Realty Income Corp (O) 2014 Q1 法說會逐字稿

Good afternoon ladies and gentlemen, thank you for standing by.

Welcome to the Realty Income First Quarter 2014 Operating Results Conference Call.

(Operator instructions) This conference is being recorded today, Thursday the first of May, 2014.

I would now like to turn the conference over to Janeen Bedard, Associate Vice President.

Please go ahead, ma'am.

Thank you Lorenzo, and thank you all for joining us today for Realty Income's First Quarter 2014 Operating Results Conference Call.

Discussing our results will be John Case, Chief Executive Officer, Paul Meurer, Executive Vice President, Chief Financial Officer and Treasurer, and Sumit Roy, Executive Vice President, Chief Investment Officer.

During this conference 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.

We will disclose in greater detail the factors that may cause such differences in the Company's Form 10-Q.

I will now turn the call over to Mr. Case.

Thanks Janeen, and good afternoon, and welcome to our call.

I'm pleased to report an excellent start to 2014 with AFFO per share increasing just under 7% to a record quarterly amount of $0.64.

Paul, you want to expand on the numbers?

Thanks, John.

As usual, let me comment on our financial statements just provide a few highlights of the results for the quarter, starting with the income statement.

Total revenue increased 26.3% for the quarter, obviously this increase reflects our significant growth from new acquisitions over the past year as well as some healthy same-store rental growth.

On an annualized rental revenue basis at March 31, our annualized rental revenue was $867 million.

On the expense side, depreciation and amortization expense increased to almost $90 million in the quarter, as depreciation expense has obviously also increased with our portfolio growth.

Interest expense increased in the quarter to $51.7 million.

This increase was primarily due to the $750 million issuance of ten-year bonds we did last July, as well as some credit facility borrowings during the quarter.

On a related note, our coverage ratios both remain strong with interest coverage at 3.9 times and fixed charge coverage at 3.2 times.

General and Administrative, or G&A expenses in the quarter, were approximately $12.9 million.

Our G&A as a percentage of total rental and other revenues has decreased to only 6%.

Our projection for G&A for 2014 remains the same at approximately $50 million.

Property expenses were $10.6 million for the quarter, however, this amount includes $6.4 million of property expenses reimbursed by tenants.

The property expenses that we are responsible for were approximately $4.2 million for the quarter, and our projection for 2014 of property expenses that we will be responsible for also remains the same at approximately $16.5 million.

Income taxes consist of income taxes paid to various states by the Company and they were just under $1.1 million for the quarter.

As we explained in the press release, we have chosen immediate early adoption of the new accounting regulations related to discontinued operations, which were just released a few weeks ago.

Through our property sales, gains, impairments and other related revenues and expenses will now appear throughout the income statement as opposed to being aggregated in the discontinued operations line.

During the quarter we did record impairments of $1.7 million and gains on sale of $3.9 million on property sales and properties held for sale at March 31.

And you'll see, there's new line items in the income statement.

Some of this information continues to appear in the discontinued operations line, however, if it was associated with properties that were already held for sale at December 31, and this topic is discussed and explained in more detail in our 10-Q.

Preferred stock cash dividends totaled approximately $10.5 million for the quarter and net income available to common stockholders was approximately $47.2 million for the quarter.

Funds from operations, or FFO per share, was $0.65 for the quarter, an 8.3% increase versus a year ago, and as John mentioned, adjusted funds from operations or AFFO, or the actual cash we have available for distribution as dividends, was $0.64 per share for the quarter, a 6.7% increase versus a year ago.

We again increased our cash monthly dividend this quarter.

We've increased the dividend 66 consecutive quarters, that's 16 1/2 years of consecutive quarterly dividend increases, and our dividends paid per common share increased 6.4% this quarter versus a year ago.

Our monthly dividend now equates to a current annualized amount of approximately $2.19 per share.

Briefly turning to the balance sheet, we've continued to maintain a very conservative and safe capital structure.

As you know in early April we raised $529 million of new capital with a common equity offering which we used to repay borrowings on our $1.5 billion acquisition credit facility.

Our acquisition credit facility today currently has a balance of approximately $285 million.

We have plenty of availability on that facility.

We did assume approximately $46 million of in-place mortgages during the first quarter, so our outstanding net mortgage debt at quarter end increased to approximately $799 million.

Our bonds which are all unsecured and fixed-rate, and continue to be rated Baa1 BBB+, have a weighted average maturity of 7.4 years.

Our overall debt maturity schedule continues to be in very good shape with only $48 million of mortgage principal coming due in 2014, and $125 million of mortgage principal in 2015.

And our next bond maturity is only $150 million due in November of 2015.

Our debt-to-EBITDA at quarter end was only 6.1 times.

Currently our total debt to total market capitalization is approximately 30% and our preferred stock outstanding is only 4% of our capital structure.

So in summary, revenue growth this quarter was significant.

Our expenses remain moderate so our earnings growth was very positive.

Our overall balance sheet remains very healthy and safe, and we continue to enjoy excellent access to the public capital markets to fund our continued growth with well-priced, long-term capital.

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

Thanks, Paul.

I'll begin with an overview of the portfolio, which continues to perform well.

Our tenants are doing well based on what we're seeing today.

We ended the quarter with 98.3% occupancy based on the number of properties with 73 properties available for lease out of 4,208 properties.

This is our highest occupancy since the third quarter of 2007, and occupancy is up from 97.7% one year ago.

Occupancy based on square footage and economic occupancy are 99%, and we expect our occupancy to remain fairly stable for the foreseeable future.

Our portfolio remains diversified by tenant, industry, geography and to a certain extent, property type.

At the end of the first quarter, our properties were leased to 211 commercial tenants in 47 different industries located in 49 states and Puerto Rico.

78% of the rental revenue is from our traditional retail property types, while 22% is for non-retail property types, the largest component being industrial and distribution assets.

We believe this diversification leads to a more predictable cash flow stream for our shareholders.

The end of the first quarter, our 15 largest tenants accounted for 46.4% of rental revenue.

This is up 180 basis points from the last quarter.

We made additional investments in two of our top 15 tenants, Walgreens and Dollar General, which drove this slight increase.

In 2008, our top 15 accounted for 54% of rental revenue.

The percentage has moved down while the composition of tenants from a credit perspective has markedly improved.

Today, 61% of our top 15 tenants based on rental revenue have investment-grade credit ratings.

In 2008, none of the rental revenue from our top 15 tenants came from investment grade-rated tenants.

So, we've made good progress on improving the credit profile of the top 15.

Our top 15 tenants remain unchanged, however, there's been some movement within the top 15.

No single tenant accounts for more than 5.4% of rental revenues, so diversification by tenant is favorable.

Walgreens is now our largest tenant at 5.4% of rental revenue, which is up slightly from last quarter.

Walgreens replaced FedEx as our largest tenant.

FedEx is now our second largest tenant at 5.2% of rental revenue which is unchanged from last quarter.

Dollar General moved up six places and is our third largest tenant today at 5% of rental revenue.

We continue to like the deep value proposition the dollar industry offers to consumers, in this economic environment with consumers continuing to be under pressure, and Dollar General remains a dominant player in the sector.

Family Dollar and LA Fitness fell to our fourth and fifth largest tenants at 4.7% and 4.6% of rental revenue, respectively.

All other tenants are at or below 2.9% of rental revenues.

When you get to the 15th largest tenant, which remains Walmart-Sam's Club, it represents only 1.5% of rental revenue and the percentages trail off from there.

If you move another five spots and go to our twentieth largest tenant, it represents only 1.2% of rental revenue.

We also added five new tenants to the portfolio during the quarter.

Convenience stores remain our largest industry, but continue to decline as a percentage of rental revenue.

Convenience stores now represent 10.3% of rental revenue down from 10.6% last quarter.

Drug stores are now at 9.5%, down slightly from 9.7% last quarter, and dollar stores are now at 9.1%, up from 7.1% last quarter as a result of the Dollar Generals we added during the first quarter.

Health and fitness is at 6.9%, virtually unchanged from last quarter.

Theatres at 5.4%, transportation services are at 5.3%, and then all other industry categories below that are at or below 4.5% of rental revenue.

Looking at property type, retail as it always has, represents our primary source of rental revenue, currently at 78% of the portfolio with industrial and distribution at 11%, office just over 6%, and the remainder basically divided between manufacturing and agriculture properties.

We continue to focus on retail tenants that meet our investment parameters.

More than 90% of our retail portfolio has a service, non-discretionary, and/or low price point component to their business.

We believe these characteristics better position these tenants to successfully operate in all economic environments and make them less vulnerable to internet competition.

Our weighted average remaining lease term continues to be just under 11 years, and our same-store rents increased 1.5% during the quarter as compared to the first quarter of 2013.

Some of the industries that drove our rent growth include convenience stores and quick service restaurants.

We believe 1.5% is a solid growth rate and expect it to continue around this level for the foreseeable future.

Let me take a moment to discuss tenant credit.

The credit quality of the portfolio continues to improve with 44% of our rental revenue generated from investment-grade tenants, which is up from 40% at the end of last year.

Again, we define an investment-grade rated company as having an investment-grade rating by one or more of the three major rating agencies.

This revenue percentage is also up from 36% at the end of the first quarter 2013.

We're also pleased with the rental growth we've been able to generate from these investment-grade tenants.

Approximately 70% of our investment-grade leases as a percentage of rental revenues have rental rate increases in them which average 1.5% annually, consistent with our historical portfolio rental growth rates.

Property acquisitions, we had a very busy first quarter.

We completed $657 million in acquisitions during the quarter at an initial yield of 7%.

This is the second most active quarter for acquisitions we've had in the company's history.

As a reminder, our initial yields are cash yields and not GAAP cap rates, which can be higher due to straight line of rent.

We continue to invest at attractive investment spreads relative to our weighted average cost of capital.

So now, I'd like to hand it over to Sumit to provide additional details on our acquisitions.

Thank you, John.

As John mentioned, during the first quarter of 2014, we invested $656.7 million in 337 properties at an average initial cash cap rate of 7%, and with a weighted average lease term of 14.2 years.

84% of the revenues generated by these acquisitions is from investment-grade tenants.

These assets are leased to 22 different tenants in 15 different industries.

Most significant industries represented were dollar stores and drug stores.

The properties are located in 35 states.

88% of the investments are comprised of retail properties and 8% are industrial assets.

Regarding sourcing, we continue the theme from last year of seeing record transaction flow.

We sourced $8.1 billion in the first quarter.

Approximately 85% of the transactions closed in the first quarter were relationship-driven.

We continue to utilize our relationships and remain very selective in our investments.

As to pricing, cap rates remained tight in the first quarter with investment-grade properties continuing to trade in the 6% to 7% range.

Non-investment-grade properties are trading from 7% to 8.5% cap rates.

For first quarter 2014, our investment spreads remained healthy.

Looking at our spreads relative to our weighted average cost of capital, we averaged 156 basis points which is comparable to our historical average.

We have continued to make investments at historic spreads whilst improving the credit quality of the tenants and cash flows associated with those investments.

In conclusion, we feel like we've had a good start to the year with $657 million in investments in the first quarter, and continue to see record volume of net leased acquisition opportunities.

Despite a very competitive environment, we feel confident regarding meeting our investment forecast of $1.2 billion for 2014.

Thank you.

Thanks, Sumit.

During the quarter we closed just over half of the $503 million transaction with Inland Diversified that we announced at the end of last year.

Our quarterly acquisition figures include $274 million from this transaction.

The beginning of the second quarter, we closed an additional $94 million of Inland and we expect the majority of the remaining properties to close during the remainder of the second quarter.

We continue selling select properties and redeploying the capital into investments that better fit our investments strategy, but during the quarter we sold 11 properties for just under $13 million at an unlevered IRR of approximately 10% which is consistent with where the Company has been realizing returns on dispositions over the last couple of years.

We now believe our dispositions for 2014 will be approximately $75 million versus our previous guidance of $50 million to $75 million.

Moving on to the balance sheet, as Paul mentioned we remain conservatively capitalized with excellent access to capital.

On April 1, we executed a $529 million equity offering, our second largest equity offering in our history.

The offering was upsized from 10.5 million shares to 13.8 million shares.

Following the offering we have ample liquidity for our initial funding of acquisitions activity.

We will continue to permanently match-fund our acquisitions with equity capital and long-term debt with the majority being common stock.

Outside of the credit facility, 100% of our outstanding debt is fixed-rate, so the balance sheet continues to be in excellent shape.

We achieved record quarterly AFFO per share of $0.64 in the quarter, representing an increase of 6.7% from a year ago.

Our earnings guidance for 2014 remains at $2.53 to $2.58 per share.

Again, an increase of 5% to 7% over 2013.

Our growth in earnings led to an increase in the dividend paid per share by just over 6% compared to one year ago.

In March, we declared our 75th dividend increase since the Company went public in 1994 and we remain optimistic that our activities will continue to support our ability to increase the dividend.

Out payout ratio during the first quarter continued to decline to approximately 86% of our AFFO which is at a level we're comfortable with.

2014 is shaping up to be another solid year for the Company.

We continue to see a robust but also competitive market for acquisitions, with opportunities in both investment grade and non-investment grade retail assets.

Our long-term relationships with tenants, owners, developers, advisors, continue to generate excellent acquisition opportunities for us, and we continue to anticipate $1.2 billion in acquisitions for the year.

With that, I'd like to open it up for questions.

Operator?

(Operator instructions).

Our first question is from the line of Juan Sanabria with Bank of America, please go ahead.

Hi, guys.

Just a couple of questions.

First on the dollar store exposure, Family Dollar's had a bit of a tough go.

I think they've announced some store closings.

Can you comment on your exposure there, and sort of how you view the real estate and the rent coverages?

Sure, Juan.

We continue to like the sector, due to its discount orientation and the fact that these formats are appealing to the aging demographic, and we feel good about Dollar General and Family Dollar.

You're referring to Family Dollar's quarterly conference call a couple of weeks ago, where they disclosed that for the first six months of their fiscal year they had a decrease in same-store sales, and they also announced that they were going to close some of their older and smaller formats, about 5% of their 8,500 total stores.

The impact to us should be non-existent to minimal, because we don't own those types of stores.

Our stores have healthy cash flow coverages and are performing well, and the average lease term on our Family Dollar portfolio is 13 years.

So, of course, any stores that would be closed would continue to pay rent during the remainder of the lease term, but we don't think we'll see any material, if any, impact to our portfolio.

Great, thanks for that.

That's good color.

And on the restaurant side, been a big driver of incremental growth across retail landlords' platforms.

Can you speak to your sort of historic results on being able to release restaurant leases upon maturity?

And kind of what their rent profile looks like over time?

I know you guys have a deep history with your initial beginnings.

That's right Juan, and I'll, you know, address that question in two parts.

First is our experience on the quick service restaurants has been outstanding.

Virtually every one that's rolled in the company's history has been released to the same tenant.

A couple of sales and I can't think off the top of my head of any examples where we've gone out and had to release a QSR to a new tenant.

So, the performance there has been very solid and we've been pleased with that.

On the casual dining sector, as you know it's an area that we're less pleased with, and over the years we've had a number of issues in that sector with Buffets and Friendly's.

And there, we've had more leases roll where the existing tenant did not renew or exercise their option, and often we'll release those to local non-chain-affiliated restaurant operators and take a bit of a discount on the rents relative to the expiring rents.

Great, thanks.

And I think you noted this earlier but I just missed it.

What percentage of the overall portfolio -- I know you mentioned it for the top 15 -- is investment grade?

Yes, 44% of the overall portfolio is investment grade.

Great, thanks John, I appreciate the time.

Hey, thanks Juan, appreciate it.

Thank you, our next question is from the line of Jonathan Pong with R.W. Baird, please go ahead.

Hey, good afternoon, guys.

You know, we've all heard about how the more traditional single-tenant retail net lease assets, like the Walgreens, McDonald's of the world, going for low 5, high 4 cap rates.

As you look forward, is your acquisition team adapting to that environment at all by maybe going after assets with more unconventional service tenants like childcare for instance, that would be technically considered retail but aren't currently a meaningful part of the portfolio?

No, I mean, we're still focusing on the retail, you know, tenants and industries that meet our investment parameters, and we have not changed those.

I mean, I think we're fortunate based on our deep relationships with the tenants that we're seeing transactions and investment opportunities that are not fully on market, but I'm not aware of where properties are trading that tight in those property types.

Got it and also, and then I guess as you think about the corporate sale-leaseback pipeline, historically it seems like that's almost been like a tube that seems to get refilled.

But with all the new competition looking for those kinds of assets these days, do you see that pipeline shrinking as we get deeper into the cycle?

Well you know, I think there is more competition but the opportunities continue to be plentiful and so, I don't really see the sale-leaseback opportunities declining but I would say that the overall competition is, it's probably greater today than it even was near 12 to 24 months ago.

Okay, and then maybe just a quick segue from that question -- the supply that retailers today are building out I guess you could say your future sale-leaseback pipeline, do you still think that growth is rational or are there some categories where you could see becoming another Family Dollar situation where they have to rein in that growth and close a few stores?

Well I mean, with going back to Family Dollar, they're actually going to increase their store count.

So, they're going to add more stores than they close.

But I meant just bringing down the rate of growth that they once expected.

Yes, yes.

Well, we monitor that very carefully and look at potential saturation issues, and we're certainly comfortable with the tenants and industries in our portfolio right now and we're not -- Jonathan, we're really not seeing any of that.

All right, thanks a lot, John.

Thanks.

Thank you.

Our next question is from the line of Vikram Malhotra with Morgan Stanley, please go ahead.

Hi guys, good afternoon.

Could you maybe just give us a breakdown of the 1.5% same-store rent growth, just how that kind of panned across maybe retail and the other segments?

On the investment-grade, is that what you're asking?

No, just the same-store rent, the 1.5% same-store rent growth.

Could you just kind of break that down between maybe retail and you know, office, industrial, etc.?

Yes, the majority of it came from the retail sector.

I don't have the exact percentage.

Paul, do you have that in front of you?

Yes, there were good, call it good surprises.

You're talking about the percentage rent?

Right?

Yes.

Yes.

Yes, so the percentage rent was quite robust.

Generally speaking about 50% of our percentage rent we get in the first quarter, about 30% we get in the fourth quarter, and then the remainder throughout the other parts of the year.

So, it always is going to be a swing factor on first quarter results and that's actually where you're seeing a robust revenue number this quarter, was from the percentage rent.

And we had what I would describe as very good -- I don't like to use the word surprise, but we knew it was going to be solid, but the percentage rent came in really nicely from a couple QSR tenants and just a couple other historic tenants where their results were better than we thought.

I wouldn't say there's a story to share with you as it relates to trying to nail down maybe where consumer spending habits are, or anything like that, so we don't really have a theme like that to convey.

Okay.

Sorry, I was -- but I mean that's useful Paul.

I was just kind of trying to get a sense, the 1.5% you know, was it like, 2% on the industrial and office side versus like 1.25% on retail.

I was just trying to get a breakup of that 1.5%.

The same-store rent growth that you reported for the 2,700 properties.

Yes, I mean, roughly speaking, on retail it was about 1.2%.

On industrial, just under 2%.

Manufacturing, which we don't have much of, 1%.

Office about 1.75%, and then agriculture again, about 1.3%.

Okay got it, got it.

And then, just the 7% yield on the acquisitions, is that -- assuming that's a cash yield, initial cash yield?

Yes, that's a cash yield.

Okay, and then so as you -- I mean, look at kind of future acquisitions, do you feel comfortable that you know, kind of the split you mentioned between relationships and non-relationships, that kind of split will remain kind of be in that range over the next few quarters?

And is that -- given all the competition on for deals, do you think the kind of the little bit of benefit that you get on a pricing standpoint from relationships will hold true as well?

Yes, I think so.

We've said we achieved up to a 20 to 25 basis points greater yield on relationship-driven transactions, and as we look at what we're working on in the pipeline and really just from judging from our business model over the last couple of years, we know that we're going to run somewhere in the neighborhood of 75%, 80%, 85% of our activity should be relationship-driven.

Okay, thanks, guys.

Okay, thank you.

Thank you, our next question is from the line of Todd Stender with Wells Fargo, please go ahead.

Hi, thanks.

What were the annual rent bumps on the investment-grade rated properties that you made in the quarter?

I know it's the overwhelming majority.

And then the remaining portion of that, either below investment-grade or non-rated, if you could kind of break out the rent bumps?

Yes, on the investment-grade for the quarter, we had lease growth of about just under 1.5%, and on the non-investment grade it was actually about the same, yeah, a bit more.

A bit more.

Was that on your portfolio?

Because where I was going with this is the acquisitions you made in the quarter.

That's on the acquisitions for the quarter.

Okay, thank you John.

And Sumit, you gave the spread over your cost of capital, I think it was in excess of 150 basis points.

Do you have the spread that was just over the cost of equity?

Yes, it was 35 basis points.

Okay, and how does that kind of look relative to your raise you made in October, and as well as March of last year?

I think our -- the equity that we raised in April was right around $40, and the way we've calculated our nominal cost of equity is on a volume-weighted average price for the quarter.

So, the price that we've assumed is $41 at the stock price, and then of course we've taken the way we've traditionally calculated our cost -- nominal cost of equity.

And Todd, today with where the price is, the cost of equity is about a 6.3% so it's about a 70 basis point spread.

Our ten-year debt costs are just a bit over 4%, so our blended WACC is right at about 5.2% today.

So, actually our spreads are a bit wider as we sit here today than where they were for the quarter, and the 160, 155 for the quarter is right around our historical average.

So, we're a little north of our historical average today.

So, we've been pleased with where our spreads had held up here, even though the market continues to be competitive and pricing tight.

That's helpful, thank you John.

And Paul, you've tapped the accordion feature for that extra $500 million.

Do you need it now?

You know, is there a finite period for you to keep that outstanding?

I mean, you just paid it down, you're lying down with the equity, just kind of seeing what you're -- how you feel about looking into mid-year to have that $1.5 billion outstanding?

Yes, we're going to leave that in place, if you will.

That $1.5 billion of liquidity if you will, runs until May of 2016 plus a one year extension option within our control so really May of 2017.

So, we feel real good about that.

Having that running room with that.

And you know, we see ourselves carrying some level of a balance on that facility.

Those of you like yourself, who've known us a long time, might not be familiar with that.

You saw us kind of pay down the line to zero pretty quickly at times, but that's when we have a smaller line, was part of that.

And so now you'll see us run a balance, where we are today, $285 million today and feel comfortable with that given the size of the Company, given that it really is our only piece of variable rate debt exposure in the balance sheet.

So, we feel good about the $1.5 billion, having that sort of capacity, and how long we have left on that maturity-wise, and like I mentioned, we'll have a little bit of a balance on it on a regular basis.

Great, thank you.

Thank you.

Our next question is from the line of Cedrik Lachance with Green Street Advisors, please go ahead.

Great, thank you.

You were talking about 75%-plus of your acquisitions this quarter with relationship tenants.

How much of that is a first generation sale-leaseback versus acquiring probably good existing leases with tenants you have a relationship with?

You know, about half, 50% was sale-leaseback directly with the tenant and the other half were existing leases that we acquired, primarily with tenants that we had established existing relationships with.

Okay, so when we think about the additional spread, you're talking about first generation sale-leaseback?

Well, it can be more than that.

When we define relationship, it's you know, we're directly in negotiation with the tenant, but we're the only buyer.

But it also includes where we're provided by the seller, a last look to look at the -- investing in the property based on our relationship or you know, we're able to secure the property at a lower price given our relationship with that tenant.

So, it's not exclusively sale-leaseback.

Okay.

In terms of the assets that were disposed, obviously it's a small amount, but it's -- it gets about $1 million per property.

What kind of assets were sold, and how many of those were vacant?

Well, the number of vacant properties of the 11 were 3, 8 were leased, and the types of assets these are, we said assets that no longer fit our investment strategies.

It was some casual dining, and some child care centers that we had owned for a while that were in neighborhoods where the demographics had changed, and really the neighborhoods were no longer going to support that use for the property and we elected to sell those.

So, it's generally in one of those segments that are very much out of favor with us.

Okay, and just a final question in regards to leasing.

So, when I look at the occupancy gains this quarter, it appears to me that I think a lot of that would come from acquisitions, given that you buy 100% leased properties.

It seems the vast majority of the occupancy gains are actually due to buying 100% assets.

How many properties that came due for renewal were renewed this quarter, and how many of the vacant properties that you had at December 31 have been re-leased and are currently occupied?

Okay.

Well, so far we've had 40, I think it was 45 this year that we've rolled and renewed either to the existing tenant -- 90% of those went to the existing tenant, with the remainder going to new tenants.

So, and then, you're right with regard to the occupancy.

You know, we had 70 properties vacant a year ago.

I'm sorry, a quarter ago, and then we had 73 vacant at this quarter end.

So, occupancy really would have been flat rather than ticking up by 0.1%, acquisitions drove that.

But on a year-over-year basis, it would still have grown just a bit because we have 73 properties vacant at the end of the quarter versus I think it was 81 at the end of last -- at the end of the quarter in 2013.

Okay, so how would you describe the environment in terms of being able to lease the currently vacant properties, where are you at in negotiations, what are the odds that you can lease them versus deciding to sell them?

Well, the portfolio is performing well and the tenants are doing well.

That environment is leading to more re-leasing on these vacant assets than sales.

So, and at pretty attractive terms, too.

The majority, the vast majority of these vacant assets, are being re-leased rather than sold right now.

Okay, thank you.

Thank you.

Thank you, our next question is from the line of Rich Moore with RBC Capital Markets.

Please go ahead.

Hi guys, good afternoon.

Just to expand for a second on Cedrik's question, you have 119 leases expiring for the rest of the year, and I'm curious.

Are you saying that probably 90% of those will renew?

Is that the idea?

Is that sort of the renewal rate as we think about the years going forward including this year?

This year we're expecting about 90% of those to renew.

Probably 5% will be leased to new tenants and 5% sold.

Over the longer history of the Company, you know, if you go back to since the mid-90s, that number has been 70% of the rolls would go to the existing tenant, 20% to new tenants and 10% would be sold and reinvested in new properties.

We've gotten a bit better at that over the last ten years and certainly a bit of a stronger economic environment today is leading to even better numbers, so that's where the 90%,5% and 5% are coming from, Rich.

Okay, good John, thank you.

That's helpful.

Then, just in general, I mean, how are you viewing the whole -- I mean, you know, we've watched the mall guys for example, report, and they've all seen increases in bad debt, they all talked more about bankruptcies ticking up, and I'm curious.

Do you guys see more store closings, more bankruptcies, and then what is your bad debt situation or your aging on your accounts receivable?

I mean, are you seeing any changes I guess with regard to tenants on any of that?

Right now, the tenants are in good shape and you know, even the ones that -- the casual dining tenants that we've had that have gone through a couple of bankruptcies are performing well.

So, our watch list has gone from probably 23% four years ago, to just over 5% today, and that watch list is that black category that we are looking at those tenants very closely and monitoring their operations because they've been under some level of stress.

In fact, a couple of these casual dining concepts and one of the QSRs that we've been concerned about from a credit perspective, contributed to our percentage rents this quarter and are performing well.

So, you know, knock on wood here, Rich, the portfolio's in good shape.

Okay, so no pickup in bad debt for you guys, or --

Let me have Paul address the bad debt.

Yes, and I'll give you a few numbers, Rich, that might be instructive.

In 2009, bad debt expense is $1.9 million.

In 2010, $1.2 million; 2011, $650,000; 2012, $500,000; last year, $250,000.

Okay?

And the first quarter of this year so far it's been $59,000.

So, obviously there's no issue there that's popped up in those numbers, and that'll be -- figure that on an annualized basis that would imply what, about $240,000 or the lowest bad debt expense year we've had in about 10 years.

So, from that standpoint I think we've done a nice job pruning the portfolio of a lot of these tenants that have given us these kinds of issues in the past.

So, while we're not in an outstanding economic environment by any stretch of the imagination, over the last 5 years we've seen it slowly improve, and we're pleased with the progress there.

Very good.

That's impressive, you guys always come prepared.

I like that, it's great.

And then the last thing for me is, the disposition strategy.

I'm not sure I quite understand it.

You guys are so big, [4,000]-plus properties, and you sell a dozen.

It almost seems like it's not worth the effort to even bother with dispositions if it's so tiny.

I mean, how do you view the whole thing?

Is it just if someone approaches you and is looking at a property, that kind of thing?

Is that what's happening?

No, we have an asset management group that looks at assets where we think we're better off selling those, and we're also looking at the rolls and the vacant properties and considering selling some of those.

So, it's a proactive and not a reactive approach, and it's one that we've only put into place in the last couple of years.

So, we've grown it.

Last year, we sold $134 million in dispositions and again, they're properties that really don't meet the investment parameters today, or perhaps they're a property that may meet the investment parameter today but longer term we think it could be turned into an issue for some reason.

Maybe the market's declining, or maybe we have some exposure on our rents or something like that.

So, it will continue to be more material than it has in the past.

You know, this year we're saying $75 million now, but it's a worthwhile exercise.

And fortunately, we don't have a billion dollar slug of assets that we need to sell.

I think we've done a pretty effective job of underwriting and managing the portfolio, so this was about a level that we're comfortable with.

And I think we'll continue to see it around the $75 million to $100 million up to maybe $150 million in some years.

But I don't think it's going to be significantly larger than that.

I mean remember, a lot of our growth has come over the last five years, and I think we've underwritten those opportunities well and they're not going to be really considered for this type of activity, for the most part.

Okay great, thank you guys.

Thank you, this concludes the question-and-answer portion of Realty Income's conference call.

I will now turn the call over to John Case for closing remarks.

Thanks Lorenzo, and thank you for everyone, thanks everyone for joining us today.

We really appreciate your time, we look forward to seeing you at the conferences coming up, and have a good evening or afternoon wherever you are.

Take care.

Ladies and gentlemen, this does conclude Realty Income's First Quarter 2014 Earnings Conference Call.

We'd like to thank you for your participation.

You may now disconnect.