Realty Income Corporation Q2 2009 Earnings Call Transcript

Jul.31.09 | About: Realty Income (O)

Realty Income Corporation (NYSE:O)

Q2 2009 Earnings Call

July 30, 2009 4:30 pm ET

Executives

Tom Lewis - CEO

Gary Malino - President and COO

Paul Meurer - EVP and CFO

Tere Miller - VP, Corporate Communications

Analysts

Jeff Donnelly - Wells Fargo

Greg Schweitzer - Citigroup

Rich Moore - RBC Capital Markets

Andrew DiZio - Janney Montgomery Scott

Operator

Welcome to the Realty Income's Second Quarter 2009 Earnings Call. (Operator instructions).

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

Tom Lewis

The purpose, obviously, of this call is to go over our operations and results for the second quarter of 2009. With me in the room today is Gary Malino, our President and Chief Operating Officer; Paul Meurer, our Executive Vice President and Chief Financial Officer; and Tere Miller, our Vice President, Corporate Communications.

As always, during this conference call, we will be making 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 deal on the company's quarterly and Form 10-Q the factors that may cause such differences.

With that out of the way, we'll start the way we normally do, with Paul reviewing the numbers in the quarter. Paul?

Paul Meurer

As usual, I'm going to comment on the financial statements briefly, provide a few highlights of our financial results for the quarter, starting with the income statement.

Total revenue decreased slightly for the quarter from $82 million to $81.6 million. Rental revenue was slightly down for the comparative quarter, because we actually sold 30 properties over the past year and we have not acquired any new additional properties.

We owned 2,367 properties at June 30 of last year, while we own only 2,338 properties now. Same-store rental revenue actually increased 0.5% for the quarterly period, and excluding Buffets, same-store rent growth was even healthier at 1.5% for the quarter.

On the expense side, depreciation and amortization expense increased by $209,000 in the comparative quarterly period. Interest expense decreased for the quarter to $21.4 million, and of course, this reduction reflects the retirement of $120 million of our bonds over the past year.

We had zero borrowings on our credit facility throughout the entire quarter, in fact, year-to-date. On a related note, our coverage ratios remained strong, with interest coverage at 3.5 times and fixed charge coverage at 2.7 times.

General and administrative expenses in the second quarter decreased significantly by over $900,000. This is primarily due to lower overall compensation. We expect G&A expenses in 2009 to remain flat or lower as compared to 2008 at only about 6.5% of total revenues.

Property expenses were about $1.9 million in the quarter. These expenses are primarily associated with the taxes, maintenance, and insurance expenses, which we become responsible for on properties that are available for lease. These expenses have increased somewhat. In addition, we did record additional bad debt expense in the second quarter of $585,000, although we do not expect bad debt expense to be as high in future quarters. Our current estimate for property expenses in total for all of 2009 is about $7 million.

Income taxes consist of income taxes paid to various states by the company, and these taxes total $308,000 for the quarterly period. Income from discontinued operations for the quarter totaled $2,448,000. Real estate acquired for resale, of course, refers to the operations of Crest Net Lease, our subsidiary that acquires and resells properties. Crest did not acquire or sell any properties in the quarter, and overall, Crest contributed income or FFO of $226,000 in the quarter.

Real estate held for investment refers to property sales by Realty Income from our existing core portfolio. We did sell 9 properties during the second quarter resulting overall in income of $2.2 million. These property sales gains are not included in our funds from operations.

Preferred stock cash dividends remained at $6.1 million for the quarter, and net income available to common stockholders was $26.5 million for the quarter. Funds from operations or FFO was approximately $47 million for the quarter. FFO per share was $0.46 per share.

When we file our 10-Q, we will again provide information you need to compute our adjusted funds from operations, or AFFO, or the actual cash we have available for distribution as dividends. Our AFFO, or actual cash available for distribution, is typically higher than our FFO, because we have relatively low capital expenditures and we do not have a lot of straight line rent in the portfolio.

We increased our monthly dividend, again, this quarter. We’ve increased the dividend 47 consecutive quarters and 54 times overall, since we went public almost 15 years ago. Our current monthly dividend is now $0.142375 per share which equates to a current annualized amount of $1.7085 per share.

Now let's turn to the balance sheet. We have continued to maintain our conservative and safe capital structure. Our debt-to-total market capitalization today is 33%, and our preferred stock outstanding represents just 8% of our capital structure. All of these liabilities are fixed rate obligations.

We continue to have zero borrowings on our $355 million credit facility. This facility also has a $100 million accordion expansion feature. The initial term of this facility runs until May 2011, plus two one-year expansion options thereafter. We have $35 million of cash on hand, and our next debt maturity isn't until 2013.

In summary, we currently have excellent liquidity, and our overall balance sheet remains healthy and safe. We have no exposure to variable rate debt and we have no need to raise capital for any balance sheet maturities for the next four years.

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

Tom Lewis

As I run through all of these areas I guess I'll start by saying, like last quarter, it was a fairly quiet quarter, which in this environment I guess is a pretty good thing. I'll start with the portfolio which is doing pretty well right now, given the state of retail. The tenants in the portfolio that we are talking to have generally seen their business stabilize a bit in the second quarter. That's what we are hearing so far in the third quarter also, really not hearing much from them relative to additional declines in their businesses as we were late last year and earlier in the year. So things seem to have settled down a little bit.

While we have worked with a few of the tenants to get through some issues, we are very fortunate we've dodged a lot of the failures that have occurred out there in retail, and in the few cases where we have had some situations with retailers, we've had either just a few properties or we have owned their more profitable properties. So we really weren't impacted or been able to lease a few properties and that's why occupancies remained fairly high.

The other thing as always we talk about cash flow coverages of rent down at the store level, which kind of creates our margin of safety and when times get tough for retailers, allows us to do well with the properties we have. If you look at the top-15 tenants for the second quarter, they accounted for about 53.2% of our rent, and if you look at the EBITDA-to-rent coverage, at the end of the first quarter, it was about 2.39 times and ranged from a low of one tenant at 1.22 times upto about 3.75.

At the end of the second quarter, those numbers were an average of about 2.46 and ranged from a low of about 1.55 up to 3.59. So a little positive movement overall and the lower end improving especially, which is the one we care about. So the cash flow coverage has held up pretty well and I think that's one of the reasons that the portfolio continues to perform.

As you saw in the release, we ended the quarter at 96.6% occupancy with 79 properties available for lease in the portfolio. That's up 20 basis points from the end of last quarter which we're happy about. Additionally, same-store rents, as Paul mentioned, were up 0.5% during the quarter, absent the Buffets, a little bit higher. I would think that given the economy and what's going on in retail that when you look at same-store rent growth, I think it will continue to be positive, but I also think it will be muted this year and then, we'll get into next year and see what the economies look like then. So I think with that said, any same-store rent growth today obviously is a big positive.

For the second quarter, to give you an idea where the same-store rent increases come from, we had five different industries in the portfolio that have some declining same-store rents. Those, as you might expect, were in the restaurants and motor vehicle dealership area and that was the majority of it. The rest were small.

There were three industries that had flat same-store rents, which was apparel, book stores, office supplies, which I think from what most of us were looking at in retail make sense. Then there were 22 industries that saw same-store rent increases, with the biggest increases really coming primarily from the convenience store areas, also tire stores and health and fitness. If you kind of walk through the portfolio, what seems to be working today, and this has really been the theme all year, is basic goods and services that you buy on an ongoing basis or things at a low price point or kind of the value proposition.

I think if you look at the portfolio that probably equates to about two-thirds of what we have in the portfolio. On the flip side, kind of the durable goods, apparel, high ends, consumer discretionary, and the big box stuff, I think is the weaker things in retail and that's a smaller part of our business which helps. Anyway, same-store rents were up again this quarter.

We think we continue to be well-diversified. As Paul mentioned, we have 2,338 properties in the portfolio, 30 retail industries, 118 different chains in 49 states. The count is down 9 properties in the portfolio from last quarter from the sales that you saw in the release and the industry exposures continue to be pretty well-diversified.

Our largest industry continues to be restaurants. That was at 21.1% at the end of the quarter and down a bit from the end of the year and we'll continue to work that one down. Convenience stores at 16.9%. That was up a bit due to really across the board rent increases on about 5 different tenants in the convenience store business and that industry continues to do pretty well.

Theaters were at 9.2%. Obviously, movie theaters are enjoying a really good year, again, this year with I think their revenue up about 8% so far this year. And then child care is about 7.5% of the portfolio, which seems to be doing okay in this environment.

Largest tenant is about 6% of rent. Next one's about 5.4%, and then it goes down pretty quickly from there. The top-10 tenants comprise about 40% of the revenue. The top-15, as I mentioned, about 53%. And to give you a sense, when you get to the 15th tenant, you're talking only about 2% of rent, so pretty well-diversified.

The lease links on the portfolios continue to be pretty healthy at 11.6 years. Most of that's really occurring from releasing on the longer leases those leases that are going through lease rollover. If you look at lease rollover, the balance of the year, we feel pretty about it. We've got 105 properties that should go through lease rollover between now and the end of the year. That equates to about 2.8% of rent, but the vast majority of those that equate to about 2.2% of rent are subsequent expirations.

That means those properties already went through their 15 to 20-year lease. At the end of the lease, they were the profitable properties. The tenants released them, and generally, you have very high rates of release on those. So we anticipate that we should do very well on lease rollover the balance of the year, and it's obviously a very manageable number. Overall, then, at 96.6% and same-store rent's up a bit, the portfolio continues to be pretty stable and have good performance.

Let me move on to property acquisitions. As you saw in the release, we continued to remain inactive during the second quarter and waiting for property prices to adjust downward and cap rates up. It's been about 20 months since we put out an LOI right now on a property and so we've been doing this for a while.

At this point, property prices have come down a fair bit. Cap rates have come up, as we expected. We're really now starting to see a number of transactions that come through the door that are starting to get to the cap rate expectations or up into the area around 10 cap range or so where we start to get interested. And I think very much sellers are becoming more realistic, and the bid/ask spread is narrowing, which will probably lead to some opportunities here in the second half of the year. And it's always interesting when you get a big bid/ask spread; my experience is that it tends to close as a function of prices moving up rather than down and I think that's what's happening.

So we're starting to see a pick up in activity relative to what we're underwriting. As most of you recall, when things do get into the committee and we underwrite them, we end up buying about 12 to 14% of what comes through committee.

What's been going on over the last really 6 to 12 months is that a lot of things haven't been coming to the committee because the yields weren't approaching where we wanted to be, but now at cap rates approaching up into the 10-cap range, we're starting to see more come through committee, and I know that there'll be some modest acquisitions in the third quarter and I'll really define that as a trickle and we'll see where it goes from there.

In talking about cap rates, I mentioned this last quarter, but I think it really is worthwhile saying, and that is if you look back on the 40 years that we've been doing this and follow cap rates, from 2005 to 2008, we were buying in the 8.4% to 8.7% cap rate range, and in those years bought about $1.5 billion worth of property. I'd probably estimate that we were 75 to 100 basis points in cap rate above where the one-off market was which was really a function of buying in bulk and you get a better price and a better cap rate.

From 2003 to 2004, the caps were around 9.5%, and if you go back to when we went public in '94 and take it to 2003, I went back and looked, and the cap rates during that period were always between 10% and 11%. Then, going back and looking at transactions going all the way back before '94, cap rates were pretty much always up 11% or so.

So I really think that kind of the 7% and 8% caps that you saw at retail and even some of the 9% caps on the institutional transaction, like a lot of assets in many different areas were a function of the abundant and cheap financing that was out there and it shouldn't be too surprising to see cap rates moving up again. As they approach the 10% area, I think there'll be some opportunities. We think acquisitions will move out. How quickly, I don't know, but I do know we were out looking at transactions and buying again.

Moving on to dividends, that's obviously the priority at the company. We'll pay it in cash. The majority of our shareholders are retired and pay bills with their dividends. So that's how we really focus around here. I'd anticipate that the dividend will be higher this year than last year. I would be hopeful it would be higher next year than this year and that's a primary driver for the company.

Paul mentioned the balance sheet, and I'll just relate to it into the fact that with no financings coming up, there's no great need for cash that we have outside of acquisitions. We've got about $35 million in cash on hand to spend, and our credit facility has no balance on the $355 million. So we're obviously very liquid here should some opportunities come up.

In the guidance, we tweaked the top-end down a $0.01, $1.83, $1.86, and left the bottom side of it alone. That's just a little under 0 to, I think, 1.6%, 1.7% growth. In the last quarter, we had our range for acquisitions at 0 to $250 million, and in our expectations here, we've left it at 0 to $250 million and really assume if we get to the $250 million, it's likely to be weighted towards the end of the year, but we have kept the guidance where we had it except for the $0.01 on the top end and it will just be a function on the bottom end kind of no or very little acquisitions. On the top end, I think things being decent in the portfolio throughout the end of the year and then acquiring about $250 million.

And while it's hard to have visibility in this market, given the portfolios held up pretty well and the lease links that we have on the portfolio, I think that that's a good estimate for right now, and we'll stay with that.

To summarize then, as I said, pretty pleased with the portfolio through this environment. Starting to see some acquisition opportunities and other than that pretty much a quiet quarter.

And with that, Luke, I will turn it back over to you, and we'll take some questions if anybody has.

Question-and-Answer Session

Operator

(Operator instructions). Our first question comes from the line of Jeff Donnelly with Wells Fargo.

Jeff Donnelly - Wells Fargo

Your restaurant exposure, relative to some other folks out there, is fairly high, and it's sort of above where it's been historically for you folks and clearly that industry has been under some degree of pressure. What's your thinking on the future about your exposure there as it relates to may be a buy/sell decision? The basis of this is really because unemployment is high, savings rates are up. It doesn't feel like there's a quick turn at hand for restaurant profitability.

Tom Lewis

Yes, at the end of '07, we had bought a fair amount of restaurants and at that time when we got over 20, said this is getting uncomfortable relative to size, and we're bringing it down. I don't think we've bought anything really in quite a long time in restaurants, and we've kind of put that on the list of not something we're considering. So, it's definitely our desire to bring it down and those numbers have been coming down now for a number of quarters.

Relative to selling some properties, as we have been selling, a good number of those have been restaurants and so that's what's bringing down the percentage of the revenue in the portfolio. It's interesting also, Jeff, to look at it in restaurants, which is about 20%, 5% is Buffets, which coming out of their reorganization and with the adjustment of rents, we have pretty good cash flows on and kind of took a hit there, and that leaves us with about 15%. Out of that 15%, about half is fast food restaurants, and the fast food restaurant end has held up very well, as a matter of fact, has had some very good sales with people have been migrating down the price chart into restaurants and going for lower prices, they benefited.

So if you take that out, that leaves us about 7% to 8% of casual dining. When we go through those, there has been a couple other little hits in there. So while there may be a little exposure, it's not up at 20% of the portfolio. I think it's down now to about 4% or 5% of the portfolio, where we look at it and say, “Okay, this is going to be a soft business, consumer's probably not coming back hard, and it is likely that spending will be moderated in the casual dining segment.” I think it's really down to about 4% or 5%, 6% that we keep an eye on now in restaurant.

Jeff Donnelly - Wells Fargo

I'm curious now as you're looking forward then 2 or 3 years and you talk about acquisitions coming back, are there segments or sectors that you'd like to see be more represented in your portfolio? If we're going to have a soft consumer market, has that caused you to think more about goods versus services or different geographies? How do you think about that mix?

Tom Lewis

Yes. First on goods versus services, we're about 22% just pure services and about 55%, I think, that is goods that have some type of service with it and we like the service component. It seems to hold up a little better for us, and so there's a theme there. Outside of that, I think it's where two-thirds of the portfolio is already, which was kind of staying at the basic human needs which was stuff people buy every day and at relatively low price points, and that's served us pretty well.

I think that this is a theme that we'll be playing out for quite a while and that means staying away from durable goods, kind of consumer discretionary. While I don't have specific industries, I think you just want to keep within that theme and as we're looking at things kind of come across, if it's restaurant, then we just move it right to the side and I'm not going to consider it today but anything outside of that we'll take a good look at, but basic human needs and low price point. The last point on it, if you look through the portfolio, while we don't have a lot of big box, small box has been easier to lease this year than the big box has been. So I think we'll continue to work in that space too.

Jeff Donnelly - Wells Fargo

I'm curious and normally I wouldn't ask this question of a retail landlord, but I think you guys pay particular attention to tenant credit. When you step back and look at what you see among the retailers and the service providers you have relationships with and what you hear from them, do you have a feel, Tom, I'm curious as to what, I guess I'll call it, what inning you think we're in? Do you think there is more pain, whether it's net store closures or bankruptcies, behind us than ahead of us? Or how do you think about that right now?

Tom Lewis

It's like in the 12-step program. I think it starts with first you have to admit you have a problem, and trying to see the future is not something that is really clear right now. I think you have to sit down and do some scenario planning which is you kind of say, okay, I think we'll slowly move up from here. The worst is over, and most of the retailers will be okay, but if it comes back too fast, you probably worry about the Fed tightening up a bit and a lot of people still have balance sheet as their primary problem and they'll have to refinance. So under that situation, while it'd be better, I think it'd just be okay. Kind of a middle scenario is what a lot of people are talking about, which is an L-shaped or (inaudible) and then you have to say, it's just going to go sideways for a while and people will be looking at their balance sheets and there still are maturities, so you've got some issues to look at right there. Then the other scenario, obviously, is we take another leg down, and then I think some people could have some problems.

If we just go sideways, what we're hearing from our retailers is, generally, their business has stopped declining and generally they feel better about life, but I think you have to go a few years out and look at maturities on people's balance sheet. The other thing is, again, really scrubbing the portfolio.

It's interesting because I had a research department four or five weeks ago through and run some numbers for me, and I said, go back and look at the first quarter of '09 retail sales versus first quarter '08, and what was it? The numbers they came back with was retail and food service total, kind of retail sales off 10.2% versus the year earlier. Then we looked at that and said, okay, take out autos and auto parts, because that has a big impact, and you got to about 6.9% the retail sales were down year-over-year. And then for fun, I said, okay, go get how much sales are down in the categories that we are in and weight it by how much of our portfolio it is and come out with a weighted that things are down. And that came out about 4.9% on average, but the categories that we're in, as our portfolio is weighted, were down in retail sales at the first quarter '08 versus first quarter '09 versus kind of 6.9% overall.

As we went through then and looked at the numbers, the biggest component of downside there is convenience store sales were down about 35%. However, that's really unusual and their sales were down 35% but they were pretty much dramatically more profitable in that year than the previous year, and the reason was gas prices came down, and as most people know who follow convenience stores, when gas prices go up, margins get pinched and they struggle and when they come down, they widen out. So then we said, okay, back out convenience stores and rerun it, and it basically came out that retail sales in the categories that we were in which tend to be the low price point stuff were up about 1%. So as we look at things going forward, I think if you stay on the value retail side even if things move down here, you're going to be much better off than on the other.

But the theme into the end to the longwinded answer is I still think you want to watch just as you do in REIT land and everywhere else, people's balance sheets and what their maturity schedule is down the way. For the moment, it looks pretty stable out there with the guys that we're talking to.

Jeff Donnelly - Wells Fargo

And just last question, I'll yield the floor, is as it relates to acquisitions, what do you think is causing folks or causing the market to become a little bit more liquid now and causing people to sell? Is it that you're seeing financing come back or folks under pressure to let assets go? You really haven't seen many transactions occur in other property types. It's starting, but given the cap rates that you're thrown out in the past, where you'd like to be a buyer, what's causing people to sell at those levels?

Tom Lewis

Yes. I think it's the same thing I just said before, which is most of it is balance sheet generated, where people have been sitting around for a year. They've had a big bid/ask spread. Now they're at the point where they have some financings coming up and really while credit's become a little more available, it hasn't gotten into a range where they think they can solve their problem, and they're saying, okay, I need to do something here, and as always, that's what closes the bid/ask spread. We live in Escondido and one of the areas is ground zero for decline in homes, and you saw at the end of 2006 it peaked, and then there were just no transactions for about a year to 18 months and then all of a sudden, people have to start selling, and the bid/ask spread closes.

I think that's what's starting in our area. It could always be offset a bit if financing rates really came down. So there were some alternatives in the high-yield market and while that's gotten better, it hadn't gotten far enough for them.

But I think it's just times gone by. Some people have some overall balance sheet issues they have to deal with, and now that the property is sitting on their portfolio, it's worthwhile for them to consider moving right up and getting them off the books.

Operator

Our next question comes from the line of Michael Bilerman with Citigroup.

Greg Schweitzer - Citigroup

Hi. It's Greg Schweitzer with Michael. On the increase in bad debt, could you talk a bit about the drivers of that increase?

Paul Meurer

Sure. We had a little bit larger number in the first quarter, you may recall me talking about, and then a little bit larger number the second quarter than expected. Those were receivables that were on the books that we chose to essentially write-off after what we do as sort of monthly review of those to determine whether they're collectible or not. There were a couple of big situations that made that a larger number year-to-date than we expect as a run rate going forward.

One was one where we had a judgment where we thought we would collect a fair amount of the receivables from something that happened, say, a year ago or so, and that didn't come to fruition, as it turned out. So we’ve scrubbed them pretty hard to make sure that we're comfortable with what we believe to be the collectibility of all the receivables we have. One thing I'll point is our accounts receivable have not gone up. There's been no change in that. You can see that in our balance sheet. So we don't have a lot of those kind of sitting on the books.

I mentioned in my upfront remarks that we expect the run rate to be less on a go-forward basis. Bad debt expense was $585,000 in the second quarter. Our current expectation is less than half of that for the next quarter and the quarter after that. So really that 585 may be for the balance of the year, if you will, is our current estimate. So we suspect we're going to continue to have some, more than we've had in years past, but that the bulk of it happened in the first half of this year.

Greg Schweitzer - Citigroup

And how do you get comfortable with sort of the tenant health for the retailers that report their sales to you annually? Is there any other ways that you monitor that health when you're looking at that receivables balance or as part of your watch list?

Tom Lewis

We do get their financials. More often that, it's the property-level stuff that we tend to get once a year on some of the tenants and we do get their financials. So we are able to watch their overall operations which then allows us to infer whether somebody is having a problem, but mostly what we do is pick up the phone and talk to them and have ongoing conversations. As Paul said, there's not huge receivables there. If there is a receivable from the tenant, then we'll tend to be on the phone with them a lot or if we've seen the trends go down or if the last time we were in cash flow coverages we thought that they were getting closer, there might be an issue.

And, generally, we have really good discussions with the retailers. They're pretty open. We generally have confidentiality agreements with each other and good relationships. So we're able to keep on top of them casually; if not, within the lease, they're required to report every quarter.

Greg Schweitzer - Citigroup

How much of the portfolio as a percent of revenue, say, gives you that property-level detail only once a year?

Tom Lewis

I don't know off the top of my head. Of the whole portfolio, if you get to the top-15 tenants, it's probably 10 of them that we get it quarterly, and it's probably 3 or 4 annually and 1 or 2 that we get sales and impute backwards.

Greg Schweitzer - Citigroup

Okay. And then just a couple more on tenants. Vicorp filed for Chapter 11 last year and about three months ago it was sold to American Blue Ribbon and (inaudible) Bakers Squares with Realty Income as landlord. Were any of the locations that you have and are they under closure risk or are there any that you're monitoring?

Tom Lewis

We have none that are under closure risk or are monitoring. The Chapter 11 filing Vicorp pact was in April of last year, so that is a concluded event as of a number of quarters ago. So I don't think we have any exposure coming on Vicorp.

Greg Schweitzer - Citigroup

And then on the (inaudible) deal exposure, I know there was a question last quarter on it. A similar search comes up with the numerous (inaudible) locations with Realty Income as landlord. Are you able to give us the cash flow coverage of this tenant?

Tom Lewis

We, under no circumstances, comment on the cash flow coverage into the operations of companies in the portfolio unless they're in Chapter 11. So, no, we don't report their financials. We let them do it.

Greg Schweitzer - Citigroup

How about on an industry basis, say, for the auto, RV dealer industry cash flow coverage?

Tom Lewis

Yes. Well, we do have other tenants in there and that is the one that's on the lower end and this quarter improved from a 1.22 up into the 1.55 area.

Operator

Our next question comes from the line of Rich Moore with RBC Capital Markets. Please go ahead.

Rich Moore - RBC Capital Markets

There was some talk that there might be more Chapter 11 filings when DIP financing returned. Have you guys seen anything like that? Is that something you're hearing maybe a greater possibility for some of your tenants?

Tom Lewis

No. Right now, we have no tenants that we have in Chapter 11 in our top-25 tenants which gets down about 1% of rent, and we've had nobody call us up and say they're going to go or that we think is imminent. So dip financing has widened out a little bit, which has been actually good for those situations, but the answer is just no.

Rich Moore - RBC Capital Markets

Then thinking about the spaces that you try to lease, the 79 that you have that are available to be leased, are those leasable spaces or are these things that you can actually get someone in there or do you think they're kind of terminal in a sense in that you're just not going to find a tenant in the near term?

Tom Lewis

Well, we don't think they're terminal. We've had a lot of leasing going on this year and we've been able to keep occupancy very high. And if you just look at the lease rollover list, we've had a number coming off there and then a number coming back from tenants, but thus far this year, our portfolio management group has been able to lease them as fast or faster as they come off.

It has really been an advantage to have smaller boxes, and in the smaller boxes being able to find tenants that are regional if a national goes out or a local if a regional goes out that want to go in there and then the property sales that you've seen this year, a lot of the times are letting those people know that maybe an appropriate way for them to operate that property is to own it themselves so that we stay with most of our tenants being larger chains. So, no. They're not terminal. We have been able to lease them and I think the portfolio management group this year has done a great job and more than stayed even.

Paul Meurer

Yes, one of our trends, Rich, that we pointed out over the past two years has been while historically we used to say it takes about 6 months to release a vacant space, but that timeframe has widened a bit to 9 to 12 months. However, this past quarter, it went pretty fast on a handful of them. It was a nice little trend to have that be a little faster and that's why you saw that tick up in occupancy because we're always going to have a handful that are vacant, but as a general comment, over the past two years, it's taken a little bit longer to release space. Therefore, our carrying costs have gone up and, therefore, our property expenses went up a bit over the past year, but this past quarter, we actually saw a fair amount of momentum, which was nice.

Rich Moore - RBC Capital Markets

Okay. Yes, Paul, you were heading in the same direction I was going to ask. I mean is that something we should extrapolate a bit? Do you think that's something that's a signal maybe the economy's improving a bit or the situation's getting better? Or was that maybe just a blip in the second quarter?

Paul Meurer

I don't know.

Tom Lewis

Is that a good answer?

Rich Moore - RBC Capital Markets

Yes, that's fair. That's fair. I'm hopeful here and I was hoping maybe you guys were hopeful, as well. Then one more thing.

Paul Meurer

Rich, let me just say this. We have modeled it such that it is not going to continue to improve in that manner. How's that?

Rich Moore - RBC Capital Markets

Yes, that's fair. That's conservative. I like that.

Paul Meurer

No, but that's important that we point out again that our projections include real conservative assumptions relative to the existing portfolio.

Rich Moore - RBC Capital Markets

And the last thing I had, guys, I know when you buy things, you tend to issue equity post the acquisition. With the markets as crazy as they are, when we have move-up in the equity markets, are you tempted to issue equity ahead of what might be some transactions? Is that a possibility, or you just wouldn't do that?

Tom Lewis

I would if I knew there were a number of transactions and they were about to close, which means I had accretive use for the funds on a fairly short-term basis. Absent that, we prefer to find things to buy before we go get a bunch of equity to buy it, and plus we're very lucky we have on cash on hand, but I'll give you the circumstances. We have $35 million here. If we went out and bought $35 million worth of stuff and it's a few months from now and we were sitting around and an opportunity comes in and it's $75 million or $100 million, as we got down very close to closing, where we've checked all the boxes and we're relatively sure it's going to close, under those circumstances, we would.

Then depending on size, you have some disclosure risks relative to the acquisitions if it's just one. So I'd do it if the timing was fairly close, but if the timing wasn't close, we'd prefer to wait.

Operator

The next question comes from the line of [Ben Rosenshwank] with TFM.

Unidentified Analyst

This is actually [Ryan Levinson] sitting in with Ben. I was just wondering on the 9 properties sold in the second quarter how many were occupied?

Tom Lewis

9 properties sold during the second quarter how many were occupied when they were sold? That's one of those questions where I'll give you two answers, and the first answer is I'm not exactly sure, but that's only because generally when we sell them and they're unoccupied, it is we have found somebody who would like to occupy them, and we make the choice rather than to sign a lease, to sell it to them. So it's technically unoccupied, but we do have somebody that wants it, and that's a function of when we find somebody who wants to lease it, deciding whether we'd like maintain them in the portfolio or not. There hadn't been a lot of sales of just vacant properties to somebody --

Gary Malino

I think most of them were occupied.

Tom Lewis

Yes.

Gary Malino

I'm just thinking through our vacancy list, Ryan, and where we're always analyzing for sale or lease, and I think only one of them was a vacant property being sold but not exactly sure.

Unidentified Analyst

At roughly $600,000 per property, I think it was about $5.5 million of gross proceeds, if I assume an average NOI per store, doesn't that equate to like a 20 something percent cap rate on each one of those locations if they were occupied?

Gary Malino

I can't do the math with you right now, but I am absolutely positive that wasn't the cap rate on our sales.

Unidentified Analyst

The other thing is Rite Aid announced that they're seeking rent relief on 500 stores in the second quarter. Of the 24 Rite Aids that are in your portfolio, do you have any exposure? It's obviously not their entire store base. It's just a fraction of their system. I'm just wondering if you have any exposure to that.

Tom Lewis

Yes, it's not our policy to comment on our individual tenants and what they're doing, so we can sit here all day. We have 118 tenants. A lot of times on these calls, people get mentioned who aren't our tenants, so that's the policy we'll maintain. We are not looking currently at any substantial downside in our drugstore portfolio and other areas and if there is some minor, we'd put it in the guidance but that's where we are there.

Unidentified Analyst

One other occupancy question. The two rejected leases in the Big 10 bankruptcy and the two rejected leases in the Bally's bankruptcy, I'm just wondering if those are included in the 79 vacant properties that you have?

Tom Lewis

Your information is incorrect.

Unidentified Analyst

Okay. What's incorrect about it?

Tom Lewis

I'm not going to comment individually on tenants, which we don't, but it's not correct that I have those units that have been vacated or in a bankruptcy.

Unidentified Analyst

I'm sorry? On Bally's or Big, Big 10, there was a withdrawal of their rejection on Friday, and [Bear] wrote a note about this, which indicated that they had some sort of commentary from you.

Tom Lewis

On Big 10, I will comment. Big 10 went through a Chapter 11. They're out. We have 50 leases with them, 48 leases were accepted, which is exactly what we anticipated in the bankruptcy, and the other two we have and they're released out of the 79.

Unidentified Analyst

Okay. Those are in the 79. Can you give us an indication on what the rank concession was on the other 48?

Tom Lewis

It's very typical of what we reported in all the other ones. It's right around the mid-80s is what they come in at.

Unidentified Analyst

Mid-8?

Tom Lewis

Mid-80s, 84, 85, 86 generally when we go through a bankruptcy, and any of the ones that we've had in the last year, last 6 months have been relatively consistent with that.

Unidentified Analyst

Okay. And so I take it then that you're saying that the Bally's information is incorrect?

Tom Lewis

Again, I'm not going to comment individually on all the tenants. We don't think we have exposure to any down side in rent in the health and fitness area right now.

Unidentified Analyst

Okay. But there's a Bally Total Fitness of Greater New York, there's 7 stores that you're listed as landlord.

Tom Lewis

If you think we have some down side in that, I do not believe we do.

Unidentified Analyst

Okay. So you're not debating whether you're the landlord; it's just --

Tom Lewis

I'm debating whether we think we have any down side in the tenant that you have mentioned.

Unidentified Analyst

Okay, okay. One other one just about working capital; why does your working capital fluctuate so wildly from quarter-to-quarter, I think it was a provider of about roughly $25 million of cash in the quarter?

Paul Meurer

It doesn't vary widely from quarter-to-quarter. I'm not going to debate your math with you, but for example, we used $20 million of it in the first quarter to pay off the bonds that we had coming due then. More broadly speaking, when the bond payment dates are due, March 15 and September 15, and the cash gets used at those times to pay off those bonds when they're due.

Tom Lewis

And the quarter in between, it doesn't.

Paul Meurer

Right.

Unidentified Analyst

I'll follow up with you, Paul. Lastly, Tom, you mentioned in your prepared remarks that there were a couple of other hits. I was just wondering if you could elaborate on that a little bit?

Tom Lewis

Nothing that I see coming right now, nothing going on that I know of in the top 25. So, no. Looking forward, there's nothing imminent right now that I'm aware of. Anything that has happened, we had in the guidance and we have a little extra put in there, but that's basically just an assumption something small will happen. So, nothing imminent that I'm aware of.

Unidentified Analyst

So you don't think that some of the LBOs where you were the financier of the real estate, (inaudible), nothing imminent there?

Tom Lewis

Not that I'm aware of.

Operator

Our next question comes from the line of Andrew DiZio with Janney Montgomery Scott.

Andrew DiZio - Janney Montgomery Scott

First in relation to your expert lease expirations that are coming up in the second half of '09, are those centered around any particular industry, or, although you wouldn't give us a name, any particular tenant?

Tom Lewis

You know, we're kind of at the end of the child care era because we bought those about the same time. So a high number of our lease rollovers really for the last 4 or 5 years have come out of child care and there's some child care in there. And then I just think it was a smattering of a bunch of stuff. I think that's the only theme in there.

Andrew DiZio - Janney Montgomery Scott

Paul, I think you mentioned that your cost to carry had gone up in relation to the vacant properties. When you said that, did you mean on just an overall total basis because there's more vacancy, or did you mean like a per-square-foot basis? I think you mentioned before that your cost to carry is usually about 20%, $0.20 on the dollar?

Paul Meurer

Correct. I meant it in two different ways. One is that the carry time has increased a bit typically. Like I said, this past quarter, we had some real good success in terms of time, but for the most part over the last two years, let's call it, net time of vacancy has increased from about 6 months to more like 9 or 12 months in some of the properties. So the time of the carry, which increases the overall carry cost. That's the main cause of it, if you will. The second way is, yes, our vacancy, we've had a few more properties over the past two years, as opposed to the years just prior to that, and so as such, you're going to have a little bit higher carry cost.

Andrew DiZio - Janney Montgomery Scott

Sure, okay. So you just meant in the aggregate. Got you.

Paul Meurer

Correct.

Andrew DiZio - Janney Montgomery Scott

And last question. With respect to the narrowing of the bid/ask that you're seeing, are you seeing any particular industry that's adjusted faster, or is it just overall?

Paul Meurer

Again, I think it's balance sheet driven, so it really kind of comes across the board.

Operator

And that concludes the question-and-answer session. Mr. Lewis, please go ahead with any closing remarks.

Tom Lewis

Okay. Well, I'd like to thank everybody for joining us today, and hopefully, we'll talk again in about another 90 days and see what has unfolded during that period of time. Thank you very much.

Operator

Ladies and gentlemen, this concludes the Realty Income second quarter 2009 earnings conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 800-406-7325 with the passcode 4117045.

ACT would like to thank you for your participation. You may now disconnect.

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