Realty Income Corp (O) 2010 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Realty Income third-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 opened for questions. (Operator Instructions). This conference is being recorded today, Thursday, October 28th, 2010.

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

Thank you very much, Mitch, and good afternoon, everyone, and welcome to the call, obviously to go over our operations and results for the third-quarter 2010.

In the room with me today is Paul Meurer, our Executive Vice President and Chief Financial Officer; Gary Malino, our President and COO; Mike Pfeiffer, our Executive Vice President and General Counsel; and John Case, our Executive Vice President and Chief Investment Officer.

And as always, the stirring part of the call is that during this conference call, we may 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-Q, the factors that may cause such differences.

And we'll just start with Paul running through the numbers for the quarter. Paul?

Thanks Tom. As usual, I will briefly comment on our financial statements, provide a few highlights of those financial results for the quarter, starting with the income statement.

Total revenue increased to $87.2 million this quarter versus $81.5 million during the third quarter of last year. Rental revenue increased over 7%, reflecting new acquisitions over the past year, and positive same-store rent increases for the quarterly period.

On the expense side, depreciation and amortization expense increased by about $1.4 million in the comparative quarterly period. Naturally, depreciation expense increases as the portfolio continues to grow.

Interest expense increased by approximately $3.76 million. This increase was due to the $250 million of senior notes due 2021, which we issued in June. On a related note, our coverage ratios remain strong with interest coverage at 3.1 times and fixed charge coverage at 2.5 times.

General and administrative or G&A expenses in the third quarter were $6.165 million, up from last year, but down about $500,000 from the second quarter of this year. As we mentioned on our last two earnings calls, the increase in G&A this year is due largely to recent hiring in our acquisitions and research departments. Our current projection for G&A for 2010 remains the same at about $26 million or about 7.5% of total revenues.

Property expenses were $1.763 million for the quarter. This is an increase of $291,000 for the comparative quarterly period, but only about $75,000 from last quarter. 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 were $335,000 during the quarter. Income from discontinued operations for the quarter totaled just under $2 million.

Real estate acquired for resale refers to the operations of Crest Net Lease, our subsidiary that acquires and resells properties. Crest did not acquire or sell any properties in the quarter but overall contributed income or FFO of $221,000.

Real estate held for investment refers to property sales by Realty Income from our existing core portfolio. We sold nine properties during the third quarter, resulting overall in income of approximately $1.8 million. But again, a reminder that these property sales gains are not included in our FFO or in our 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 $25.6 million for the quarter.

Funds from operations or FFO was $47.8 million for the quarter, down slightly from last year, but up over about $1 million from last quarter. FFO per share was $0.46 for the quarter, down $0.01 from last year, but up $0.01 sequentially from last quarter.

Adjusted FFO or AFFO, or the actual cash that we have available for distribution as dividends, was higher at $0.47 per share for the quarter. And our AFFO as we've said before is usually higher than our FFO, 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 52 consecutive quarters and 59 times overall since we went public, 16 years ago this month.

Now let's turn to the balance sheet. We have continued to maintain our conservative and safe capital structure. Our debt-to-total market cap is only 27%, and our preferred stock outstanding represents just 6% of our capital structure.

We were very pleased to access the equity market last month, raising almost $200 million of common equity to pay for recent acquisitions. We thus had $156 million of cash on hand at September 30th, although we did use a lot of that this month to close the acquisition of 23 properties for $126.5 million.

We had zero borrowings on our $355 million credit facility at the end of the quarter. This facility also has a $100 million accordion expansion feature. The initial term runs until May of next year, plus two one-year extension options thereafter. And our next bond maturity isn't until 2013.

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

Now, let me turn the call back to Tom, who will give you a little bit more background.

Thank you, Paul. And I'll start with the portfolio, which continued to perform well during the third quarter. I would describe operations as being in a back to normal state versus what we've had the last few years, which is nice to see.

There were no significant tenant issues that arose during the quarter and we have none on our radar currently. So it's nice and quiet in the portfolio.

At the end of the quarter, our largest 15 tenants accounted for about 54.8% of our revenue and remained pretty healthy. The average cash flow coverage of rent at the store level for the 15 largest tenants was just under 2.4 times, so it remained very healthy.

Occupancy in the third quarter ended at 96.4%. That's 84 properties available for lease out of the 2,342 we own. That's up about 20 basis points from the second quarter and down about 40 from a year ago.

In the last quarter, we had only 12 new vacancies which is about half what we had had in the previous quarter and we leased or sold 18 properties during the quarter and that was the reason for the increase in occupancy. Obviously at 96.4%, still very high and up a little bit versus last quarter as we expected.

We'd also look for, I think, small but continued improvement in occupancy in the fourth quarter as we're going through things right now. And we think we'll be up a little bit at the end of the year.

Same-store rents on the core portfolio increased 0.3% during the third quarter compared to 0.1% in the second, a small increase but positive. And if you take a look at where the increases and decreases came from, there were three of our industries that are in the portfolio and our other category that had some declining same-store rents. And that was primarily restaurants, which were about half of that, and the rest of the numbers were fairly small. And between the four industries, the decline was only about $282,000.

We had three of the industries that had flat rents and then 23 that saw some type of same-store rent increases. Nothing really big to any one industry, but if you take four or five, most of it came from auto service, convenient stores, theatres, health and fitness, motor vehicle dealerships and child care.

The 23 together had same-store rent increases of about $517,000. So you net that out and that's a gain of $235,000, which is how you got to the 0.3%.

I mentioned last quarter that absent a double dip in the economy, we thought we were at the trough in the portfolio, relative to occupancy and same-store rent. We think that indeed was the case.

And then also in same-store rent, I mentioned that over the last couple of years, we've had a couple of tenants we did some workouts with and gave some rent reductions. And if you look at those, there are only two of those that are still impacting the same-store rent numbers. One of them goes out of the comp numbers in the fourth quarter, which was the majority of it and the other one will come out in the first quarter next year -- excuse me, second quarter of next year.

So I think we'd anticipate that same-store rents in Q1, Q2 next year should start accelerating quite nicely, absent anything else going on. So that's positive.

We continue to be well-diversified. Another 2,342 properties -- 32 industries, 118 chains and 49 states. Our industry exposures remain well-diversified. Large two tenants, as you can see from the list, are now Diageo and AMC Theaters. And as I mentioned earlier, the 15 largest tenants are about 54.8% of rent. And when you get down to the number 15, you are only about 2.2% of revenue and after that it remains fairly small.

From geographic diversification, California, as I mentioned last quarter, would be -- did become our largest state this quarter. And that's a function of the Diageo transaction, but we will also mention since those properties that we bought in Napa generate most of the revenue from sales around the country, I'm not sure it really adds to the concentration level of California. But California is now at 10.9% and with behind it Texas 9.2%, Florida 7.5%, and then down from there, but still fairly well diversified.

Average remaining lease term on the portfolio is 11.2 years, and I would anticipate, given the acquisitions we're working on in the fourth quarter or closing, that that might increase just a bit. So the portfolio remains in good shape.

Let me move on to acquisitions for a moment. During the third quarter, we bought just two properties for $13.9 million. That brought us for nine months to about $303 million in acquisitions, average going in lease yield or cap rate was about 7.6%. And as you saw in the release we're quite active here in the fourth quarter.

And so far, we've closed to date 23 properties for $127 million, and as Paul mentioned, those are leased to 13 different tenant and eight different industries, properties are at six different states. And the various industries that the investments were in were small investment in consumer electronics, drug stores, grocery stores, sporting goods, health and fitness, apparel, office supplies, and crafts and novelties.

And there is really not a large concentration of any of those in the portfolios, so from a [diversification] standpoint, those should all be very, very additive. And obviously all the industries that we're already in.

Of the 13 tenants that were in it, and it's pretty widely spread out, I think nine are new to the portfolio. So I don't think we're meaningfully adding to any concentration by tenant either. And it's pretty well-diversified. And then I generally characterize the credit on the 13 different tenants as on average being higher than our portfolio sits today. So a little increase in credit, higher credits which, along with the Diageo transaction that we did earlier this year, seems to be the theme so far this year. But nice infill acquisitions for the portfolio.

And as we always do, we will provide some additional data on these as is our custom when we aggregate all of the fourth-quarter acquisitions when we do the fourth-quarter call and add in blended cap rates and all the rest on those acquisitions. That gets us to about $430 million a year for acquisitions.

And then as we mentioned, we have under contract the portfolio of 136 properties that would be leased to one tenant for approximately $250 million. That's part of an M&A transaction that we hope to close this year or early in the next year and, once again, in an industry that we're already in. However it would be working with a new tenant.

In this case, in particular, working with the buyer of the company, who is working with a seller of the company, and the timing and closing, and the additional disclosure relative to any data on that portfolio is in their hands at this point. And so, we'll wait for them to conclude the transaction which we anticipate should happen in the next 90 days and at that point, we'll try and add some additional color, relative to industry tenant and some other details at that time.

But we thought it was important to at least get out there relative to disclosure, given the capital markets activity we just undertook and it gives everybody a little greater context on why we took a little more money than we needed to fund the acquisitions that we've already closed in the fourth quarter.

Should that one close by year end that would bring us to around $700 million in acquisitions, at just about an 8% cap rate or lease yield for the year, and that's obviously a stronger year in acquisitions than we originally anticipated. And that, along with the portfolio, doing pretty well, I think bodes well for revenue and FFO growth next year.

Just talk a little bit about the acquisition markets and what it looks like today. We continue to see what I'd call a decent flow of acquisition opportunities to work on. We will -- we usually report at the end of the year and we will again this year, but we'll probably see a little over $2.5 billion that we look at seriously for the year and that goes to our committee. There's usually three to four times that much that may come through the door.

But you can pretty quickly get through a lot of it and know it's not going to work. So about $2.5 billion the committee sees.

I will put that in perspective. Really from about 2005 to 2007 that number was more like $3.5 billion to $5.5 billion. So the run rate today in terms of just general transaction flow is substantially lower than it was in 2005 to 2007. But if I go back and look it's closer to the [1.5, 2.5] run rate that we saw pretty much from 2000 to 2004, but is most certainly up over a year ago.

And it will be interesting to watch and see how that continues flowing. But for right now we have some things to look at.

If you look at what's coming across the transom, relative to industry's theme, there isn't a lot. I think in every call I've done over time, if somebody asks are there particular industries where you see transactions, restaurants and convenient stores is always mentioned, and that's just because there are a lot of units and a lot of players in those industries.

They're both fragmented, so there always seems to be a fair amount going on there. And that hasn't really changed.

But outside of that, really looking to theme, it's not really industry, but we get comments from people that look at cap rates today and think perhaps this is a decent time to sell. Add some liquidity. There is also some ongoing M&A that you are starting to see on the street which I think has been recognized in the press and other areas.

And then we've really had some people citing, as we get towards the end of the year here, potential changes in tax rates. And because of that the need to sell a property here and there and that's been beneficial.

Cap rates have continued to soften a bit, and I think that's given the demand for yield in the world today and kind of below interest rates everywhere. And I think we would look for rates to generally be in about the 8% range for decent-sized transactions. Can be a little lower than that as you move up the credit scale and maybe a little down as you move up or vice-versa, a little lower as you move up the credit scale, a little higher as you move down.

But I think low interest rates really are impacting yields on almost any type investment. And I think that's certainly the case in our market also.

At the same time, though, cost to capital has been very attractive. Even though cap rates have softened, I think spreads on new acquisitions right now are just about the best we've ever had as long as we've been doing this.

I went back and looked in the - I keep a chart that every year is kind of the nominal cost of equity, which is taking an FFO yield, dividing it by the stock and then grossing it up for the cost of issuance to try and get you a nominal cost, hurdle rate of equity if you will, and then comparing it to the cap rate for each year that we bought at. And if you look over the last 15 years, we've averaged over a nominal cost of equity spreads of about 105 basis points on acquisitions.

And if you look this year on what we'll buy, I think the spreads are closer. Actually a little above, about 200 basis points. So even though the cap rates will soften a bit with cost to capital where it is, it has been a very good environment relative to spread to acquire and it will continue to do so.

The other thing I'll mention on acquisitions is -- and I've done this for a few quarters, but I think it is so descriptive of where the market is today, which is out there being in the business, you will see $10 million, $20 million, $30 million that you will do in a quarter. And then it comes down to maybe a couple of large transactions that really move the ball.

And should this end of the year one close and obviously the Diageo earlier is the primary differential. I think we started off the year guiding to about $250 million in acquisitions and said that will just depend on if we do a couple of big deals and that looks like it indeed is the case. And I think that will probably be the case going forward.

It's this run rate of $10 million to $30 million a quarter and maybe $40 million and then, taking a look at if any larger acquisitions come in.

Relative to guidance, for 2010, we guided to $1.82, $1.83, which would be off 0.5 to 1% in FFO growth. And that is really a reflection of raising the additional equity before we closed the properties, and raising a little extra equity given that - we likely will have some additional acquisitions coming, and then the acquisitions closing primarily in the fourth quarter with very little in the third.

For 2010, we also have on our assumptions plugged in the $250 million acquisition transaction to close towards the end of the year and not substantially add to the revenue line for this year. It could be a little after that, it could be a little bit before that.

And then, relative to permanent capital, we plugged in about a $200 million equity offering for later in the year to fund that.

But I also want to state at this point, we wanted to put something in there that is a plug. When it closes we'll decide how we should permanently fund it and what kind of capital to use. Obviously, equity's been attractive but where it is a month or two from now is an open question.

Debt markets are also very attractive for us. I think 10-year today we would be inside 6%. So obviously the spreads would be a little larger if we decided to go that route. Preferred is also isn't bad, I think that would be inside 7%, and when we get around to closing this, we'll take a look at the capital markets and try and weigh in on what the best form of capital for issuance would be.

Obviously that will impact the numbers. If we use equity this year, that's in the numbers. If we don't close it this year and don't fund it this year, that would add a little bit here to the numbers in 2010.

If we close it early next year then, depending on when and how we fund, that obviously can move the numbers $0.01 or $0.02. So we've tried to be conservative on this and try and get some guidance that we can get relatively close to or into.

Obviously, as you look at this year, acquisitions have started to grow the topline. And you can see that in the numbers, and we think that that really helps us relative to have some clarity for our guidance for next year and our ability to see FFO growth.

In the release you'll notice that, for 2011, we're estimating $1.96 to $2.01 per share. That's 7% to 10% FFO growth for the Company. We did use within that for acquisition purposes for next year, plugged in $250 million for acquisitions with most of it closing in an equal basis at the end of the quarter. Anybody that is running a spreadsheet, that will give you a little insight into that.

And then just generally next year going into the year, we see the portfolio being a little stronger relative to modest improvement, again in occupancy and same-store rent. And obviously, the acquisitions that we've made here should be very accretive. And we think that will allow us to continue to grow the dividend next year and at the same time also bring the payout ratio down quite a bit.

So we're cautiously optimistic.

And as for the balance sheet and access to capital, Paul went through that. We're very liquid and in good shape and don't have any maturities coming due. As always, no mortgages on the property.

So to sum things up. The portfolio operating on a normal basis with modest improvement and good acquisitions, and I think with that, we'll think we'll have some FFO growth next year. And we'll open it up for some questions.

Mitch, operator, if you could do that for us?

(Operator Instructions). Lindsay Schroll. Go ahead, please.

Could you talk a little bit about what the competitive landscape looks like for acquisitions?

Yes, it's very interesting historically for the Company. The biggest competitor obviously has been the 1031 tax-deferred exchange market. And that is much, much, much, much quieter than it has been in recent years mostly because there is not a lot of people out there with gains they need to shelter. So on the one-offs, there is actually a lot less competition than there used to be.

In terms of larger transactions, as always there is competition. Generally, if you look over the last 15 years, there has been four or five people out there trying to do larger transactions. And today it's maybe two or three that are out there. But given that the volume is a little lower than the last few years, there is competition, but it's reasonable. And at least, I think for us, we have a good cost to capital that allows us to compete effectively.

The other area of competition that is very big for the Company, since we tend to work on these larger, M&A investment banking type deals, is the high yield market. And as we all know the high yield market is very accessible at very good rates today.

And I'd say that really is the primary competition that we're seeing out there today, is in the high yield market. If you saw the high yield markets soften, that probably would be a positive for our acquisitions.

Great, and is there a maximum amount of acquisitions you think you could handle in the year? I mean, does that impact your staffing or does it -- would it make it sense to bring back Crest at some point?

Yes, that's an interesting question. I'm not sure I've ever gotten that one before. But I think it would really come down to the ability to access capital at a substantial spread for us from a manpower standpoint, particularly since the additions we made earlier in the year. We're set up very well for that, and we don't think that would be a substantial problem.

Relative to Crest, while things seemed to have settled down here and interest rates are low and properties can be sold in the one-off market, I think it's a volatile enough environment that I wouldn't anticipate using Crest in large numbers to buy and then sell properties. I think the -- your risk you might take on relative to mark-to-market if things went the other way would be very difficult.

So right now, I think we wouldn't really want to use Crest very much. But if you look at next year, I mean this year if we do close to $700 million, I think we did that one year before, that would be just fine but if we did more than that and capital is available, we'd be happy to do whatever volume we can find that we like from an underwriting standpoint. And we can fund a good accretive spread.

Great, thank you.

Michael Bilerman.

Hi. It's [Greg Hannon] with Michael. Could you guys walk through the diligence on the underwriting process as you go through these bigger volume type of deals?

Sure. It's -- really hasn't changed all that much. Initially what happens is we'll generally get in some type of book, small book or just some information that will say here's the tenant, here's the industry, here is the number of properties, about how much money they're looking for.

And generally, we're in that industry already. We've already comped it, we know who the other players are. We pretty much know what replacement costs are for that type of property, and it gives us a starting point. And very quickly we'll talk to the Company, try and get an idea of what their plans are and why they're doing what they're doing, what they're looking to do and over what period of time and see if we're going to get there relative to the economics and spread. And that's kind of a starting point.

At that point, what happens is research then gets involved and we get their public financials -- of the tenant, either public or private. And we get their financials and we go through them, and we [dart] them which is our internal credit scoring methodology that kind of equates to about a 90%, 95% correlation of an S&P rating. So we can get an idea where we would see them from an unsecured credit standpoint.

We would also at that point spreadsheet out the properties, relative to the price cost per square foot, and then we try and get store operating numbers which is the EBITDA of the stores and lay that out and get an idea of what that looks like versus rent. And so there is an effort there. And then the third part of the properties themselves with a list of where they are, how many square feet. And then we start passing that out to the real estate research group to try and start mapping them and getting on the phone and calling the areas and getting some initial sense of value.

And if we can get that together, then it goes to the investment committee which will sit down, take a look at the transaction, get initial idea from a diligent standpoint. If we think it can get through underwriting, and that's using all three unsecured credit profitability of the stores and then what the real estate looks like. And that really is a go, no go to perform a more due diligence.

And if it's yes on due diligence then we get much deeper into the company, a lot more work is done on the real estate and ends up coming back in a 20- , 30-page report, and an investment committee meeting deciding if we're going to go to full due diligence. And if it's a full due diligence that means we think there is a transaction there and that's one member of the committee; it's the calling officer, and a research officer getting on an airplane, flying out, meeting with the tenant and trying to get deeper into their operations and finish the unsecured credit underwriting meeting with management.

It's also then getting real estate research people out on a plane to visit each one of the properties, video them, run demographics, bring that back, write it up into an individual property report on each one.

And then finally, making sure that the numbers we get on the properties and what we're paying are what we look for, and then that comes back to committee and comes to a yes, we're going to get there or no, we aren't. And if we are going to get there generally then, it flows out of committee and into legal, we'll start bringing in the people that do work for us there and start drafting agreement getting to title and moving through the various parts.

So it's pretty standard, relative to how it all looks and generally can run anywhere from four weeks up to three or four months, depending on what the tenant needs to do.

Great. Thanks. That helps. And then assuming the M&A transaction goes through pro forma for that deal and the 123 you closed, subsequent to the quarter end, will any industry be meaningfully above 20% of rent?

Not meaningfully, no.

Okay, and then the cap rate spread between the 123 deal that you've closed and the pending deal. Would that be about 1%?

Cap rate spread between those two?

Between those two.

No. I don't think so. I think you can get there if you look at what we've done through the second quarter and what the cap rate was there or through the third quarter and then blend in what the balance would have to be to get to 8%. I think you'd come pretty close.

Okay. And then the -. I can assume the cash flow coverages on those two pending deals are in line with the average?

Pretty standard, yes.

Okay, thank you very much.

Jeffrey Donnelly. Go ahead, please.

Tom, I guess a question for you on cap rates. It was helpful you were talking about what you're seeing in the marketplace, but I'm curious why you think you haven't seen cap rates compress I guess more in the net lease sector? Traditionally it's very debt-sensitive.

Right.

Product-typing, when you look at some of the other property types out there, you see many other property types trading towards the historical low end of the range of what they have seen on cap rates and it doesn't feel like that's the case with net lease. It feels like it's kind of hung in there in the 8.

It did a little bit but I'd also share with you that 8 is kind of the all-time low for us too. If you look back over the years, I don't think we've had a year below 8 cap rates and we're really on the edge of it now. So we see that compression.

I'll also share with you and I think you've picked this up on some of the work you've done looking at the 1031 market out there. Given the lower transaction flow and the lower closed flow, cap rates at some point become a little more anecdotal and looking at the difference between listening rates and closing cap rates there can be a pretty good spread.

And for us here, it's been a smattering of smaller stuff but a couple of big transaction that got us to that number. But you can, Jeff, definitely see the impact and I think it's primarily coming from the high yield market. And so 8% is at the low end for us.

And where I guess when you look at sort of the higher credit tenants out there, traditionally like a Walgreen's for example, years ago you used to see those go substantially below 8. It's not unheard of to see some of those transactions in the 5's and 6's at one point.

I'm not saying you guys pursued them, but where are some of those higher investment grade-rated tenants going today on a net lease basis?

Yes, I'd say 6. But just for the value of them, they used to be really heavily 100% financing things and no yield and -- but they're back down there again but a lot of it is little more cash flow-oriented. They're low too in the one-offs. If you can get a really good credit where yields are, people are jumping at them.

It's helpful. And then just one last question is, I think I asked you guys about it earlier in the year and you touched on it too, is what's your AFFO dividend coverage? Just really looking for an update because year-to-date, it's continued to narrow a little bit versus last year and I'm curious with the acquisitions that you're doing.

Do you expect that to stabilize, and begin to turn the other way? And I guess do you have something of a target of where you'd like to bring that to in a certain timeframe?

Yes, if you use AFFO that's generally $0.01 or $0.02 above our FFO and then what we've always done is throw Crest out. So a few years ago when the payout ratio, it probably looked lower to other people than it did to us because you had Crest in there, which we did not use to pay dividends, but if you look at core FFO and you really get back to about 2005, I think core was about $1.59, the dividend was $1.35. It was about an 85% payout ratio. And '06 off core was 84% and then you really enter a period kind of '07, '08, '09, and '010 where FFO was a little flattish. It was up and quite a bit in '07 but in '08, '09 and '010, it's been flat. And we've done modest increases with the dividend.

And the dividend for 2010 off core if you guess for $1.82 is about a 95% payout ratio. And we've always wanted to pay out probably 85% into the low 90s and they're comfortable there given the stability of the business. However next year, if you look at the guidance we put out and if you took it towards the mid upper end, you're really dropping back down to a 87%, 88% payout ratio. And we don't think that's a bad thing to do at all.

So I think we'll be able to modestly increase the dividend, but if we hit those numbers, drop that payout back to low 80s and operate between 85% and 90% and that's where I probably like to for a couple of years while we're all seeing with low interest rates, things stabilize a bit, I'd like to get payout ratio down a little bit and hold it there till we have a little more clarity.

And actually just one more question occurred to me, just I've asked you on a few calls sort of what's your view of the future was because it oftentimes served as the backdrop for how you're thinking about leverage, balance sheet and acquisitions. I think it was a year ago, I can't remember quite how you categorized them but it was sort of the Japan-like outcome if you will where it's the decade of -- the lost decade and some of those were more dire.

I guess how you're kind of looking at the future right now?

My insights will be worth every penny you pay for them (multiple speakers), which is I think the double-dip scenario which I had pretty high I backed off a little bit. The Japan low growth scenario, I lean a little more heavily towards and while I'd like to see some additional growth, I think it will come with higher interest rates. And today I don't know where you did double-dip 25%, probably to Japan 35% and I'll hope for slow growth but a little inflation on the upside but my crystal ball is a little cloudier than others.

And that leads me to think that keeping leverage down below 30% which has dropped, too, here just makes me feel really good and not adding substantially to any near-term debt rollover would be great.

So if we issued debt it would be 10, 12 plus years as we always had. Permanent preferred sounds great and equity doesn't sound bad. But I think generally maintain low leverage through this environment, even though interest rates are low.

If they change them someday, which they are likely to do whether it's five, six, seven years out, that will have an impact on the income statement as you refinance. And you probably want to minimize that.

Thank you. And ladies and gentlemen, this concludes today's conference call. I will turn the call back over to management for any closing remarks.

Well, thank you, everybody, again for joining us during a very busy earnings season and it'll be interesting to see how the rest of the quarter turns out. And we look forward to talking to you next quarter. Thank you. And that concludes our call.

And ladies and gentlemen, this concludes the Realty Income third-quarter 2010 earnings conference call. You may now disconnect and thank you for using ACT Conferencing.