Realty Income Corp (O) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Realty Income fourth quarter 2011 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, February 9, 2012. It is now my pleasure to introduce our host for today Mr. Tom Lewis, CEO of Realty. Please go ahead.

Good afternoon, everyone, thanks for joining us on the conference call, and we will review operations and results for the fourth quarter and full year for 2011. In the room with as usual is Gary Malino, our President and Chief Operating Officer; Paul Meurer our EVP and Chief Financial Officer; John Case our EVP and Chief Investment Officer; Mike Pfeiffer, our General Counsel; and Terry Miller, our Vice President of Corporate Communications. And as always during the 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 in the full Company's Form 10-K the factors that could cause those differences. And we will start call as we always do with the numbers. Paul?

Thanks, Tom. So as usual I will provide some brief comments on our financial statement and provide some highlights of the financial results for both the quarter and the year starting with the income statement. Total revenue increased 23.6% for the quarter and 22.6% for the year. Our revenue for the quarter was $114 million or approximately $456 million on an annualized basis. This obviously reflects the significant amount of new acquisitions over the past year and positive same-store rent in our portfolio increases for the year of 1.3%. On the expense side, depreciation and amortization expense increased by about $9.5 million in the comparative quarterly period as depreciation expense increased obviously as our property portfolio continued to grow.

Interest expense increased by just under $3.9 million, and this decrease was due primarily to the June issuance of $150 million of notes in the reopening of our 2035 bonds, as well as the $237 million of credit facility borrowings, which we had at year-end. On a related note, our coverage ratios do remain strong with interest coverage at 3.5 times and fixed charge coverage at 2.9 times. General and administrative or G&A expenses in the fourth quarter were $7.95 million or 7% of total revenues. Our G&A expense has increased as our acquisition activity has increased, and we invested this past year in some new personnel for future growth. G&A was also impacted by the expensing of acquisition due diligence costs, $357,000 during the fourth quarter and a total of $1.5 million expensed during the year. Our current production for G&A for 2012 is approximately $33 million, which will continue to represent only about 7% of total revenues.

Property expenses were $2.3 million for the quarter and $7.4 million for the year. These, of course, are the expenses primarily associated with the taxes, maintenance, and insurance on properties where we are responsible for those expenses on properties available for lease. Our current estimate for 2012 is similar at about $7.5 million. Income taxes consist of income taxes paid to various states by the Company. They were $367,000 during the quarter. Income from discontinued operations for the quarter totaled $1 million and this income is associated with our property sales activity during the quarter. We did sell five properties resulting in a gain on sales of $1.2 million during the quarter, and a reminder that we do not include these property sales gains in our AFFO or in our FFO.

Preferred stock cash dividends remained at $6.1 million for the quarter. And net income available to common stockholders increased to approximately $34.9 million for the quarter. Funds from operations or FFO per share increased 8.5% to $0.51 for the quarter and 8.2% to $1.98 for the year. Adjusted funds from operations or AFFO or our FAD, or the actual cash we have available for distribution as dividends was higher than FFO and it increased 8.3% to $0.52 for the quarter and 8.1% to $2.01 per share for the year. Our AFFO will continue to be higher than our FFO, and this differential between our AFFO and FFO will continue to increase.

Our capital expenditures are fairly low. We have minimal straight-line rent adjustments in our portfolio, and we believe we will continue to have some FAS141 non-cash reductions to FFO due to in-place leases that we acquire in large portfolio transactions that we do. In addition, in 2012, we will have $3.7 million non-cash charge to FFO for the redemption of our preferred D stock representing approximately $0.027 per share in FFO. Our 2012 AFFO earnings projection is $2.07 to $2.12 per share or an increase of 3% to 5.5% over our 2011 AFFO per share of $2.01. We increased our cash monthly dividend again this quarter. We have increased the dividend 57 consecutive quarters and 64 times overall since we went public over 17 years ago; and of course, as we announced this week, we have now declared 500 consecutive monthly dividends over the past 42 years.

Our dividend payout ratio for the quarter was 85% of our funds from operations and about 84% of our AFFO. Briefly turning to the balance sheet, we have continued to maintain a conservative and very safe capital structure. This week we closed on our recent preferred stock offering, which raised over $373 million in gross proceeds at a coupon rate of 6.625%. We were very pleased with the strong investor demand in the offering and we very much appreciate the underwriters who supported us and did a terrific job on this offering. Use of proceeds will be to repay outstanding 7.375% class D preferred stock, which will save us $1 million cash expense annually, and also to pay off all of our acquisition credit facility borrowings. Our balance sheet continues to be well-positioned to support our acquisition growth.

Our current debt to total market capitalization now is only 25%, and our preferred stock outstanding still represents only 8% of our capital structure. Our $425 million credit facility did have $237 million of borrowings at year end; but as I mentioned, we used the preferred proceeds this week to pay off all of those borrowings on the facility. We have no debt maturities until 2013. So in summary, we currently have excellent liquidity, and our overall balance sheet remains very healthy and safe. Now, let me turn the call back over to Tom who will give you a little but more background on these results.

Great. I will start with the portfolio. During the fourth quarter, the portfolio continued to generate very consistent cash flow. At the end of the quarter, our largest 15 tenants accounted for about 49.8% of our revenue. That's down 480 basis points from the same period a year ago and 220 basis points from the third quarter, so our acquisition efforts continue to help us reduce our concentrations in the portfolio getting that down to 49.8%. The average cash flow coverage at the store level for those top 15 tenants, which we mention each time was right at 242 times, so very healthy.

We ended the fourth quarter at 96.7% occupancy, and 87 properties available for lease out of the 2,634 in the portfolio. That is down about 100 basis points from the third quarter, and up about 10 basis points for the same period a year ago. During the quarter we had 43 new vacancies, 25 of those came from expirations at the end of the lease. And that is a little higher number than usual, but occasionally with the expirations it gets a little bit lumpy and that was the case in the quarter. We also had 18, which were defaults primarily related to Friendly's. We also leased or sold 15 properties during the quarter and also added properties to the portfolio, which is how you get to the 96.7% number. If we look forward into the first quarter, I think with the Buffet's filing and as we begin leasing the properties up that are on the vacancy list, we could see another 20 or 30 basis points decline in occupancy down to around 96.5% or 96.4% is the best estimate right now. And then we would anticipate that we would see occupancy increasing from there over the next few quarters as we really generate some more leasing activity on these.

Let me take a moment and walk kind of through how we calculate occupancy and then give you some color on it. For the last 18 years or so, we calculated occupancy by taking the number of vacant properties we have, which is 87 and dividing that by the number of buildings that we have in the portfolio, which is 2,634 and that is pretty simple methodology that gets us to 3.3% vacancy and 96.7% occupancy. For a number of years now internally we've run occupancy a couple other ways just to eyeball the numbers. Another way is to take it just on a square footage basis instead of property where we take the vacant square footage and then divide it by the total square footage from the portfolio. Another way to do it is on a dollar basis, which is to take what was the previous rent on any properties that are vacant and divide that by the sum of that number and the rent on all the occupied properties and then that gives it to you on a dollar basis. And we've run all three methods for quite a while and generally they would be around the same number as historically our building sizes and kind of rents per property overall were pretty consistent. However, in the last few years as we bought some larger properties that has skewed the numbers and we also have about 4.5% of the portfolio now in agricultural land that have no buildings on it, yet are under long-term leases.

And so we are getting some variance in the three different methods a bit, and somebody recently asked me rather than -- when I said occupancy, they asked if it was physical or economic and while I'm not quite sure what their version of economic occupancy was, we thought we would go ahead and provide all three numbers; and again, the traditional way is 87 properties vacant, 2,634 total and that's 3.3% vacancy rate and a 96.7% occupancy rate. If you do it by square footage, the total vacant square footage is 746,000 square feet. If you divide that by the 27.369 million square feet in the portfolio, that gives us a 2.7% vacancy and a 97.3% occupancy rate. And then the last way, if you take the former contractual rent in the fourth quarter for the vacant properties that was about $2.48 million, and if you combine that and the rent on the occupied properties of $113 million, you will get $115.78 million. And then if you divide that back into that $2.48 million, that will give you a vacancy of 2.1% and an occupancy of 97.9% on a dollar basis. So you can pick you're own number.

We will, for historical continuity, continue to report it on the physical occupancy number, but what we will now do is make those numbers available and we'll figure out how to get them into our reporting and then mention them on the calls or if anybody wants to know what they are. Obviously all three are fairly close and represent fairly high occupancy. Same-store rents on the portfolio increased 1.1% during the fourth quarter, which is in the kind of average range in our mind. For the year same-store rents increased 3.3%.

Taking a look at where those came from during the year, we had three of the industries that had declining same-store rents in the portfolio, bookstores was one, automotive service, and quick service restaurants, which is fast food; but it was a relatively modest decline of only about 492,000, so fairly small. Two industries had flat same-store rents, that was drug stores and transportation services, which is fairly new to the portfolio. And then 24 industries saw some same-store rent increases. The majority of that and kind of going from highest to lowest was in increases was movie theaters, motor vehicle dealerships, casual dining restaurants, convenience stores, sporting goods, automotive, tire, and health and fitness; the balance were fairly small increases.

In those numbers, casual dining restaurants and motor vehicle dealerships may seem surprising relative to a contribution for the same-store rent increases, but I would note we gave a few temporary rent reductions to a few of those tenants in those industries during the recession. Those expired and that's what caused the increases in those two industries, and it is not a trend we would think is going to continue. And again, the balance in the industries was a fairly small increase. The 24 industries together had a total increase of about $4.7 million, and that gets to a net gain of $4.25 million in same-store rent.

Diversification in the portfolio continues to widen. We are in 38 industries, that's up 6 from a year ago, and our concentrations in the industries continue to decline. Convenience stores is our largest at 17.2%, that is down 110 basis points from last quarter and we think we will continue to bring that one down. Restaurants, if you combine both casual dining and the quick service, are a little less than last quarter; now at 16.4%, that is down 90 basis points from last quarter. Casual dining is now under 10% at 9.8%, and it's down about 110 basis points from the last quarter. Quick service, fast food was up about 20 basis points to 6.6%. The next one is theaters, which rose 9.8% as we made some acquisitions this year. Also, health and fitness was up 80 basis points to about 6.9%, and both areas we continue to like and will likely add to.

The only other categories that's over 5% now is beverages at 5.3%, so I think we are in very good shape relative to industry concentrations, we will keep them reasonable and try and continue to lower them. On a tenant basis, the largest individual tenant at 5.3% of rent is AMC Theaters. That is down 10 bips. Diago is 5%, and then everything else in the portfolio is under 5%; and again, when you put the 15 largest together, they're just under 50%, 49.8%. And then when you get to the 15th tenant, it's about 2.2% of rent, and if you even went further to 20%, it gets down to about 1.5% of rent and then goes down pretty quickly after that. So fairly well diversified from a tenant standpoint. Geographically we also remain well diversified.

The average lease term remaining is 11.3 years that's up a little bit over the quarter with recent acquisitions. We announced a couple of weeks ago that Friendly's is back out and operating having completed their organization fairly quickly, and also announced Buffet is in the process and we worked with their managements, we know well very quickly to structure an agreement with them, as we said in that press release a few weeks ago. It is subject to court's approval in the reorganization process, which is underway. Like in the Friendly's situation with Buffets, Mike Pfeiffer, our General Counsel, co-chairs the creditors committee; and we are hopeful that a process can be completed expeditiously, which I think would benefit all parties involved and we can move through that one fairly quickly. Relative to a theme with those two, I think it continues to be a difficult environment for retailers that sell discretionary goods to generally low income consumers, having tenants like these two in the casual dining area would generally fit into that category in our mind. And as we've mentioned, we would not be surprised to see a little more softness with another tenant in that area as the year goes on.

Fortunately, our exposure to that area is modest and continues to decline, although we would prefer if more of that decline was generated from asset sales and investments in other areas as a way that it declines. The majority of the portfolio continues to do quite well in occupancy as I mentioned is very high. We will move on to acquisitions now. It's obviously a very strong year in that area, and I will let John Case, our Chief Investment Officer comment on activities there.

All right, Tom. We remained quite active on the acquisitions front in the fourth quarter. We acquired 39 properties for approximately $190 million. The average initial lease yield on these investments was 7.5%. The average lease term was just under 20 years. Properties are diversified by geography, tenant, industry, and property type. They are located in seven states, 100% leased to four tenants in four different industries and represent three property types with our traditional retail investments accounting for 86% of our funds invested during the fourth quarter. 80% of the acquisitions are leased to new tenants, which further diversifies our portfolio.

In the fourth quarter we closed the final $19 million of the $544 million diversified net lease portfolio or ECM transaction we announced in the first quarter of 2011. Our fourth quarter activity brought us to $1 billion.

Is that $1 billion with a B?

With a B. $1 billion and property investments for 2011, the most we have ever completed in a single year in dollar terms. The $1 billion for the year was comprised of 164 properties, had an average initial yield of 7.8%, and an average lease term of 13.4 years. The properties are leased to 22 separate tenants in 17 different industries. We continue to be pleased with our level of acquisition activity, which really helped us drive our FFO growth in 2011.

Most of you have heard Tom describe our acquisition activity as lumpy before, well, it continues to be that way. $852 million of our 2011 acquisitions came from three large portfolio transactions. The remaining $148 million of acquisitions came from single property and smaller portfolio opportunities. We generally see these from quarter to quarter by just being in the marketplace. And these should lead to about $100 million to $150 million of acquisitions annually. So our success on the three large portfolios really drove our volume in 2011.

On this year end call we usually give to you an overview of the previous year's acquisition transaction flow and provide some additional perspective. I am going to go slowly here because there are a lot of numbers I want to share with you. In 2011, we sourced $13 billion in total acquisition opportunities. This is everything that comes in the door, not all of it makes sense for it. So of the $13 billion sourced, our acquisitions team analyzed about $8 billion in opportunities in 2011; an increase of about 70% versus 2010. Of this amount, just under $3 billion was taken through our investment committee. The $3 billion represented 1,300 properties with 45 different tenants.

Over the last 10 years, our investment committee has averaged working on about $3 billion in opportunities per year ranging from a low of a $1 billion to a high of $5 billion. So 2011, was right in line with our long-term average. The $1 billion we acquired represented 33% of what our investment committee worked on; and of course, was a record year for acquisitions. Over the last 10 years on average, we have acquired 15% of what our investment committee worked on. This year's 33% figure reflects our success in closing those three large portfolio transactions. Our initial yields or cap rates have averaged 8.9% during the last 10 years with a high of 10.4% and a low this year of 7.8%. Cap rates have declined over this period as interest rates have declined and as net lease properties have become more mainstream as more investors have entered the market.

We have historically tracked our cap rates relative to 10-year treasury yields. Since we went public in 1994, our cap rates have averaged about 475 basis points over the corresponding 10year treasury yields. The 2011 average 10-year treasury yield was 2.8%. So our initial yield is 7.8% was 5% over the average 10-year this past year, a bit better than our long-term average. Obviously, now with the 10-year treasury yield at 2%, our cap rates are closer to 5.75% over the 10-year.

Another factor impacting our cap rate is our move up the tenant credit curve the last two years. In 2011, 41% of our acquisitions were with investment grade tenants. Our completion of these high credit tenant acquisitions reduced our overall initial yield by about 30 to 40 basis points in 2011; however, our investment spreads remained very attractive to our long-term average, and we improved our tenant credit profile. Over the last 17 years, our acquisition cap rates spread over our nominal cost of equity has averaged about 110 basis points. We calculate our nominal cost of equity by taking our forward FFO yield and grossing it up for issuance costs. Last year that spread was approximately 170 basis points.

As we have moved into 2012, our acquisitions transaction flow has continued to be quite active consistent with the volume of opportunities we were seeing in 2011. Sellers were motivated by the significant liquidity in the net lease market, continued private equity, and M&A activity are also leading the sale-leaseback opportunities. The flow is fairly evenly divided between investment grade and non-investment grade opportunities, and the majority of it is in our traditional retail properties, but we are seeing possibilities in all of our property types. There continues to be a significant competition for property portfolios, but we should continue to be competitive in the marketplace.

Cap rates are trending down slightly from where they were in the second half of 2011 as interest rates have declined a bit. Cap rates generally range from the low 7% area to the high 7% area for investment grade tenants, and from the high 7% area to the high 8% area for non-investment grade tenants. We currently anticipate our initial yields on acquisitions for 2012 to average around 7.75%. Tom?

John's promised they will average 7.75%. Thanks. Obviously, we are pleased with the results for 2011 in acquisitions and I think as much by the pace of transactions that's coming in the door right now that will drive what we are able to do this year. And we think that will continue to play a roll in obviously growing the revenue and AFFO, which is what drives dividend increases. I think secondly and equally important for us is it will also help us in adjusting the makeup of our portfolio where we're trying to do a couple things, which is move up the credit curve with the tenant base and then also into areas both inside and outside of retail that we think we want to make up a larger piece of the portfolio and -- going forward.

If you look at the last 24 months or so, we bought about $1.7 billion of property. $1 billion of it was in retail and I think much in the sectors that we think we'll do well if we continue here with a tepid retail environment where lower income consumers continue to struggle. $720 million of the properties we bought are into areas outside of retail that we think will do well for us. And of the $1.7 billion total, about $770 million was done with investment grade tenants and a good measure of the rest of the acquisitions are also at the credit curve close to investment grade, and we are pleased with that.

The other thing about it is how we've funded the acquisitions. Living in a very low interest-rate environment that's largely generated by monetary policy at the federal level, I think it's easy to get lulled into the assumption that rates will stay low, which they might; however, we want to be mindful of where they could go in the future particularly if they were to go up substantially, and I think that's true not only for our tenants as they would refinance their balance sheet down the road but I think also for our own balance sheet. And one of the things we want to make sure we do is we are fairly active here in acquiring is that we don't materially add to our own levels or to our near-term maturities. So if you look at the permanent financing that we have done or funding of these acquisitions over last 24 months or so, we did 4 equity offerings that generated gross proceeds of just over $1 billion. We did $150 million of debt that had a maturity of 2035. And then, last week we did the perpetual preferred offering, which was $373 million.

And that's about $1.5 billion in capital and with either no maturity or a small piece with maturity very far into the future. And as we think about capital, we will continue to keep in mind that the cost of capital could be materially higher in the future, and the cost of refinancing that could be an issue, so we will try and take care of that in terms of how we're fund acquisitions. Relative to the balance sheet and access to capital, we are in very good shape. As Paul mentioned, there's plenty of dry powder to continue to acquire. On earnings and guidance obviously, the acquisitions, occupancy, and same-store rent increases the portfolio had in 2011 really drove the revenue FFO and AFFO, and that will benefit us, those acquisitions here in 2012. In the release a couple of weeks ago, we adjusted our guidance for the preferred issuance to 201 to 205 on FFO and that included that non-cash charge that Paul talked about. And then AFFO at 207 to 212 and that's 3% to 5.5% AFFO growth, and that number will be our primary focus; as Paul mentioned, it's the best we have for recurring cash flow right now.

Kind of finally, before we take questions I would be remiss if, like Paul, I didn't mention the press release yesterday announcing the 500 consecutive monthly dividend. That's over 41 years of monthly dividends, which is a long time. I think the Company was about at 108 consecutive dividends when I came in to do due diligence in the Company and met the founders, Bill and Joan Clark, it was probably over 200 when I came to work here 25 years ago; and I called the Clark's who are actively retired to talk to them about getting to 500, and I like their comment, which is very typical for them which was, That's great and I hope you guys are focused on the next 500, which we are. Anyway, a nice milestone for the Company that they founded a long time ago. Operator, Diane, we'll now open it up to questions.

Thank you. We'll now begin the question-and-answer session. (Operator Instructions) One moment please for our first question. And we have a question from the line Lindsay Schroll from Bank of America Merrill Lynch. Please go ahead.

Good afternoon. Can you please discuss the health of the casual dining sector overall and whether the filings by Friendly's and buffets were more retailer specific issues or indicative of broader industry trends?

Yes. That's a good question and happy to do that. We are not overly positive on the industry to say the least. I think a theme in almost everything we look at today is whether it's in casual dining or somewhere else is to try and look at the consumer that that individual retailer or here, restaurant, is targeting; because if you look at kind of the upper income consumer, they are spending both discretionary and nondiscretionary. The middle market consumer, which seems to be a little smaller group today is spending on non-discretionary, but is really looking for value when they are out doing discretionary spending and that includes casual dining. And then when you get to the lower end consumer, not only are they extraordinarily value conscious on discretionary -- or nondiscretionary, they are almost are not spending in discretionary.

So pick your casual dining and pick who their customer is, but I think for a lot of people most of those chains are appealing to the middle and lower market and it's a tough operating environment; and we think it will continue to be so. The other things going on there over the last couple of years is also minimum wage has gone from I think $5.85 an hour up to over $7.25, so they have seen some labor pressures and then at the same time had some commodity costs move. So we have the industry rather -- relative to further investment kind of we are not going to do it, and then we'd like to continue to reduce it as part of the portfolio because it is an area that even though for short periods it can snap back, we are not overly positive it will. I would be remiss if I didn't note the (inaudible) chain is doing very well in that industry and they are, but casual dining for us is we watch -- it's an industry that we are not going to be doing additional acquisitions in.

Okay. And then I think you've talked about wanting to dispose of your office assets. And I'm just wondering what the demand is for those versus retail, if the cap rates are similar, the buyer's the same? If you can just talk about that.

Yes. I don't think we're looking to dispose of it. We don't have much in that area and those tenants. I think it's more of a comment that that's not something we are looking to aggressively add to the portfolio. In the ECM transaction, we had a couple of -- a few office buildings that came with that, but it's still a relative small part of the portfolio. It's only about 2.6% of rent. So I wouldn't see it increasing, but currently we don't have plans to sell the assets.

Okay. Thank you.

Thank you. And our next question comes from the line of Joshua Barber with Stifel Nicolaus. Please go ahead.

Hi. Good afternoon. I certainly hope there's not going to be a quiz on all those numbers that you threw out.

Sorry about that.

That's okay. Just a couple of quick questions, when you were talking about the eventual rents from releasing the buffets in the Friendly's deal, what is the time horizon that you are using for releasing those assets?

It varies a little. In the Friendly's, I believe, we assumed that we did not lease anything until late in the year or early in the next year. We think we will do better. With the Buffets, we had a little more aggressive move on it because we have had a little better luck as we've gone through this recently.

Okay. Have any of them actually been released so far?

There are LOIs in place in a handful. And so I think a best estimate is kind of 6 to 18 months, and what that means is you will have some outliers that happen sooner and you will have some outliers that happen later than that.

Okay. And regarding casual dining, obviously we've talked a lot about that; can you talk about the sponsors of the casual diners especially the ones that you have exposure too and what their willingness to restructure or to keep those entities going rather than bankrupt them right now, what those owner posture tends to be today?

Yes. They tend not to be 7s, they do tend to be 11s. Certainly that was a case in Friendly's and that's the case in Buffets, and when you think to sponsor, you kind of want -- there's a couple things obviously these are levered entities, and one of the strategies in the toolbox of these people has been to if the chain starts to struggle and the debt trades to a discount, go into the market, buy the debt and then they become both the debt and equity owner. And that gives it some optionality to go through an 11, continue on the chain and do some work on the contracts -- other contracts of it.

But I think as long as they can see in the properties, profitability in the chain overall they're obviously going to look for 11 and that will either be through the debt holders becoming the owner, or in the case as I mentioned where both have the same. But if you look at Friendly's and Buffets both the rents are pretty low, which gives them the opportunity to do that. And then what we've try to do in all of these of course is get some optionality for if the business recovers, that we can get a piece of that, but in most cases they do want to operate. But it is a chain by chain basis. There's been a fair amount of bankruptcy in that industry over the last four or five years, 34 or 35 of them and the vast majority have been 11s.

Great. Thank you very much.

Our next question comes from the line of Paul Lukasik with Morningstar. Please go ahead.

Hi. Good afternoon.

Hey, Paul.

Just a quick question on the acquisitions, do you have a preference right now for doing deals with the credit tenants in the 7s versus the non-credit tenants in the 8s; or you're still happy to do either category?

We are happy to do either and it really is investment grade we would like to take it up the credit curve when we can find them, it's a competitive world today. But like to do that. And then when they are not investment grade, we'd rather be moving kind of up the cusp with it. And when you get to noninvestment grade if -- again, is kind of a tenant of a low income consumer and discretionary, we really don't want to be investing there even though yields can be very attractive. But we are willing to do both today.

Okay. And then just the acquisition assumption that's currently embedded in your guidance.

I think right now about $0.5 billion is what I've got in there.

Okay. And in thinking about same-store rent growth is 1% to 2% still a good long-term assumption?

I would think I'd hang around 1% level or closer to that through the first half of the year as we deal with some of these properties. And that was the case a few years ago and then I think it probably -- long-term probably 1% to 1.5% is to consider average. When we get above 1.5%, that's high just given the way lease structures work.

Okay. And you mentioned that I guess a couple of the categories that contributed to the increase in the last quarter, the motor vehicles and the casual dining, that was from the expiration of rent reductions. In this quarter is that something that lasts then for 12 months in the same-store numbers, but that this time next year that impact would drop off?

Yes. I think that's the case and then I'd also think we will get some boost from leasing.

Okay. Great. Thanks for taking my questions.

Thank you. And our next question comes from the line of Todd Stender with Wells Fargo Securities. Please go ahead.

Hi. Thanks. Tom, you were indicating the vacancies edged higher than expected in the fourth quarter. Other than the Friendly's stuff, who was the 10 on the bulk of those?

I'd have to go look. It was in automotive, it was service, but what it was is we have vacant properties and then we have a list and there's generally 20 to 30 properties on it that are closed properties, but they are still under a long-term lease and the tenant is healthy. And what happened at the end of the third quarter, there was a bunch of properties that a tenant had closed about two years ago that were still under lease and still paying and those all came off at once. And so, we have gone back and we've looked at that list, which always exists and there's very little of that this year, very little next year; but it was one little lump. And I forgot but it is in automotive service tenant, I believe that was a bunch of them and then there were just a couple of others.

Okay. Will they likely be teed up for sale?

We will tee them up for re-lease or sale, both.

Okay. And just along those same lines, did you say disposition volumes increased maybe ahead of schedule, maybe where you thought you'd be this time last year just to get out in front of some of these credit issues?

That's exactly what our plan is in terms of property sales. We've typically sold $25 million to $30 million of properties a year, but that's mostly just working through lease rollover and occasional tenant issue, and that has just been kind of the average, but we really do want to accelerate that kind of bit. And if it's okay, I'll spend a second on it. Over the last year, we went back and undertook a very lengthy project that took about seven or eight months where we underwrote basically the majority of the portfolio. I think we picked the largest 67 tenants and they combined at about 83% of rents. And we went through a rating of each industry. We then went through our exposures relative to how many of their units we own and how many units we own, percent of rent, and then went back through their credit ratings, ran their balance sheets, debt, maturity schedule, usage of line of credit, cash, debt after cash liquidity revenue, and then went after their trends and looked at the margin trends and revenue trends and fixed charge coverages.

And then literally modeled each one of them once again and started running some stress tests where we would move their revenues and margins and then kind of refinance their whole balance sheet over the next five or seven years, and we added on 300 basis points of higher financing costs at 600 basis points and then did some mixing to get a perfect storm. And we took all of that and that kind of guided us along with some themes we have relative to what would higher interest rates do, how's retail going to be different, that the lower end consumer may have trouble coming back, that nondiscretionary is going to be difficult; and in doing that, then really we kind of laid out a top to bottom in the portfolio. At the same time we did the same thing with properties, and when we got through we merged that and basically came up with a group of the portfolio that over time that we would like to move out of and in combinations with acquisitions and sales kind are re-org that portfolio.

And initially we targeted a little over 100 properties about $110 million or so that we bought those at, about $100 million of carrying value. And we've started at process to market them, and we have done some staffing here, done some systems and we've just literally launched that over the last month or so. So for this year if we can move that up to $50 million from the normal $25 million to $35 million, that would be just great. My sense is to do the whole $110 million will be moving in through this year and early into next year. But the plan right after that will then be to take the next on the list and we would like to over the next three, four, or five years be fairly active in recycling capital and moving into some new areas that we'd rather have in the portfolio.

Okay. That's really helpful. Thanks, Tom. And just lastly, it looks like you had one agricultural property, did I see that right?

We did. We had one additional property with Diagio, it's in the Napa Valley. It's kind of wedged in between the other vineyards that we own, and it is one that we had looked at doing aways back, but there were a couple of complications operationally for them on it, but we were able to do that, so it's a little addition to the Diagio portfolio.

Any pricing on that? An indication what the cap rate was?

It's relatively similar to what we did two years ago.

Okay. Thanks.

Thank you. And our next question comes from the line of Anthony Paolone with JPMorgan. Please go ahead.

Thanks. Good afternoon. Just following up on that Tom and thanks for laying out your thoughts on dispositions. Can you give any sense of what that magnitude might look like against the $500 million of acquisitions you are thinking about for 2012?

Yes. There is about -- well, acquisitions for 2012, again, our best guess this year is we would like to do 50 and that probably adds in 25 to 30 of this new grouping of investment properties we would like to sell. So that's the number there, but there is $110 million probably over the next 18 to 24 months. And then behind that as we went through and did the whole portfolio, it wasn't, we need to sell these now, but these are areas we want to move out of. It was about 20% of the portfolio that we looked at and said over the next four or five years, that's what we'd want to recycle.

But you say 20% of the portfolio, is that 20% of value or 20% of the buildings or --?

Revenue.

Revenue. So does that suggest just a lot -- like a much bigger ramp in sales beyond 2012, 2013?

No. If you think of about 20%, that's 400 or 500 properties. So I think over three to five years that's about 80 properties a year or so.

And to some extent more art than science, Tony, so for example if we buy $1 billion worth of real estate again that can do more than $50 million in sales this year who knows. But if -- we'll kind of manage that from an earnings run rate perspective as well.

Yes. It's a balancing act with acquisitions and all the other things going on in the portfolio and still hitting good numbers and raising the dividend, but we think we can move a good part of the portfolio over the next few years.

Okay. And then you talked a bit about same-store revenue. I was wondering if you can give a sense of same-store NOI maybe net of things like $7.5 million of property expenses that you bear, the effect of Buffets and Friendly's this year. Just some of the things -- some of the vacancies you picked up in the fourth quarter from some of those leases that burned off, and just how that rolls into a same-store NOI number for 2012?

Let us work on that.

One thing we do, I think we do a pretty good job of giving you the specifics of how we approach same-store calculations in the 10-Qs and 10-Ks, so we'll have that laid out to give you exactly what we've put in it versus what's not in, because everyone does it a little bit differently. I think what you are generally going to find, and that's why Tom tries to give you some guidance on where we get some bumps in which industries and which ones we're down, is that obviously the ones that we've got bumps in, it was probably a number slightly healthier than 1% to 1.5%. But the ones -- the vacancies is what really drags it down to that kind of overall run rate, so when you're --

In my head, Tony, but if you want to e-mail what the puzzle is, let us take a look at it.

Sure. And I guess what struck me and where I was coming from was even between a 1% to 2% band gaining towards the lower end of that, it just still seemed like not a whole lot of impact given what is happened with Buffets and Friendly's and stuff. Like does that include all those things?

Yes. That's very fair. It definitely impacts. And when we talk about an 80% recovery rate, that is when we get those leased up. So if you have an event happen, for the next 12 months after that, the impact is certainly greater than the 20% that you don't recover because that's during the period where they are vacant. And aside from not gaining rent, there is also the triple net expenses. And so in a year like this and it really bands the year between Friendly's and Buffets, that does have a pretty good impact. It may exceed the same-store rent for a period of time until you get those leased.

But even with the impact on the top line of Friendly's and Buffets, you still think you'll come in at that low 1%s?

I'm only hesitating because I'm trying to make sure.

Obviously you understand why 2011 wasn't as effective because Friendly's occurred late in the year and Buffets had not occurred yet. Fair enough. So your question is on the projection for 2012, and I think what we are saying is we were expecting same-store rent to be more like 1.5% plus next year, reasonably healthy from an overall historical perspective for us and the Buffets and Friendly's vacancies is what's dragging that down closer to a 1% number certainly for the first nine months of the year or so.

Okay. I just wanted to make sure that that was in that low 1%s. I would have actually guessed it to have had a greater negative impact than that. Great. And then just the last thing, I'm just curious as you've thought about your strategy and the push towards a little bit more higher credit quality or desire to go up the credit quality spectrum, how did you think about going higher credit quality versus perhaps maybe any other options like staying where you are in the credit spectrum and focusing more on certain MSAs or just a different product category or something like that?

That's a very good question. I think rather than what we are doing, talking about why we are doing it is really important; and starting about four or five years ago as we were doing strategic planning, one of the things we did is said, Okay, let's look back at the last 20 years and say -- it obviously went really well and then say, Okay, why did it go really well? And to try and differentiate between being in the right place at the right time; and then secondarily, what we did, and there are kind of three themes in there that are driving it.

One is looking at retail in our business. If you look at the last 20 years, you had great domestic economic growth, personal income growth, the baby boomers were at peak earnings and spending years, the next one is very important, the consumer levered up. Retail spending growth rates were really high. Retailers added a lot of new stores and it was the right place to be at the right time and we were, and then we said, Okay, let's look forward, there's a bit of the new normal the term goes around, debt to GDP is approaching up 90%, which takes something out of GDP growth and personal income growth. The baby boomers are aging, you've got the baby bust behind them, and the consumer is unlikely to lever up at the same rate because they can't and may even delever a bit. And so maybe retail isn't as -- the growth rate isn't as high as it was in the past, and then you throw in kind of the impact of internet on retailing; and you say, It's the difference between running downhill and the difference between running on flat land and the first up was to say, Okay, industry and tenant selection will be more important in the future than in the past because it's just not as great environment.

And then really going one step further and saying, Let's take a look at the consumer. The low end consumer did pretty well the last 15 to 20 years with all of the growth in construction and real estate and the building trades, home improvement there was a fair part of what normally would be kind of the lower income, each business we have and which consumer it serves, and assume it's not going to be as good as it could. The second thing which is also really, really important and I alluded to, but take a minute is with interest rates. You had the 10-year over the last 30 years go from 14% to16% to 2%, and that's very much running downhill. And that obviously made asset prices rise; but kind of more importantly, it made leverage always work and refinance always work and there were a lot of what might have been marginal business models that work because interest rates were falling so fast.

And there was a fair amount of our tenants that used a fair amount of leverage and environment when interest rates were going down. And so with the 10-year at 2%, the chance of having a material declining interest rate environment is almost zero because if you go from 2% to 1%, it's only 1%. And so that benefit won't be as robust. And then you say, Okay, what if rates stay low? Well, that's generally because the economy is probably limping along and very tepid relative to economic growth; and in that environment over time, good possibility you could see credit spreads gap, which means refinance rates for those tenants would be higher. And then moving out five to seven years, you take a look at those tenants and you'll say, If they had to refinance their entire balance sheet, what would it do? And that's what started that project which we did where we really know what it would do. And then you throw in obviously anybody that has impact by internet.

And when we got done with all of that, we said, Okay, we want to go up the credit curve so at five to seven years from now, interest rates are higher and the tenants have to refinance their balance sheet and that affects cash flows really out of their -- Second, in terms of the type of consumer they really serve, again we want to stay away from more of the consumer discretionary. And then third, where can we go outside of retail that should benefit -- good examples are FedEx and the impact it has for them with internet taking more and more retail sales and other areas where we can also get investment grade credit and then maybe even have some very large Fortune 1000 tenants that are benefiting from having a presence overseas where we are not, but as they are a tenant of ours, we would benefit.

So it was all of those kind of put together that we said, Okay, in retail, up the curve, out of certain areas, and into others; and then outside of retail, up the credit curve, so we wake up five, seven, eight years down the road and we've kind of remade the portfolio. And if it is -- has been a slower retail environment and/or interest rates were materially higher, it won't have near the impact it might have, because the last 20 or 30 years and the track record -- it was put together because of that is a function of the operating conditions to some extent and it's unlikely that that will persist into the future. So that was kind of the thought process.

Okay. Yes. Thank you. I appreciate that.

Thank you. And our next question comes from the line of Rich Moore with RBC Capital Market. Please go ahead.

Yes. Hi. Good afternoon. I was looking at the -- or thinking about the impact of Friendly's and I went back to the press release you had. Is that what you pretty much are seeing what you put in the press release on January 18th; is that still what you expect from the Friendly's closures, and then how much you'll recover of what's left?

Yes.

Okay. And then when in the -- at what point in the year did they stop -- did all of this take place? You said it was late in the year, but how much of that fourth quarter rent, I guess, that we see?

We received October rent and then the impact, say15 of the 19 rejections, we did not receive November or December rent, and then the other four rejections, we haven't received January rent, to kind to give you a feel. Is that helpful?

Okay. Yes, that does. And then as far as what you'll recover from the others, when did that start, the reduction?

All of that started November 1st basically on the concessions and that sort of thing, on any properties where we agreed to a lower rent level, but October was a full rent.

October was full rent, I got you. And then for Buffets, you are thinking -- obviously nothing has happened, but are you thinking the same that you have in the press release, this same sort of parameters that you mentioned in here?

That will all come back to January 1st basically. Again, that's all loaded in power projects, both Buffets and Friendly's, those recovery numbers and with the expectation as mentioned of call it a 6 month to 18 month general window. Some earlier, some later than that in terms of re-leased on the rejected ones.

Okay. But those parameters, Paul, as far as how much base rents you'll lose and what the concessions will be under managed, you still feel comfortable about that?

Yes. Yes. We are at same place we were with the press a couple of weeks ago.

Yes, absolutely.

Okay, and that all comes back to January 1st?

Correct.

Okay, I got you. And then I wanted to ask you, when you release some of these, when you redo a Friendly's do you have to put capital in in anyway for the new tenant?

Sometimes a little.

A little, but generally not huge amounts. Historically, the -- whoever the new tenant was that's part of the work he does on it. And we agreed to a long-term rental agreement. It's generally not -- it's also you don't get two years free rent and you do it, it's generally we negotiate a rent and that's his responsibility. So it is a marginal amount of CapEx that it adds in.

Okay. And users for these would --

And we will talk to you in about 90 days. And thank you, Diane.

Ladies and gentlemen, that does conclude today's teleconference. Thank you for your participation. You may now disconnect.