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Executives

Tom Lewis - CEO

Paul Meurer - Executive Vice President and CFO

Analysts

Greg Sweitzer - Citigroup

Chris Lucas - Robert W. Baird

Jeffrey Donnelly - Wells Fargo Securities

Rich Moore - RBC Capital Markets

Realty Income Corp.(O) Q1 2010 Earnings Call April 29, 2010 4:30 PM ET

Operator

Welcome to the Realty Income first quarter 2010 earnings conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) This conference is being recorded today, Thursday, April 29, 2010.

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

Tom Lewis

Thank you, Alicia [ph], and good afternoon everyone, and welcome to our first quarter conference call. With me in the room today is Paul Meurer, our Executive Vice President and Chief Financial Officer, Mike Pfeiffer, our Executive Vice President and General Counsel, and Terry Miller, our Vice President of Corporate Communications.

And as I am obligated to say that during this conference call, we will make certain statements that maybe considered to be forward-looking statements under Federal Securities law, and the Company’s actual future results may differ significantly from the matters discussed in any forward-looking statements. And we’ll disclose in greater detail on the Company’s quarterly and on the Form 10-K, the factors that could cause such differences.

And with that, we have Paul, review the numbers. Paul?

Paul Meurer

Thanks, Tom. As usual, I’ll just briefly walk through our financial statements and provide a few highlights of our financial results for the past quarter, starting with the income statement.

Total revenue increased to $83.3 million this quarter versus $82.5 million during the first quarter of 2009. Rental revenue increased 1% overall, while same-store rents increased 0.8% for the quarterly period.

On the expense side, depreciation and amortization expense increased by $492,000 in the comparative period as depreciation expense increases naturally as our property portfolio does grow. Interest expense remained flat at around $21.4 million. We had only $39.9 million of borrowings on our credit facility at quarter end. And on a related note our coverage ratios remain strong, with interest coverage at 3.5 times and fixed charge coverage at 2.7 times.

General and administrative or G&A expenses in the first quarter were $6.7 million. Our current projection for G&A for 2010 is about $26 million or about 7.5% of total revenues because this would naturally be impacted by the level of acquisitions during the year.

Our acquisition related costs are now included in G&A expense. As per FAS 141R, in the first quarter, this expenses per FAS 141R totaled $48,000.

Property expenses remain flat at about $2.2 million for the comparative quarter and these expenses are primarily associated with the taxes, maintenance and insurance expenses, which we are responsible for on properties available for lease.

Income taxes consist of income taxes paid to various states by the Company and they remained at around $300,000 for the quarter.

Income from discontinued operations for the quarter totaled $754,000. Real estate acquired for resale refers to the operations of Crest Net Lease our subsidiary that acquires and resale properties. Crest did not sale any properties in the quarter but overall contributed income or FFO of just over $200,000.

Real estate held for investment refers to property sales by Realty Income from our existing core portfolio. We did sell three properties during the quarter, resulting overall in income of approximately $548,000. And these property sales gains are not included in our FFO or in our AFFO calculation.

Preferred stock cash dividends remained at $6.1 million for the quarter, net income available to common stockholders was $24.1 million for the quarter.

Funds from operations or FFO remained at around $46.7 million for the quarter and FFO per share was again $0.45 per share for the comparative quarter. Adjusted funds from operations or AFFO for the actual cash available for distribution as dividends was higher at $0.46 per share for the quarter.

Our FFO is usually higher than our FFO each quarter because our capital expenditures are very low and we have very minimum straight line rent in our portfolio.

We increased our cash monthly dividend again this quarter. We have increased the dividend 50 consecutive quarter and 57 times overall since we went public over 15 years ago.

Now, let's turn to the balance sheet. We've continued to maintain our conservative and safe capital structure. Our debt-to-total market capitalization is only 28%, and our preferred stock outstanding represents just 7% of our capital structure.

As I mentioned we only had $39.9 million of borrowings on our $355 million credit facility. This facility also has a $100 million accordion expansion feature. The initial term runs until May 2011, but has two one-year extension options thereafter.

Our next bond maturity date is until 2013. And in summary, we currently have excellent liquidity and our overall balance sheet remains healthy and safe.

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

Tom Lewis

Thanks, Paul. And I will just jump into the portfolio. Obviously, the portfolio did pretty well during the first quarter, very stable. I think our conversations with tenants generally to see their business being the little bit better that the consumer maybe as opened up to little bit even to some of the discretionary type items and I won't say everybody is ebullient, but there is a little better tone and pretty much across the board with a lot of the tenants which is nice to see.

At the end of the quarter our 15 largest tenants comprised to about 53% of our business. And as is the custom we owned tended down to more profitable stores and cash flow coverage. EBITDA at the store level is still ranging around 2.5 times and little better than last quarter but there is not much movement. And obviously tending down to more profitable stores has been something that's worked for us in the past.

We ended the third quarter with 96.7% occupancy. 77 properties available for lease that's out of 2,344 and that occupancy was down 10 basis points from the fourth quarter but up 30 basis points from the same period year ago and remains fairly high. Same-store rents jumped up a bit for the quarter to 0.8%. That's slightly higher than the fourth quarter and then compares up – I think 0.2% a year ago. So, better there.

And to give you an idea where the increases and decreases are coming from which may point to some trends or may not. Six of our 30 industries, I'd say six and our other category have rental declines. Tire stores were about half of it.

And then, as many of you know, we own one industrial property in San Diego and its rents were down about 15% over a year ago. But if you take the declines in those kind of seven industries together it was down about 620,000. That four industries that were flat, apparel, office supplies, equipment rental and travel plazas. And then there were about 20 in the portfolio that did see same-store rent increases.

The biggest increases interesting rental came from restaurants, our convenient stores and child care and each one of those individually saw rents go up about $250,000. And then the auto service, theater, health club, some of the other areas that we're invested in, had some modest increases and a handful for the rest of them have fairly small increases.

Is nice to see rents going up on restaurants, again, it's been while some steps in the case but the 20 together have rent increases about 1.2 million and that brought us to the net gain of about 615,000 on same store rent. We continue to be pretty well diversified we've 2,344 properties in the portfolio that’s up five from the end of the year, still 30 industries, 118 different chains in 49 states. Our largest exposure by an industry standpoint continues to be restaurants, that was 21.9% at the end of the quarter, which was up a bit from year-end but we did not buy anything in the restaurant category that really just came from the rent increases, I talked about a moment ago.

Convenience stores were up 17% as also a function of rent increases, we didn’t buy any convenient stores during the quarter. Theaters at 9.1%, its doing very well, and then child care and health and fitness were both about 6.8%. Our largest tenant is at 6.1% that’s LA Fitness, which is up due to some additional acquisitions we've made in the fourth quarter and also a couple of year in the first quarter. And if you then take the going down the lease to the 15 top tenants that comprise about 63%, when you get to number 15, you're down to about 2% of revenues, so we continue to be fairly well diversified and the lease length continues to have the good term on it, we’re sitting just about as 11 years right now. So, the portfolio did pretty good during the quarter, very stable and nice to see the stabilization continue and rates, occupancy rates remain pretty high.

Let me move on for a moment to property acquisitions. During the quarter, we had a number of opportunities to look at and we've brought eight new properties for 28 million. The acquisitions were with two tenants, one in the automotive service business and then again in the health and fitness business, all of these had triple net leases with an average length of 18.2 years starting cash-on-cash cap rates of 9% and then all of them also had opportunities for those lease yields to increase as time goes on and obviously pretty good spreads with that rate.

I mentioned, we had lot of things to look at during the quarter and I would say that we continue to see modestly the number of transactions that are out in the marketplace kick up. And also talking to the people that are kind of in the deal flow that we talked to on a regular basis that seems to be more discussions with our company's and entities about coming out and looking at sale lease back so.

We think, we will continue to modestly pick up, certainly not a flood but sellers seem to be returning to the market. I think there are number of reasons for that just time has going on and also cap rates are beginning to soften and I think that explain some of the sellers coming back because one way to end a bit get as spread is that people on each side moderate their expectations and cap rates softening just a bit I think its bringing more people back.

And we saw that not only what we bought but in terms of kind of what was out there in the market, we either didn’t do or was shown to the market. And I think its also reflected last quarter I talked about looking at bonds spreads as kind of a proxy for looking at where pricing and volume could be and I was looking at bond spreads with double B [ph] and be the other day and I think just absolutely past in a year ago double B bond spreads in the high yield market where about 910 basis points and when I look that on the other day, I think the average was about 419 and if you look at single B spreads a year ago there were up around 1200 basis points that are come into about 577.

So I think, in almost all areas of the financial markets, you seen yields borrowing, and I think that’s reflective of having some impact on cap rates although cap rates tend for lag. I think the other though obviously is, if you look at cap rates come in bit, our cost to capital has also come in, obviously, the equity has performed very well and that brings in the cost of issuance.

If you look at debt today, debt is very attractively priced I think for a lot of rates and certainly it would be for us we’re told and even preferred as fairly well priced. So, even though there has been some softening in cap rates I think spreads are very, very attractive for acquisitions out there in the market.

Every quarterly kind of try and give a feel for the acquisitions market what we are trying to see. And I think maybe a good way to address that is as we look at the business today, just by being out there in the marketplace and obviously being well capitalized most of the folks in this industry know that we’re out buying again.

And I think just by saying we’re buying, we can pretty much look at $15 million, $20 million, $30 million that seems to come through the door every quarter in acquisitions, mostly in kind of small transactions or one-offs, and that’s kind of gets us to run-rate really about $100 million or more and that’s kind of where are running, where we see just enough transactions come in, so we are able to do that.

The other thing that didn’t happen and this why it gets hard to predict is, each year it seems when we are out, we’re active somewhere between two or three or four or five or six larger transactions down the pipe that you end up working on. And the question is whether you close none of them, in which case your run-rate to the 100 one of them, two of them, three of them in which case your over 250 million, or whether several of those in size hit and then acquisitions are much bigger than you thought, and that’s really where we are today.

I call tell you during the first quarter we worked on a couple larger transactions, didn’t do them. We continue to work on a couple here but as to whether they’ll come to fruition or not we really don’t know. So it does make -- I think trying to predict a little harder but I’ll tell you it’s definitely a better flow of the larger ones that are coming down the pipe to work on. And my experience is that does lead you to, to most often having one or more of those come true, but again we don’t know. But we are seeing more of the larger ones. I also mentioned in the press release, the hiring of John Case is our new EVP and Chief Investment Officer.

Within John’s leadership, we have good impact on that department and on our acquisition efforts over time. He’s just joined the company this week. But, I also think that we are going to probably add another acquisition officer too. We’ve just gone through a recruiting class for associates held on campus, and adding a few people there and we’ve also made an additional research. So this year, I think we are going to add additional staff to kind of ramp-up our efforts here and hopefully down the road, that will pay some dividends for us. But I would look for additional acquisition activity this year.

Relative to guidance for 2010, we are staying with the 186 to 192 or, you know, 1.1% to a little over 4% of that overall and that assumes relative stability in the portfolio, which is what we’ve seen lately. And at this point I think a 100 to 250 million of acquisitions.

Now, withstanding the comments I just made in terms of larger transactions, but it’s also important relative to the 2010 numbers, when those acquisitions come in the quarter, our experience is they come -- tend to come in later in the quarter and that heavily impact this year’s number. However, obviously, for next years’ numbers, all acquisitions we get this year to really regardless of where they are going to impact the numbers next year.

I would also say that, I think our guidance that to hit the middle or upper-end of our guiding range, I think it will take more of a contribution from acquisitions and to do that over the next couple of quarters here in 2010. I think that’s too primarily to some additional G&A most of that on the staffing side. And we estimate that the G&A is going to climb a bit this year.

We have been running for the last couple years down under 6% of revenues with G&A but this year adding, I think probably 5 or 6 people. Our sense is, is the G&A is going to run about 7.5% of revenues, which is obviously higher. I still think it; it puts us in pretty good step for other people in our business. But as you recall late in 2007 we made a number of decisions to kind of stop acquisition and liquid across [ph] raised capital and at that time we reduced staff a bit that kind of pattern down the hatches and we ran the business very lean.

And I think looking now when things beginning to open up its time that we, we ramp-up some people and some staff and try to take advantage of the market that we think maybe coming out there and that’s what leads us to have the higher G&A.

The balance sheet remains in good shape as Paul mentioned we have made about $40 million on the line and no debt coming due, no mortgages so pretty simple balance sheet and pretty liquid and our accessed capital I think is clearly available for the company out there at very good prices. As to dividends obviously we think dividends will be higher this year than last year and that’s our plan for next year also to have them go up. So I’ll just summarize by saying a stable portfolio balance sheet in good shape. And we’re going to try and make some headway this year on the acquisitions and people can access some capital later on the year when we do that and grow the business.

And with that, I Elisha [ph], I will open it up for questions.

Question-and-Answer Session

Operator: (Operator instructions) You have the question from the line of Greg Sweitzer. Please go ahead.

Greg Sweitzer – Citigroup

For Michael Bilerman [inaudible] as well.

Tom Lewis

Okay. Hi, Greg.

Paul Meurer

Hi, Greg.

Greg Sweitzer – Citigroup

Tom, you talked about deals modestly picking up and that is on the larger ones, is that is for a couple of months now. In your view, how will the deal environment has evolved say yes, or no. How far do you think we are from tighter spreads and more of the buyout type product measuring [ph] and intensity when demand picking up?

Tom Lewis

It's hard to know obviously when you are looking into the future. The one thing I’d been kind of surprised that is more M&A talk. Be that private equity or one individual buying another. And so if you look at the kind of the larger transactions, we've seen come by, I think a bunch of them are little more M&A oriented which is pretty gone away. And so I think if the economy continues to get a little bit better and if the capital markets are open, you’re probably going to see it generated from that.

And then, secondarily there’s just been some companies come out and I wouldn’t say these are people who really have balance sheet problems, but folks who are saying, I’d like to take advantage of this market now and do something. But I still haven't seen the flood [ph] that was call for of the people that really are kind of desperate to do some refinance. And I think as long as the capital market stay open here, that might be slowed a little bit by their access to capital in other areas, but I hope that they would do what a lot of people in the real world [ph] did, but take advantage of it, pick it the right size for the balance sheet.

So, my sense is I don’t know where the future is, you kind of got to look at scenarios and this moving along slowly and with a lot of liquidity out there I think we’ll keep cap rates moderating a bit. And I think cause volume to increase but it's not the big proliferation jump back up and spread is tighten, I actually think you might get maybe deal flow moderate a little bit, but you might get a lot of higher rates.

Greg Sweitzer – Citigroup

Okay. And could you provide a little detail on what you’re seeing with respect to the loan across a credit card and for the deals that are on the market today. You know, maybe where the most competition is and how well that CapEx rate is between higher decent deals and across the credit spectrum?

Tom Lewis

Yes. You know, it’s interesting, last year what was happening is that bid/ask spread just got really big and the volume went down and just our cap rates moving to 10%. And today they are coming back in and it’s funny. Even though it seems spreads coming pretty dramatically in the bond markets, cap rates tend to like that, and I think cap rates tend to bunch up a bit more than you see credits cards.

They have been a little bit flat so I'd have to characterize the business is kind of in the 8 to 9.5 range depending on quality today. And if you look at that, that the double B and single B, you have that 9% plus but that is moving down as there are some demand that returns to the market.

Greg Sweitzer – Citigroup

And last one. How comfortable are you pushing those C store industry exposure [ph]?

Tom Lewis

I will be comfortable doing that, but we just kind a feel generically that getting much over 20%, you really want at some point say, I’m going to stop this. So whether you go right to 20, you got a 21, 21.5 or whatever the number is. I would be comfortable adding in that area but when you get much over 20%, I think just generically we want to stop, same as we did in restaurants.

Greg Sweitzer – Citigroup

Okay. Thanks a lot.

Operator

We do have a question from the line of Chris Lucas. Please go ahead.

Chris Lucas – Robert W. Baird

Good afternoon, guys.

Tom Lewis

Hi, Chris.

Chris Lucas – Robert W. Baird

Just Tom, I want to follow on that one that comments if you just made about the compressing cap rates. It is a question that we used to get ready to, you know, kind of repeat itself here?

Tom Lewis

Good question. Well, I’d say, we are little more confident relative to volume and cap rates. I don’t think we are ready to say. We are back to a world that have spaces in it and those not going to be volatility yet, because that business is so heavily dependent on at least flat to lowering cap rates to make money, and there is generally a period of anywhere 3,6,9 months year the cycle of property. And I am going to have to get quite a bit more comfortable before we use Crest again or I am going to have to be in a situation where the cap rate that we are able to buyout really was wholesale and very high, and we think the market cap rate is substantially below, and that we can do something fairly quick.

So I am not positive enough to bring Crest back into the equation again. And most of the transactions we have talked on -- again while there is more coming to market and cap rates are down, but it doesn’t look like it did in 2007 where you are going to have to buy a large portfolio and so part of it. So I would say for now we have no plans at all to lease [ph] Crest

Chris Lucas – Robert W. Baird

Okay. And then just what’s the competitive landscape of that right now. I mean is this an environment, I mean, your cost to capital on the spread sound terrific. There is so much volume, right. So is that a function of the market competitive or there is no deal for right now, even the dynamics that you have right now?

Tom Lewis

It's really interesting because the volume has picked up, I am not sure quarter-to-quarter then reporting numbers on deal flow and what we look at, they tend to be very messy. I normally do them at the end of the year, because, yes, transactions you worked on a one quarter that they go away but they come back, and so that messes up the numbers quarter-to-quarter. But to give you an idea we worked on 16, 17 different transaction. There was about $475,000 million that we looked at and one of the things I was looking at before I got on the call, is we keep a peace for the ride of it, and it -- reason why we didn’t do the deal and it's kind of like credit issue, proceeds issue. Seller withdrew because he didn’t like rate, credit issue, proceeds issue, cap rate, real estate issue didn’t like the real estate. Two more seller withdrew because he didn’t like rates, couple of were more – they wanted more for the real estate than it was worth. And if you go through that's kind of what's going on for us. And then, as I mentioned earlier in accordance run rate of 20%, 30%, 40% in quarter isn't going to be that unusual and this is going to be a question one of these that matched up with proceeds cap rates underwriting, we liked it and you do a larger transaction.

And that’s pretty much what it was in 2005, '06,'07, and during that period when I go back and look at it, there really only was 20, million, 30 million, 40 million a quarter and then all of sudden there were three or four big transactions of 50 to $250 million and that's how you got to the larger numbers.

Chris Lucas – Robert W. Baird

Okay. And then, just Paul, a quick question on the G&A, despite to the first quarter relative to fourth quarter, was there anything you need in the quarter? You didn't have – I don't think as new hires (inaudible) So, what was going on there?

Paul Meurer

Well, You have a – in a sense new hires do impact that number because you need to accrue for them on a monthly basis what you expect kind of comp to be at the end of the year. Although, it going to take that into account do you've people wants to January, February and March accrued comp, is impacted by that and that's a true expense.

In addition, we are at higher stock price, so as these stock invested, you actually had an impact of higher expense basis, based on a higher stock price with the stock invested in January for lot of people.

Chris Lucas – Robert W. Baird

Okay. Perfect. Great, thanks a lot guys.

Operator

The next question is from the line of Jeff Donnelly, please go ahead.

Jeffrey Donnelly – Wells Fargo Securities

Tom, how do you think about the cushion between your AFFO and the cash dividend, it’s obviously narrow than the last two years. I think from, I think about like 20% of your AFFO down to about 5%. Is it your goal to restore that? That cushion or I guess, I am scared what do you think about it?

Tom Lewis

Sure. You know, kind of dividend history is, you know, Jeff before we will publicly paid out a 100% or kind of above, up and down and when we went public, we wanted to get the payout ratio down a bit until we had really diversified out the portfolio and nobody wanted to raise it. And we're probably comfortable around the 90% level of AFFO plus or minus were in around 93. Now, I think, but I would think if FFO picks up over the next two, three years, we'll continue to grow the dividend. But may be grow up at a little lower rate then the growth of FFO is what I would like to do. But I would wanted to think too far below 85%, and I think closer to 90 is long-term what we're comfortable about, we're in the business to pay dividends to people and that's really what we're all about and then secondarily the business tends to be pretty stable.

Paul Meurer

The other thing two is to look, and we've continued with small dividend raises. Let me kind a diagraph and kind a walkthrough what really went on you know the last few years. It’s interesting because while our FFO is going to be relatively flat. You know, kind of 2000 to 2010, we've raised the dividend but in smaller rates. And if you think and look at the earnings the last three years and you take Crest out and as you know, we never calculated the Crest and we’re looking with our payout ratio. So, the payout ratio look artificially lower than it was, because they're anywhere from 6 to $0.10 of share in Crest. So, we're really looking at the quarter earnings and trying to payout course to the 90.

So, whatever that moment of payout ratio looks like compacts little less. And we close Crest down and then if you look at the last few years not doing much acquisitions for the last three. You're really down to our core FFO coming of the portfolio and we're very portioned in that most of the acquisitions that we really did 2002 to 2007. One other things we didn't talk a lot about that we're really centering in on as trying to build higher lease accelerators into those transactions that we did. And when we got to the 2007 and 2008, we've really started seeing both kick in. Now that's right into the recession and so the interesting thing was even though there was some rent erosion of the core portfolios, we doubled about fixed filings and couple of other tenants that need a rate reductions. That the revenue line and the FFO line state fairly flat but that was also a function of this over just starting to kick in. And so the modest dividend increases we're really were a function of wanting to continued increase a dividend and having stability but also seeing some of that erosion and that was probably in run rate about $0.09 in erosion that was made up for find this accelerators.

And so as we can not look forward right now, my sense is if you don't get it double dip from here and watching our watch list which is spinning out. I would think that kind of that erosion would probably in towards the end of the year and when that happens I think you are going to see the run rate on things go rents go up. And when we see the run rate and things go, rents go up and we see that erosion stop that's when we're going to get a comfort level for the core earnings going up and really that would be the first time I think much more dividend increases above the four times kind of we done the last few years.

Jeffrey Donnelly – Wells Fargo Securities

Very helpful. All right. Actually since you touched on a little bit, I think depending your outlook for the economy, I think last quarter you gave us a view, a forward view as the backdrop how you are going to manage the income, that was somewhere between I guess it called bad and neutral. Have you shifted it all, as you’ve seen some of these glimmers of strength returned to various segments of the economy?

Unidentified Company Representative

If I was standing looking over my left shoulder to bad and standing looking over my right shoulder the neutral maybe I have just adjusted myself to look a little more to neutral for now but I am skeptic.

Jeffrey Donnelly – Wells Fargo Securities

Okay. Is it that should imply that you look to maybe de-lever the company further or do you think its fine, the way it is?

Unidentified Company Representative

You know, frankly I think the leverage is fine the way it is. We are right around 29%, 30% leverage if you do it that way and that’s kind of what we targeted. The long-term policy and I think we put together in 1984 was we wanted to keep it below 35 and if we ran from 20 to 30 to 33 that was great. And given around 30 right now we’re just fine but if we could use equity for our growth in the future we don’t think that would hurt because with all of this money that's sloshed into the system you kind of making a bifurcated that, one is, is that okay, we grow slow, it's going to long time before rates go up and there is not much inflation in which case you’d say, yes, let's leave leverage where it is or even increase it. But the colliery of that is if you do get down the line and there is some traction in the economy, then maybe you’ll see some inflation in that case rates would go up and delivering modestly would be a very warm and comfortable position to be in at that time. So, I think a little biased for delivering but it's not major program.

Jeffrey Donnelly – Wells Fargo Securities

And just last question was, I don’t want to leave Paul out of it, what’s going to be the, I guess, the annualized run-rate of increase in G&A not only if just the amount of people you just hired but I think you mentioned of that the some additional hire is beyond that. So, if you look at it I guess on a full year basis is we’re going in to 2011, and I guess the second part of that is, is there a level of acquisition volume that you need to see to justify the added cost?

Unidentified Company Representative

Yes, G&A for this year, well, first of all, let’s put it this way 2009 with about $21 million or 6.4% of total revenues which is a metric we always kind of glanced that. This year we expected to be about $26 million or about 7.5 % of total revenues. That assumes, you know, that the 100 to 250 million of acquisitions kind of a net level. But to extent the acquisitions could accelerate beyond that for some reasons G&A could be a little bit higher to the extent it’s on the $100 million level, then it would be a little bit lower but at 7.5% total revenues. I think that still put us in pretty good said [ph] and pretty good said [ph] historically in terms of not only where we’ve said as a the percentage of total revenues but where we’ve said we’re on a comp basis I think relative to somewhat appears in what you [ph].

Unidentified Company Representative

And I’ll just say that I think the acquisition guys, I wouldn’t say there’s a certain level of acquisitions to justify the guys that would say there’s a certain level of that, guys needed to get the acquisition.

Unidentified Company Representative

There are going to be a light effect. Right, I mean, that’s something Tom touched on was how we kind of bend down and enhanced [ph] little bit ‘07, ’08. You saw G&A go down a little bit ’09 as well, and now you’re going have a light effect here where we’re wrapping up G&A a little bit in advance that what we see as some opportunities on the acquisition side that we think we’ll justify those in large [ph].

Jeffrey Donnelly – Wells Fargo Securities

I don’t mean, to have kids [ph] you know has to be off on a tear that you know, jeopardizes the company but on the other hand, you know, if you are ramping a backup I am assuming a city more than and you know, $100 million a year?

Unidentified Company Representative

Yes, we most certainly know their right to, but you know, again I don’t want to get too far out in projecting the future because, if we just run back to a year ago you look at those credits spreads that I’ve talked about. You looked about what was going on. It was a very different world, so we all feel a lot better here 12 months later, but let’s also remember what we went through and be discipline in terms of how allocating capital on the buy side or issuing and if I am going to take a little risk I will do it on some personal and G&A and hopefully it will work out well.

Unidentified Company Representative

And we don’t have any more positions in research if that’s really what you getting at here Jeff.

Jeffrey Donnelly – Wells Fargo Securities

So, I want to be the Catty [ph] thanks. Thanks guys.

Unidentified Company Representative

Thanks.

Operator

Your next question is from the line of Rich Moore. Please go ahead.

Rich Moore – RBC Capital Markets

Yeah. Hello, that is -- on the movie galleries that you talked about last quarter. I think you were thinking you are going to get back 12 out of the 24 and it look like you only had two more vacancies total this so I think that’s around 77. Is there anything happened with that?

Unidentified Company Representative

Yeah. We got couple back, but I really can’t comment on it because it’s we’re full swinging [ph] around the committee.

Rich Moore – RBC Capital Markets

Okay. Okay. So is it --

Unidentified Company Representative

When we will, when we can --

Unidentified Company Representative

Let me just reiterate what we mentioned before. Rich it might be helpful. We used to have 34 locations we got 11 back in ’07. So, in theory those 11 were of lesser quality then the 23 that we cap the debt time. And that the experience of that 11 it’s been descent. We had seven of those released that 70% of prior rent so that might be a helpful metric as you look at what might happened to the remaining 23 that we have now.

Rich Moore – RBC Capital Markets

Okay. I got you; thanks and you can’t go any further now, I take it.

Unidentified Company Representative

Yes.

Rich Moore – RBC Capital Markets

And as far as, yes you did great. And as far as other bankruptcies you said watch list was kind of thinning out. Did you have any others this quarter and when we say thinning out I mean usually I think of the first quarter is kind of bankrupt this season. So sounds like that they are sending out a private and pretty good progress of the year.

Tom Lewis

I think we are sending out the issue and this is why I was talking earlier about, okay, if things are starting to thin out here, when does occupancy kind of bottom and when does same store rent the erosion come off it. And there’s a lag effect, so I really, I’ve gone down to portfolio management and sit down and said, “Okay, let’s take a look at everything out there, what’s your working on what we see coming”. And it end up with kind of an absent nothing else of major proportion. You probably look fourth quarter, first quarter next year to see things for rent increasing. But you know, there has been a slow down in things popping up on the watch list. You never --

Rich Moore – RBC Capital Markets

Okay. Nothing this quarter, Tom.

Tom Lewis

No, nothing this quarter

Rich Moore – RBC Capital Markets

Okay, great. And then the lease expirations coming up, I mean, how do you feel about those? I guess a little bit more positive given the economy.

Tom Lewis

Yes, relative to lease roll over we've done, we were off to a good start for the year. I think we've done 26 in the first quarter and 25 went back to same tenants. And we actually saw some increases where it's been modest decreases in the last few years. It's a fairly small schedule. This year, I think there are 118 left, but that’s about 3% of revenue, but if you look at it, two-thirds of those are rolls that have rolled before. And typically when they go through rollover the first time, if there is something we could get it back and it hits you. The second rollovers are little better. So, our guess for the year right now is we got in the cash flow it's little bit of decline off there of a few 100 basis points but not a lot.

Rich Moore – RBC Capital Markets

Okay. Good, thanks. And then I think you said the new properties you acquired the auto services and health and fitness, are any of those existing tenants?

Tom Lewis

Yes, LA Fitness, which is one of the reasons that you see that pop up a bit.

Rich Moore – RBC Capital Markets

You're right. Right, good point. And then, okay so just then, and then would there be more with either, either category, either those ---

Unidentified Company Representative

I hope so. But, you know, LA Fitness is our largest tenant. At some point we'll make a decision. Generally, 10% is our absolute maximum, but there are up at 6.1, so we want to watch that. They’ve been a very good company relative to performance, they've done extremely well and they – we've done good business with them, so we may do a little more, but at some point it need to moderate.

Rich Moore – RBC Capital Markets

Okay. And the other services guide is not something sitting behind this initial purchase.

Unidentified Company Representative

No, no. Not that I’m aware of. He was new, we talked to him for sometime and we’re able to do a transaction and they are our clients, so he has to come up. We hope we get the call.

Rich Moore – RBC Capital Markets

Got you. And then last thing, I think I had notes last quarter that Tire was one of the better same store rent increases and then this quarter it was one of the worst. Is that right?

Unidentified Company Representative

That is, and let me bifurcate that. We had one tenant that went through a chapter 11 last year. And I think we talked about him in the last call. Big 10 Tires and there were some rent reductions and this is the first quarter that they kind of hit the same store rent numbers. And last quarter we had increases from our other tire people, so part of that is timing.

Rich Moore – RBC Capital Markets

Okay, very good, got you. Thanks guys.

Unidentified Company Representative

Thanks, guys.

Operator

And that dose complete today's question and answer session, I'll now turn the call back over to Mr. Lewis for any concluding remarks.

Tom Lewis

Okay. Thank you very much everybody for taking the time and enjoy the rest of earning season. We look forward to talking to you soon. Thank you.

Operator

Ladies and gentlemen, this concludes the Realty Income first quarter 2010 Earnings Conference Call. If you like to listen to a replay of today’s conference, please dial 1800-406-7325 or 1303-590-3030 and enter an access code of 4283815. And since we would like to thank you for your participation. You may now disconnect.

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