Spirit Realty Capital Inc (SRC) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to the Spirit Finance Corporation Fourth Quarter Earnings Release Conference Call. [OPERATOR INSTRUCTIONS]. We would like to make an announcement that we realize that there is a problem with the Webcast at this time and we are working to repair it hopefully as quickly as possible. It is now my pleasure to turn the call over to your host, Miss Cathy Long, Chief Financial Officer. Please go ahead Cathy.

Thank you. Good afternoon. Thank you for joining us on our fourth quarter and 2005 year end conference call. I'm Cathy Long Chief Financial Officer of Spirit Finance Corporation. With me on today's conference call from Spirit is Mort Fleischer, our Chairman and Chris Volk our President and Chief Executive Officer. Before we begin, I need to remind everyone that part of our discussion this afternoon will include forward-looking statements. They are not guarantees of future performance and therefore undo reliance should not be placed on them. We refer all of you to our filings with the Securities and Exchange Commission for a more detailed discussion of the risks that may have a direct bearing on our operating results, performance and financial condition. And with that, I will pass the call to Mort.

Thanks Cathy, and thanks to everyone for joining us today on our conference call to discuss our year-end and fourth quarter results. The format for today's call will be as follows. I will provide some introductory comments, then Cathy will review our financial performance for the year and quarter, as well as provide initial guidance for 2006. Chris will then discuss operations and make some additional remarks. Following our prepared remarks, we will be happy to address any questions you will have.

I'll let Cathy and Chris comment on the specifics of the year and quarter; but I wanted to start off by saying that we're excited about our progress and the momentum we have built for the future. At the end of 2004 we went public and for 2005 we set a very aggressive goal of investing at least $800 million. Spirit continues to have strong legs and we are pleased to report that we invested $877 million in 2005 and have invested more than $1.5 billion since our inception. Our investment activity has resulted in 94% growth in FFO per share for 2005 over 2004, when we also increased our quarterly dividend by 10.5%.

It is important to understand that Chris Volk and I started this company with a long-term vision to build shareholder value as we assist our customers with more efficient real estate capitalization strategies. We formed Spirit Finance to lower our customers' cost to capital by improving how they finance their operationally essential real estate assets. We continue to emphasize that we believe capitalization efficiency is the next significant frontier with the creation of incremental shareholder wealth for our customers and our shareholders.

Since the majority of Spirit's FFO growth is external, when long-term interest rates rise we are able to benefit as spread investors since we'll be able to write new leases at higher rates and lock in the spreads with our fixed rate debt strategy. With that, let me turn the call to Cathy.

Thank you Mort. I'll start by providing a review of the results of our fourth quarter activity and touch on some highlights for 2005. Then I'll provide an update on our real estate portfolio and provide our initial guidance for 2006. During the fourth quarter of 2005 we continued to reap the benefits of the growth in our real estate portfolio over the prior quarters. Fourth quarter FFO per share improved 40% year-over-year to $0.21 per diluted share, while AFFO rose to $0.20 per diluted share. Net income was $6.9 million or $0.10 per diluted share on revenues of $29.3 million, including revenues classified as discontinued operations, which I'll discuss a bit later. In the fourth quarter we completed over $241 million in real estate acquisitions. This includes adding 16 new customers to our portfolio and diversifying into several business sectors, such as health clubs and gyms, convenience stores and car washes, super markets and educational facilities.

For the full year of 2005 Spirit Finance reported FFO of $47.4 million or $0.70 per diluted share, an increase of 94% over 2004, while AFFO increased to $0.69 per diluted share. Net income per share rose 71% over 2004 to $0.41 per diluted share and included income from discontinued operations of $1.9 million.

The difference between GAAP earnings and FFO for 2005 consisted of depreciation and amortization of $20.3 million and an $800,000 gain on the sale of properties. It's important to note that our FFO continues to track closely with our adjusted FFO with the difference represented only by $0.01 per share of straight-line rent revenues. As we've mentioned on prior calls, much of our portfolio rental increases are contingent on changes in the Consumer Price Index and are reported as revenue only when the actual CPI increase is known. That means that our current revenue is much closer to actual cash rents received than if we had a significant component of our rent revenue represented by straight-line rents. We expect our CPI rent escalators on our existing portfolio to translate into revenue increases in the future.

The weighted average current cash-on-cash yield on our portfolio is approximately 8.5%, which excludes any future CPI rent escalators and also excludes percentage rents, which are based on a percentage of the lessee's gross sales. On average, our leases have annual expected rent escalations of about 1.5%.

Turning to our balance sheet, at December 31st, 2005 we had $1.5 billion in total assets, including over $1.4 billion in gross real estate investments, $59 million in mortgage and equipment loans receivable, and $30 million in cash and cash equivalents. In addition to using the proceeds of our December 2004 IPO to acquire property, we've added leverage during 2005. By the end of 2005 we had $895 million in debt, including $665 million in long-term fixed rate mortgages and notes payable, and $230 million outstanding on our variable rate secured credit facilities. At December 31, 2005 nearly two-thirds of our investment portfolio was match funded with fixed rate long-term debt.

As of year-end 2005 our portfolio consisted of 684 owned or financed properties geographically dispersed across 40 states with our top three states being Texas, Arizona, and Florida. At year-end industry diversification included restaurants at 30%, movie theaters at 13%, and educational facilities at 10% with a dozen other sectors each representing less than 10% of exposure. At the end of 2005 we had just one tenant having more than 5% exposure, that being Carmike Cinemas at 5.7% with all others being below 5%.

Our top 10 clients represented 36 % of our total investments down from55 % a year earlier. Our properties are generally leased on a long-term triple net basis so Spirit is not usually required to make any capital expenditures on the portfolio. The weighted average maturity of the non-cancelable portion of our leases is 14 years, providing us with stable long-term cash flows. Less than 3% of our lease portfolio will expire in the next five years.

We sold 43 properties during 2005 with a gross investment value of $57 million for a net gain of nearly $800,000. These properties were generally acquired as part of real estate portfolios, where certain of the properties do not meet our long-term strategic investment objectives. Current accounting principles require that we report the operating results of our sold properties, including the gains or losses on dispositions as discontinued operations. This classification has no impact on reported cash flow, net income, FFO or with the reinvestment of the proceeds or expectations of future revenues. As we had anticipated during the initial years of our operations, our pay out ratio exceeded 100%. During 2006 we expect that our dividend pay out ratio will fall below 90% of funds from operations as we continue to grow our FFO.

Turning to credit, we continue to adhere to our diligent underwriting standards and portfolio monitoring process. This strategy has continued to result in a strong real estate portfolio. To date, all of our properties are occupied and are current in their monthly lease and loan payments. Our real estate portfolio is leased or financed to 106 properties -- 106 companies, excuse me, and as I mentioned, no single credit exposure is greater than 5.7% of our total investment.

In February 2006 we completed a public offering of 13.8 million shares, which raised aggregate proceeds of $154 million net of underwriters' discounts and before operating expenses. We put these funds to work right away by paying down $110 million of borrowings outstanding on one of our secured credit facilities and investing the balance in new properties.

Now I'll turn to our earnings guidance. As we've discussed previously, it is not our policy to provide quarterly earnings guidance. During 2006 the company expects to close at least $800 million of acquisitions, which should result in FFO per diluted share for 2006 to range from $0.93 to $0.98 depending heavily on the timing of acquisitions during the year. The volume of completed real estate transactions varies significantly from quarter to quarter with most of the transactions occurring at, or near, the end of the quarter, and therefore each quarter's closings may have little impact on that quarter's FFO and revenue.

We generally expect the first quarter to be the smallest in terms of acquisition activity followed by the third quarter. The second and fourth quarter would usually be the largest. Another way to think about timing and volume is that in 2005, although we completed $877 million in acquisitions, only a weighted average additional investment of about $300 million contributed to FFO that year. Additionally, FFO is impacted by the persistently flat yield curve, which impacts the spreads on properties positioned on our short-term credit lines. Here spreads have fallen costing us as much as 200 basis points on these short-term borrowings.

We anticipate that such spreads can be recovered to traditional ranges when, and if, the yield curve reverts to more historic steep patterns. To offset the impact of the flat yield curve, we may pursue opportunities to strategically acquire properties to be sold for gains through our taxable REIT subsidiary. At this point in time, we do not expect gains from such sales to contribute more than $0.03 to $0.05 per share to FFO in 2006. I'll now turn the call over to Chris to discuss operations and some of our fourth quarter transactions.

Thank you Cathy. We're pleased to have announced completing over $1.5 billion in sale lease back transactions and mortgage loans since we began investing in real estate assets in December of 2003. Our investment pace during the final three quarters of the year exceeded $200 million per quarter, with $241 million closed in the fourth quarter alone.

Our mission at Spirit Finance is well underway and the momentum is building. By applying our market knowledge and core competency we're helping leverage real estate assets better and more efficiently than our customers with a pre-tax cost of equity that is about half of theirs. This is where mutual value creation lies with our objective to apply this value equation across our retail service and distribution customers who transcend the credit spectrum. During 2005 Spirit continued to diversify our portfolio across many industries, property types and tenants. In the fourth quarter we invested in 87 assets that were leased to 25 tenants, and of those tenants 16 were new to Spirit. The investments were diversified and consistent with our existing portfolio, had average lease terms of about 15 years and average going in lease rates of -- approximating 8.5 %. The average investment size was $11 million with no investment greater than $50 million.

Our internal relationship management staff originated approximately two-thirds of the transactions with the remaining 2005 transactions coming through brokerage relationships. In 2005 in addition to Jeff Fleischer and the rest of the senior management team our sale team continued to expand with relationship managers who are dedicated to serving specific industry tenant groups. As we carry our momentum forward in 2006 we expect to reap some of the benefits of our investment in our marketing team.

Let me now update you on our pipeline. Right now we're evaluating approximately 90 investment opportunities with an average investment size of about $25 million. The weighted average Year One yield approximately is 8.5 %, which is right on top of our historic yields. Here it is important to note that when we discuss our lease yields, or expected pipeline yields, these are current cash-on-cash yields. We seek to structure leases that avoid the need to straight line rents.

And let me give you an example how the inclusion of straight line rents would inflate the way a yield is reported. For an average 15-year lease, at an 8.5% of current cash yield, a straight line yield assuming 1.5% annual lease escalations would raise the lease rate by about 100 basis points to 9.5%. I illustrate this because some since straight lines or non-cash rents are not excluded from funds from operations; it is often the convention to report leases accordingly. Since we pay a lot of attention to cash performance at Spirit, we report our current cash-on-cash lease yields or expected pipeline lease yields without regard to the straight line convention.

Spirit has sustained target investment opportunities of 2 billion or more since 2004. At the same time, we have converted just over 10% of potential investments to actual closed investments. This means that the market for what we do is extremely large and our view is growing. This also means there is short term volatility arising from the pace of acquisitions. During the first quarter of this year, we anticipate investments approximating $150 million, which is a substantial increase over the $38 million for the first quarter last year.

Like 2005, we anticipate a minimum net investment activity of at least $800 million. This implies a 50% increase in the size of our balance sheet at a minimum, which brings me to another point. That is that Spirit's results in 2006, like last year, will be highly sensitive to investment timing. That said, we here are much more focused on long term results than short term results and volatility.

During 2006, we're proceeding with initiatives to potentially accelerate our growth. Our short term objective is to sustain or exceed our 2005 investment pace. But our long term goal is to have a much more meaningful size and scale in order to take advantage of one of the largest markets in the country for investment real estate.

We believe we have a terrific platform. We have broken new ground within real estate investment trust with our liability strategy; we have a sales organization with momentum. We have harnessed the latest technology to run Spirit efficiently and have a highly scalable platform. The long term objective is to turn this unique REIT platform to address the increasing needs of corporate America for capital efficiency on a larger scale.

Some of our advantages are endemic to REITs, and some result from our unique structure. Going forward, we plan to use our REIT status to our shareholder and customer advantage by writing long term leases that permit maximum client flexibility. We also plan to use our platform where possible to lessen tax leakage from corporate asset sales. Last year, for example, we successfully completed one such transaction by acquiring the stock of the company and spinning out the operations. We believe that this technology and variations of this technology stand to be more meaningful in the future.

As part of our growth acceleration initiative, we may engage in larger transactions where we can add value to our customers. In the near term such transactions might cause us to lose investment diversity. However, we anticipate growing integrated diversity as we seek to have greater size and scale. We have never included such investment opportunities in our stated pipeline, but we believe that the market for such investment opportunities will likely become more vibrant in 2006.

Whether through management guidance or through activist shareholder suggestion, asset intensive companies are seeking means to reduce their capital costs. Capital efficiency, which is the third means of shareholder value creation behind asset and operating efficiencies, has come into greater focus for business leaders since the formation of Spirit Finance. We believe that the impetus in the marketplace for efficient capital strategies is just beginning. From the privatization of public companies to alter public and private corporate capital structures, we seek to represent an important treasury tool for corporate America and to add measurably to our mutual shareholder value.

Let me add a little color on 2006. First, it's important to reiterate that our stated investment objectives for 2006 do not include any transactions of significant size. Second, based on our historical patterns, most transactions will close at the end of a quarter and truly will not start contributing to our FFO until the following quarter. Finally, in terms of funding sources, about 75% of the transactions will likely be targeted for funding with our own unique master funding conduit, as opposed to CNBS funding, which provides us with an efficient cost of execution, coupled with greater flexibility for ourselves and for our customers.

In terms of liquidity to affect our investment strategy, we currently have available short-term credit facilities that, combined with our recent January equity issuance, effectively gives Spirit up to $450 million in minimum investment capacity. Spirit continues to hedge our warehouse investments in order to lock into attractive long term equity spreads. And at the end of the year, Spirit was highly matched funded with long term liabilities and assets funded on lines with hedges in place.

Before beginning the question-and-answer session, I want to highlight a few points that Mort and I feel are important. First, Spirit is a relatively new company, with a seasoned team of managers that has put into place a uniquely efficient REIT platform. In just over two years of operations, we have invested over $1.5 billion in quality net leased real estate assets. With our platform in place and marketing efforts progressing, we're carrying momentum into 2006.

Second, the quality of our funds from operations is strong and recurring. During 2006, we expect that our dividing payout ratio will fall below 90% of funds from operations as we continue to grow our FFO.

Third, while we are a new company, our growth in FFO per share is still significant. In 2005, we attained 94% growth in FFO per share, with FFO per share expected to be in the neighborhood of 35% growth in 2006. This growth is absent any initiatives I have mentioned to potentially accelerate our growth through larger investment transactions.

Fourth, the market for our services is extremely large. We believe that the next great wave of real estate to enter the REIT marketplace will come from the balance sheet of corporate America, and we have positioned Spirit as a uniquely qualified player to assume a leadership position having size and scale.

And finally, management is strongly aligned with our shareholders, and we will continue to pursue the use of efficient capital to create more meaningful opportunities for the company.

With that said, operator, I'd like to turn the call to questions-and-answers. Are there any questions?

[OPERATOR INSTRUCTIONS] We'll take our first question today from Ross Nussbaum with Banc of America.

The first question is, can you comment a little bit, you mentioned what is in the pipeline potentially on the acquisition front. Can you comment a little more on timing in that when we look back at 2005, the first quarter was your slowest of the year, and then it really picked up from there. Is that something we can expect this year as well, or will it be a little evenly split?

Ross, this is Chris. And our expectation is that certainly we'll do a minimum of $800 million for the year. Typically, our guidance, historically, has been that the first and third quarters tend to be the slowest. Last year that was not fully the case because we had a very strong third quarter, even though the quarter was slow.

This year, of course, we carried some more momentum into the first quarter, just following having a good pipeline last year. The pipeline, if we closed about $150 million in the first quarter, that's significantly ahead of where we were last year. Since you're probably going to ask anyway, I would say we've closed about $90 million as of today of that 150 or so. And we expect that the second quarter will be typically larger than the first quarter, the third quarter will be slower and the fourth quarter would be the largest still. But that is subject to some volatility, as you can see from last year, where the third quarter was the largest.

Okay. And then with respect to tenant concentrations, obviously the restaurants have crept up. Where are you comfortable seeing that exposure to the restaurants? Will it come down over time, or is that a level you think is going to be maintained?

Well, restaurants are something that we are familiar with, so I would say that -- and the last company we ran we had almost nothing but restaurants for the longest time. That said, the restaurant concentration has actually gone down. We started off at -- I think we were at 35%. We're at 30% now. So it's been creeping actually down. And I think that going forward, if you look at our pipeline, I would expect that we'll be diversifying away from the restaurant sector.

Okay. And then last question. If I look at the break out right now between free standing retail properties and then other, whether it's office or the skewers that you have in there, how does that percentage break down right now?

Our next question today comes from Jessica Tully with Credit Suisse.

Ma'am, I hadn't quite answered Ross' question.

I'm so sorry. We'll get Ross' line back over. Ms. Tully, will you wait for just one moment.

Certainly.

That's okay. Ross, what I'm going to have to do is get back to you on this because I don't have a breakdown of what's a distribution facility, versus what's free standing retail. I would say that most everything we have -- the majority of stuff we have is going to be either free standing retail or service. And service would include things like movie theaters, for example, which would not be a restaurant. And very little of it is going to be in distribution facilities.

Okay. I'll follow up with you. Thank you.

All right, Ms. Tully, please ahead with your question.

Good afternoon. I just wondered if you could talk a little about the gym business and what factors you use to tell if it's a good credit. Because I know there are a lot of good gyms and then there are some that aren't so good. And I just was wondering how you make decisions like that.

Jessica, this is Chris. We've done one gym facility to date. It's a facility that's in Oregon, and it's in a marketplace where the operator's been for a very long time and they have substantial market share. We tend to look at the strong market positioning of people within our marketplace, and we look as we deal with many of the assets or most of the assets, we spend a tremendous amount of time focusing on store level fixed charge coverage ratios and free cash flow.

And in this case, the operators had performed extremely well over a sustained period of time. In fact, membership has climbed almost year to year as long back as I can remember. So the one transaction we've done in this sector we're very pleased with. We have not done every transaction we've faced with in this sector, because there are certain credits that are problem credits. And if you look at our pipeline, when you're converting only 10% of the investments that you're looking at, that means you're turning down a heck of a lot of investments. And so that cuts across a lot of sectors including healthcare or health clubs.

Great. And then I had a quick question for Cathy. In terms of above market or below market leases because obviously in a GAAP statement you have to account for those, and I think on your balance sheet you had - I think it's 21 million of lease and tangibles. Do you have additions to revenues or deductions of this non-cash item and is it material?

No. Most of the lease and tangibles that we have are related to in-place leases -- the value of the in-place lease and so that gets basically depreciated out through depreciation expense.

Okay. Thanks very much.

[OPERATOR INSTRUCTIONS] We'll take our next question from Michael Billerman with Citigroup.

Hi. This is actually David Carlisle with Michael and John Litt. The question I had for you was just following up in regards to the $0.03 to $0.05 gains that you expected in your 2006 guidance. About how much of properties do you anticipate that would represent in sales to generate that amount of gains?

This is Chris Volk and in terms of number of properties I can't say exactly the number of properties. In terms of the percent gain, it's going in the neighborhood of 10 to 12% would be the expectation and our objective here is to use this as a tool to basically offset and mitigate any loss interest spread from a flat yield curve. So the idea is to try to make it so that Spirit doesn't have any non-recurring cash flow, that we're basically smoothing it out and since we lost some income it just made a lot of sense and clearly we can sell off assets without impairing our target for net acquisitions.

So when we talk about $800 million we're talking about $800 million in net acquisitions not in gross acquisitions. I wanted to say also -- I wanted to clarify if you can bear with me David

Sure.

-- Jessica Tully asked about - she asked about intangibles - lease intangibles and for those of you who don't know what a lease and tangible is, a lease intangible is what I would refer to as SEC GAAPS, Securities and Exchange Accounting and Commission GAAP which is the requirement of the SEC to use acquisition accounting to include a form of intangible on balance sheets if you acquire a property which is subject to an existing lease agreement. And so we and other people who do this have developed a methodology for estimating how much of that should be capitalized as an intangible. But keep in mind that the appraised values of the properties that we're acquiring still equal or exceed the total amount that we're paying. So we're booking an intangible even though the tangible asset has a tangible appraised value equal to or greater than what we're buying so in that sense it's not really an intangible.

Right. Basically, you're taking the purchase price of your property and allocating it between the tangible land building and the intangible in-place lease. To the extent we do a direct origination where we originate a sale lease back transaction we don't have to worry about this allocation. It's only if we acquire a property that has an existing lease on it.

Getting back to these gains, Chris, is this stuff that you already have held for sale or that you had put into your TRS or is it stuff that you're going to buy and then flip?

It's principally stuff that we're going to buy and flip, so it's not in our TRS today and it's not shown in our balance sheet as held for sale.

And then for the 800 would include let's call it about 50 million or so that you intend to put into your TRS and then flip for the $0.05 gain?

The 800 does not include -- the 800's a net number so that it would make it like 850.

So anything about that you're going to use?

Now is this like a [culling] process where you're trying to get rid of sort of the bottom end of your portfolio, or is really just the way to make up for the lost revenues due to the interest spread?

This is just being purely opportunistic.

So when you reinvest and going to be reinvesting at higher caps than what you're selling it?

We'll be reinvesting at roughly the same cap that we're selling at except for the fact that - well let's put it this way. If we originated 850 and anybody can look at the Internet today and look at net lease so you can go on nnn.com or a host of other websites and you'll see that properties like these sell very often in the 7s. So they're almost -- and sometimes the 6s -- so they're worth almost more in the private markets than they are in the public markets. So there is an arbitrage there which you can take advantage of and we will do that periodically. We will consider of course among other things portfolio diversity issues and whatnot in making decisions which properties would be appropriate for this, but the idea for this is that -- to make up for lost interest rate margin, that's all.

But I mean you're generating capital gains which are - which you have to distribute which increase the amount you pay in dividends to the extent you don't 1031 it in order to make earnings. And even if you defer the gain you're increasing the basis on the assets when they're eventually sold creating a greater tax issue down the road. So it seems to me like instead of churning just to make earnings wouldn't it be better just to take the earnings down because you're losing a little on spreads of interest rates and not churn the assets?

Is this John asking the question?

Yes.

All right John. John, I mean, our thought on this was simply that we felt like we almost had a fiduciary obligation if we knew that we could make the money and we wanted to offset some lost spreads which typically has been there our entire business careers. And today if you look at the 10-year three month treasury's 459 - the 10-year treasury's 459 so our process was that we could make this up. We knew we could make it up pretty easily by doing this and so we said why not. I mean it's -- from the standpoint of benefiting our shareholders it's not difficult to do and at the same time it's going to be easily replaced by spreads later on when it gets to normal level. Compared with some many real estate investment trusts that are out there that have so many one-time gains this is just such a small amount of what we're going to do next year that it's to me an insignificant issue.

And the $0.03 to $0.05 is embedded in you 93 to 98 and so excluding - your 90 to 93?

Up to that many cents is included. That's correct.

Okay. And then maybe you can step back and talk a little bit about these larger type or elephant type transactions. Is there stuff that you're working on today - I know it's not included in your guidance but can you just give us a little bit more of a flavor of what's happening?

David, this is Mort. I'm going to comment on that in my closing remarks.

I'm sorry it was Michael. We're three people on the phone. Apologies

David, this is Mort, I'm going to comment -

It's Michael.

-- oh Michael. I'm going to comment on that in my closing remarks.

Well then we can't appropriately follow-up with questions. But I guess we'll wait until your closing remarks.

[OPERATOR INSTRUCTIONS] We have a question today from Paula Poskins with Robert W. Baird.

Thank you. Could you just characterize what you current sector breakdown looks like versus what you're ideal would be? Or said differently, what sectors would you like to be in that you're not currently in?

This is Chris. I would say that Spirit views that single tenant operationally essential real estate is essentially a sector so it is the asset class. So restaurants are not an asset class. Car dealerships are not an asset class. And that said we're here to be opportunistic with respect to the sectors we have. We have sales people who are sector centric in terms of the people they call on - on the industries we call on. There are industries that they are calling on that are currently not represented here, and -- one such sector being bank branches for example. But outside of that we don't have an ideal mix and are targeting high levels of diversification, ultimately -- and I'm talking about several years from now just because we're going to have huge size and scale and be across a lot of industries. So that's really the story behind Spirit Finance.

Thank you.

Sure.

And We'll go next to Chris Lucas with Robert W. Baird.

Good afternoon everyone.

Good afternoon.

Catherine, just a couple of quick follow-ups on the guidance questions. Do you have a run rate that we can utilize for G&A going forward?

Well, we had talked last year about our target of getting our G&A to be under 1% of our assets under management and we are there now so that's where we would expect to continue.

Okay. And then in terms of just G&A for the sort of -- sequentially in the quarter was up almost 20%. Anything that you can comment on that would give us a little help in terms of where the expenses are going?

Yes. One thing to think about is approximately 25% of our expense - our G&A expense - is variable directly linked to the size of the portfolio. For example, this cost of servicing. As we had mentioned on prior calls we outsourced some of the clerical parts of our servicing operation and those costs were to be increased directly in proportion to increased portfolio size. So things like liability insurance on the properties might be another thing that directly linked to the property. So if you think about it that way about a fourth of the costs will increase as the portfolio goes up.

Okay. And then one final question. In terms of the '06 guidance, is there a share count that you can give us or some thought process on an equity raise in those numbers or not?

Well, right now if you look at what kind of dry powder we have, for example, the equity that we raised in February plus our cash on hand and bank lines available would get us somewhere in the neighborhood of 450 or 500 million more of acquisitions. So with our target of doing at least 800 million we would need to tap equity again during the year. Again, depending on the timing of the acquisitions.

Okay, thank you.

You bet.

And we have a question from Ralph Lock with Focus Financial Corp.

Hey, good afternoon guys.

Hello.

You mentioned that you had about 895 million of debt of which about 665 million was long term fixed and the rest was variable under your credit line. Is that roughly the kind of proportions that we ought to expect going forward and how do you sort of think about getting the ratios on kind of a longer term basis?

Yes. I think that our debt capacity under our lines is $500 million. We don't intend to keep it at that rate for a very long period of time, but depending on whether or not any of these elephant-type transactions come along we may lever up that high temporarily on our short term lines. But generally with the master trust transaction that we did last July that created a vehicle for us to use to be able to offload the debt from our lines into this vehicle more often than we otherwise could if we were doing separate discrete deals. So I would envision that we would be using that master trust vehicle one or two times a year offloading our volume.

So based on that, it sounds like the percentage of fixed would tend to rise gently over time as you get larger.

That's true.

That's exactly right -- and this is Chris. I mean, the outstanding lines were 260 at the end

230 --

- 230 at the end of year. Keep in mind that all 230 of that was hedged to launch an execution which is very important so we're not in the business of taking floating rate risk any way on that and it's hedge pending execution in terms of the financing market which is principally master funding type marketplace. So if you take the 230 and you add that to the 440 or so which was master funding and you assume all that sort of long term liability then that gives you sort of a 75/25 mix of master funding to CMBS.

Okay. And just one more question. Have you seen any significant changes in the competitive landscape for the kind of deals you're trying to do over, say, the last couple of quarters?

Our view is it's been stable and you can see that in the kind of cap rates that have been represented in our pipeline and in our portfolio of acquisitions which have also been fairly stable for the last three quarters or so.

Okay, thanks.

Any time.

And ladies and gentlemen this does conclude our question-and-answer session. At this time, I'll turn the call back to Mr. Fleischer for closing remarks.

I'm just going to make a few brief comments on strategy and address Michael's question about elephants. When we started the company we thought it was important to get our base flow of business in place and to get our sales force in place and I can tell you that we're proud that - it's never finished but it's in place and our, what I like to call our bread-and-butter business, is coming through with some regularity as you can see in the last few quarters of last year. Currently, the majority of our real estate investment transactions are sourced through the efforts of our internal sales staff. Transactions are also sourced from time to time through brokers and referrals from other industry participants.

Some of the methods that we are thinking about and we think could be very exciting in the future are private equity funds where we buy all the real state from them that they might acquire and help them drive return on equity. Some of the more -- another very exciting thought process that we've been looking at is tax-free spins, we think that's got a lot of opportunity. Joint ventures is another area that we've thought about. And lastly but certainly not least, we've thought about and had some discussions with up-REIT and down-REIT transactions.

If you ask us are any of these pending or can we talk about these, I'm going to save you the trouble, the answer is no. We would love to talk about it but we will when it's the appropriate time. We believe that we can use a REIT for imaginative ways that haven't been done, and we're working on it.

And so with that I'd like to close my comments and thank all of you for joining us today. And if there are any additional questions we'd be happy to take them.

And this does conclude our conference call for today. We do appreciate your participation. You may now disconnect at this time.