

Thank you.

Rich Moore; RBC Capital Markets.

On the Diageo acquisition, Paul, what was the charge actually, the acquisition expense on that that's in G&A?

Not very high.

So it'll be disclosed in our Q that comes out later today.

But for the second quarter our total acquisition-related expenses as per FAS 141R that we needed to expense was $40,000.

Those numbers are going to be quite variable.

It's going to depend on particular transactions in terms of who pays for what expenses, whether there's transfer taxes involved in different states.

So if you have a portfolio that involves multiple states and for whatever reason there's lots of expenses that we need to pay for as opposed to the tenant taking care of, it could be a much higher number.

In this case, that was not the case.

Diageo had already done a lot of work to prepare for the offering.

That's another way of saying that the G&A was actually in people and in things we're trying to do here to grow the business, not really on the property expense side.

Correct.

Got you.

And then, Tom, did I understand you really don't have any bankruptcy concerns at the moment, other than obviously Hollywood?

Right.

Well, being in the credit business, you're always concerned.

But, no, there's nobody right now that's on the watch list that we think is imminent or we see some substantial problem with.

And that's a very different case than the last three years where there'd be a couple, three names sitting on the watch list at any given time.

Okay.

And thinking about Hollywood for a second, how would you characterize those locations?

Because usually I think of Hollywoods as having pretty strong, or that sort of industry even, having strong locations to release.

I mean, would you characterize these in that manner, maybe stronger than the typical tenant that you have, or is that not true?

Well, you know, it's interesting, normally you would think that.

And when we bought these, there was a huge amount of development -- these were bought 10, 11 years ago -- by both Blockbuster and Hollywood.

And so we looked at a lot of units and selected just one package, bought at one time.

And off the top -- these are about 8,000 square foot buildings.

They're on one to two acres of land.

We paid $1 million to $1.4 million and they are mostly out-pad types to grocery anchor centers, good traffic.

Rents when we bought them were about $16 a foot, and they grew to $19 a foot.

And when they had their Chapter 11 a couple of years ago, the recovery rate was pretty good and they weren't that difficult to lease.

The problem in the business right now is, while they're good assets there's an awful lot of video stores for release out there, if you just take Hollywood and then just some of the other chains that have had problems.

So there's really a glut of them on the market.

We're seeing good activity, but I think the rent spreads are going to drop pretty dramatically there.

And we have, let's see, 23 of these.

We've got 18 back to date.

I think we've got 5 to go and we have a lot of activity.

But there'll be a hit there, but we've got it in the numbers.

Okay, good, thanks.

And then, on the restaurants, is that something you're ac- -- I know you had said before that you were trying to bring that down, but it sounds like you're pretty actively bringing that down.

Is that accurate?

So you're going to probably sell off more of the restaurants over the next few quarters?

Yes.

We are selling a little bit.

And if we did anything new it would be with an existing tenant and one unit here or there, but essentially not buying.

And we are selling a few.

But the other thing is, is if you look at the two tenants that are still in the same-store comp numbers, one of them is a restaurant and that's where some of the rent came down.

Okay.

I got you.

And then, as far as acquisitions go, any particular category, obviously beyond wines, that's exciting for you?

You know, it's pretty broad based.

It would be surprised if we're not back into some of our existing areas that we've invested in on the next few acquisitions.

We're out looking at a couple, three new things that we'll comment on when we finally get something or work on them.

But my sense is probably the balance of the year it'll be probably be back into the kind of the core stuff.

Okay, very good.

Thanks, guys.

Dustin Pizzo.

Tom, it's Ross Nussbaum here with Dustin.

What do you think happens with Spirit now?

I don't know.

And I wouldn't speculate.

We obviously knew Chris and Mort very well and saw them a lot.

In the last couple of years we've talked to them a little bit, but haven't been deeply involved.

And obviously we wouldn't comment on anything we were looking at, be it an individual or a larger-type transaction.

I'd only go back, and this is -- it's not on Spirit.

It's generic.

We've been offered a lot of companies over the years.

And generically it's kind of difficult to do M&A, in our opinion, in this business.

And that's a function that we spend so much time on underwriting and then when something comes along to have to underwrite a large package all at once is problematic.

And that's been the case.

But I actually don't know.

So you have no -- so you won't comment, I guess, what you're working on.

Will you comment on what you're not working on?

No, because then if we weren't working on something and you asked me and I said yes, next time when you asked me if we were working on something, then you'd be able to identify it.

So I think if we are working on it, it's no comment and if we weren't it's no comment.

And if we were looking at it but not interested it'd be no comment.

And if we weren't looking at it, but interested, it'd be no comment.

(Inaudible - multiple speakers.)

(Inaudible - multiple speakers.) Here's an odd one for you.

You've made a couple hires in 2010, obviously bringing John on board.

Should we read in any way, shape or form into that that you're starting to have succession planning thoughts?

Does that have any bearing on the hires you've made?

Well, interesting, there's no relative to me, no succession thoughts at the moment, so, no.

But relative to the hires we make, yes.

One of the things that we're doing is we have a strategic planning program and a major emphasis of that is leadership development.

And that's really looking at the Company and doing an organization chart for five years from now and ten years from now, and trying to look at where people that are in the organization today that are likely to move away over that period of time.

And then looking in house and developing people and then also going outside to get some talent either for that reason or a variety.

But the answer generally, am I looking to go anywhere in the near future, the answer is no.

And I don't think any of our senior officers are in that mode at the moment.

Thank you.

Andrew Fenton; Credit Suisse.

Just thinking as the economy picks up, do you see activity at Crest picking up?

Or do you think that will stay dormant?

If it does, kind of only on a marginal basis.

We closed Crest down, obviously, because we saw a lot of risk there and the timing worked out perfectly.

And Crest was really valuable since we started it in 2000 when it was a competitive atmosphere and we bought large portfolios and wanted to sell off part of them.

There are a lot of people who have exited our business, probably more than the deal flow has dropped.

And so, to date we haven't had to buy a lot in a transaction that we didn't want to own and we haven't had to do it.

And so, as long as we don't have to, that was the only reason we were using Crest.

It wasn't a side business to make a buck.

While we made money, it was really so we could work on large transactions and sell off a bit.

If down the road it became the case where we needed to do that, I think we'd take a long hard look about our confidence in the economy and in the number of buyers out there for that type of property before you'd add much inventory.

Because I think it's a lot riskier business than it looked like for about seven, eight years.

We're aware of that.

We were in a period of declining cap rates and it made anybody who flipped or did this type of business, it made it look like a very easy business.

But in normal times with relatively stable cap rates, it's a tough business and an easy business to get caught in.

So we'd like to minimize what we do there unless we're absolutely forced to, based on competition in acquisitions.

Great.

Thanks, guys.

This concludes today's conference call.

I will turn the call over to Management for concluding remarks.

All right.

Well, thank you very much, everybody.

In the end, pretty solid in the portfolio, and now let's see if we can start moving the top and bottom line.

And thank you for taking the time to be on the call, and we'll talk to you next quarter.

Thank you.