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Realty Income Corp. (NYSE:O)

Q4 2007 Earnings Call

February 14, 2008 4:30 pm ET

Executives

Tom Lewis - Vice Chairman and CEO

Gary Malino - President and COO

Paul Meurer - EVP and CFO

Mike Pfeiffer - EVP and General Counsel

Tere Miller - Vice President of Corporate Communications

Analysts

Sumit Preet - Banc of America Securities

Philip Martin - Cantor Fitzgerald.

Anthony Paolone - J.P. Morgan

Andy Gigiowel - Citigroup

David Fick - Stifel Nicolaus

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Realty Income, fourth quarter 2007 Earnings Call. (Operator Instructions).

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

Tom Lewis

Thank you very much, Benz and good afternoon everyone. Welcome to our conference call and our purpose is, again, to go over the operations and the results of our 2007 fourth quarter and year and then we see if can offer some color for 2008, as is our custom.

In the room with me today is Gary Malino our President and Chief Operating Officer; Paul Meurer, Executive Vice President and Chief Financial Officer; Mike Pfeiffer, our Executive Vice President General Counsel, and Tere Miller, our Vice President of Corporate Communications.

And as always, I’ll start by saying that during this conference call we will make certain statements that may be considered to be forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements and we will disclose in greater details in the company's quarterly report and on the Form 10-K the factors that may cause such differences.

And Paul Meurer, then if you could go ahead and start with an overview of the numbers in the quarter and the year, well get kicked off.

Paul Meurer

Thank you, Tom. As usual, I am going to comment on our financial statements, provide some highlights of our financial results for the fourth quarter and start by walking through the income statement. Total revenue increased 16.8% for the fourth quarter as compared to the fourth quarter of 2006. Rental revenue increased to just under $78 million in the quarter, primarily as a result of new property acquisitions. On an annualized basis, our current total rental revenues are now approximately $318 million.

Same-store rental revenue increased 1.2% for the quarterly period and 1.4% for the year. Other income was unusually high at almost $2.7 million for the quarter, due to the interest income from excess cash proceeds invested from our September bond offering.

On the expense side, depreciation and amortization expense increased by almost $4.6 million in the comparative quarterly period, and depreciation expenses increased as our portfolio continues to grow.

Interest expense increased by about $9 million during the fourth quarter, as compared to the fourth quarter of last year and that's increased due to more bonds outstanding, as compared to a year ago, specifically to $550 million of 2,019 notes we issued in September.

We had zero borrowings on our facility throughout the fourth quarter. On a related note, our interest coverage ratio continues to be very strong at 4.1 times, while our fixed charge coverage ratio also remains strong at 3.1 times.

General and administrative expenses for the fourth quarter were about $5.5 million, representing only 6.8% of total revenues for the quarter. Overall for the year, G&A expenses were $22.7 million, or about 7.7% of total revenues. We expect G&A expenses in 2008 to remain at or maybe even below this ratio.

Property expenses went down on a comparative basis to $872,000 for the quarter. Overall, our portfolio remains very healthy at 97.9 % occupancy. Total property expenses for the year were only about $3.5 million and we expect these expenses to essentially remain flat or slightly higher in 2008.

Income taxes, which consist of income taxes paid to various states by the company, these taxes totaled $444,000 for the quarterly period. Income from discontinued operations for the quarter was $3,115,000. Real estate acquired for resale of first few operations of Crest Net Lease, our subsidiary that acquires and resells properties. Crest sold 17 properties for $25.7 million during the fourth quarter, for a gain on sale of $3.5 million and overall for the quarter, Crest contributed net income or FFO of $2,735,000.

Real estate house for investment refers to property sales by Realty Income from our existing core portfolio. We sold four properties during the fourth quarter, resulting overall in net income of $380,000. Preferred stock cash dividend increased to about $6.1 million for the quarter, because of the Class D preferred shares we issued in the fall of 2006.

Net income available to common stock holders was $27,113,000, down slightly from $28.4 million in the fourth quarter of 2006. For the year, net income increased by over $15.7 million to about $116 million. Funds from operations or FFO increased 6.5% in the quarterly period. FFO per share increased 4.3% to $0.48 per share, as compared to $0.46 per share in the fourth quarter of 2006. $0.03 of this quarter's FFO came from positive results from our Crest sales activity. Our FFO per share before the Crest contribution or FFO generated by our core portfolio was $0.45 per share as compared to $0.46 per share in the fourth quarter of '06. As we noted in the press release, the primary reason for this number being slightly less, is the holding cost associated with the excess cash we raised in the September bond offering.

Funds from operations for the year increased 21.8%. FFO per share, for the year increased 9.2% to $1.89 per share as compared to a $1.73 the year before. FFO before Crest for the year increased 3.5% to a $1.78 per share, as compared to a $1.72 per share in 2006.

When we file our 10-K, we'll then provide information you need to compute our adjusted funds from operations or AFFO or actual cash available for distribution as divided. Our AFFO, or cash available for distribution is typically higher than our FFO, as our capital expenditures are relatively low and we don’t have a lot of straight line ramp.

Our continued growth in earnings allowed us to continue to increase in our monthly dividend this quarter. In December, we increased the dividend for the 41st consecutive quarter and the 47th increase of the dividend overall since we went public over 13 year ago. Monthly dividend paid for the year increased 8.6%, as compared to last year. Our current monthly dividend is now $13.675 per share, which equates to a current annualized amount of $1.641 per share. Our dividend payout ratio for 2007 was only 82.5% of our funds from operations and even lower on an AFFO basis.

Briefly turning to the balance sheet, we continue to maintain our conservative capital structure. Our debt total market capitalization is only 32% and our preferred stock outstanding represented only 8% of our capital structure. We have zero borrowings on our $300 million credit facility and thus, we have no exposure to variable rate debt. Our credit facility also has a $100 million expansion of (inaudible).

Furthermore, as of year end we had a $193 million of cash remaining from the September bond offering. This cash is also available for 2008 acquisition, before we even need to borrow on the credit facility. In November 2008, we have a 100 million of bonds coming to you and in January 2009, we have another $20 million of bonds coming due. We've planed to reserve cash or credit facility capacity for this $120 million of obligations over the next 12 months.

Thereafter, our next debt maturity isn't until 2013, so we do not need to access any new capital for any upcoming financing needs, which I am very happy about, and so I'm not sure the public capital markets are really very open and available right now anyway.

In summary, we currently have tremendous liquidity with substantial available capital for acquisitions and our overall balance sheet remains very healthy and very safe.

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

Tom Lewis

Okay. Thank you, Paul. What I'm going to do is normally run through the key operating areas of the company and then I'll try and give you some color relative to the rest of 2008. Let me start with the portfolio. The portfolio is generally performing well. We ended the fourth quarter with 97.9% occupancy, which means we had only 48 properties available for lease out of the 2270 that we have on the portfolio. That's down about 40 basis points from the previous quarter, and is primarily a function of lease rollovers varying month-to-month. And that we think continues to reflect pretty good operations in the company at the 97.9% occupancy.

The vacancy continues to come primarily from the normal activity of dealing with lease rollovers. And that's basically coming to the end of the 15-year to 20-year lease, which we have all the time, given the size of the portfolio, and how long the company has been around, and I think that the portfolio management department does a pretty good job of handling most of those without them coming to vacancy with some due.

Eight of the new vacancies, however, did come from credit default from a couple of tenants this quarter. It's not a larger number, given almost 2,300 properties, however, it has not been the case as most of you know, over the last 6, 7, 8 quarters that any of that was coming from credit default and so it peaked my interest. I took some time to go in and take a look at each of the situations and try and get an idea what it was. And after looking at it, I really don't think it is tenant-oriented or really related to a couple of the tenants we have on just a few properties.

By the way our projection of rent loss on the release of the 8th we estimated about $10,000 in annual ramp dissolve, so it is not significant given that we have about $300 million in annual revenue.

I think almost everybody is aware of the Buffets filing involving 116 properties that we own in our portfolio. They comprised about 7.7% of our rents and that reorganization is ongoing; we think it will take a couple or three quarters to work itself out. I would say we feel pretty good about our situation on those assets. We believe the properties we own with Buffets are the more profitable properties and as such we should do pretty well on the reorganization. We also believe we bought those assets at very attractive prices and also very attractive rents and that is we should do pretty well. I would note though, it is an evolving situation and as is typical with these; we have worked on many of them, generally it takes a while for them to work themselves out and since it is in the course, I am going to be mindful in my comments today that I don't want to get too specific relative to the individual assets or the components or outcome of process and that's probably a good general idea of disclosure.

However, we will report fully a postmortem on this as we get through it and talk about what went on as we typically do when these situations come up. And it will be very instructive for all of us a couple of quarters down the road, to walk through this and take a look at it and I think we will all find it interesting.

We will have some brief commentary in the K that we will disclose, as I said we have 116 properties that represent about 7.7% of ramp. Buffets has rejected 24 properties on a Schedule (b) filing right after the bankruptcy and none of them, none were Realty income properties. I will also say that as of February 12th Buffets was current with the lease payment on all of our properties; that does mean the February ramp and some here in the middle of February that means they are paid up on all of the properties.

And we will also say that based on our current analysis of the Buffets locations that are actually owned by Realty Income, we believe that the filing will not have a material effect on our operations or the financial position of the company and that commentary will be indicative and we'll it file shortly.

I would also add for everybody’s benefit that the Buffets filing was not part of our assumptions as we put guidance out for 2008 on the November call as you may have noticed, we have the same guidance for 2008 now as we did on the November call however, we do have the Buffets filing and our current opinion of its resolution is included in those assumptions that we use for guidance today and obviously we have the same numbers in guidance for 2008.

Let we move on. Same-store rents in the portfolio increased 1.2% during the first quarter, our fourth quarter that’s why it was 1.1% for the same period a year-ago and for the year we're up about 1.4%. Of the 30 industries that we have represented in the portfolio only one had declining same-store rent during the quarter and that probably won't surprise you that that was home improvement, five had flat same-store rents and 24 of the industries have same-store rent increases and about half of the increases came from sporting goods, childcare, restaurant portfolio and convenient stores.

We continue with our acquisitions to further diversify the portfolio as I mentioned earlier, we're up to 2,270 properties. We have 30 retail industries represented in the portfolio and as of today, about a 115 different retail chains. We are not in 49 states; we added one state last year, which was Maine. We are still not in Hawaii, perhaps due diligence at the senior level might be warranted on that guys.

For the year, we added 325 new properties to the portfolio, they released the 16 retailers and 12 of the retailers were new to our portfolio. I think we remain fairly well-diversified relative to industry exposure. As you may have noticed in the release, restaurants were up, given the recent transactions that we've done in the industry over the last couple of years. At the end of the fourth quarter, we were about 24.2% as we went out and took advantage of really some of the dislocation that's going on in the restaurant industry and there are particular needs for financing recently.

We now believe, given we're at that level, we are full in the restaurant sector. We stepped back actually, very little of what we did in the fourth quarter was restaurant and now you'll see we’ve reduced that back under 20% of the portfolio, which will primarily be through acquisitions in other areas. We've done that before with other industries and now we'll do it with restaurants, which is an industry that we like.

The second largest industry is convenience stores, which is about 14.1% exactly where we were a year ago with it and down from 19% two or three or four years ago. After that we have theaters, at about 8.4%, which is down from 10% a couple of years ago, and then child care, which is about 7.7%; for those of you who've covered us for many years that was actually close to 50% of the portfolio a numbers of years ago. So we continue to be diversified.

I think, as a goal, generally we want to keep any one industry under 20% and any tenant under 10%. We will, from time to time, go a little bit beyond that, if there are some compelling opportunities in an industry. But we don’t get much beyond that, we want to stop and then take it back under 20% and that's obviously what we will be doing here and we have done a couple of times in the past.

From a tenant stand point, our largest tenant is about 7.7% of rent here. Currently, I think it was 7.8% on 1231. The next largest tenant in the portfolio is about 4.5% and then our ten top tenants are a group, or about 42% of revenue. Our top 15 are largest 15 tenants are about 55% and once you get beyond the 15 you're really down about 2% of rent and so I think we remained fairly well diversified relative to the tenant base.

(inaudible) remaining lease link when the portfolio also continued to increase and is pretty healthy at 13 years and that’s really been going up as a function of a fairly high level of acquisition activity that has been coupled with when we are writing lease rollovers, where obviously the leases have become very short and we lengthen those out when we realized them. So I think in some of the portfolios, we have seen a little bit of credit deposit this quarter, but with occupancy very strong and same store rent up, we feel very good about where we sit today and also where we are going to be throughout the course of the year.

Let me move on to property acquisitions, which were obviously very active in the fourth quarter, where we bought $120.8 million in new property, we had 93 new properties and properties under development. Average cap rate that was very attractive at about 8.6% and at an average lease term of about 19.5 years. So, very good additions from a standpoint of the spread that we will be receiving, as well as the length of the leases. There were about nine different retailers in four industries and spread out in 19 states. All of that was for the core portfolio and none of the acquisitions were for our Crest Net Lease subsidiary in the fourth quarter.

We funded that $120 million of acquisitions, with cash on hand that was generated from our September issuance when we issued $550 million of 12 year notes at a 6.77% rate. So with an 86 cap in the money costing us 677 we have about a 183 basis points positive spread on those acquisitions that should increase as lease payments accelerate and time goes on.

For the year then, I gave $533 million in acquisitions on 357 properties, that obviously was significantly above our estimate for the year, of the $503 million and 325 properties were for our core portfolio and only about a $30 million was for our Crest Net lease subsidiary. And again, the average cap rate was about $8.6% and it was well diversified by tenant and also by industry and by the states that it was located in. By the way, $533 million is our second largest year in acquisitions which really does follow behind '06 where we did about $777 million and obviously all of those acquisitions should positively impact our FFO for 2008.

Normally on this call and I'll do it again this year, we give you some statistics relative to what we went through in committee and the percentage of the transactions that we reviewed that we actually looked at. We have a lot of transactions come in the door that generally our acquisition officers will take a look at and realize pretty quickly they don’t fit what we're looking for. So I am not including those in these numbers, but if you want to take this down, I will give you an idea of the activity that we had in committee and what we bought.

In committee this year, we worked on 112 separate transactions, they involved 2342 properties, the approximate value of the real estate was 3.95 billion the average cost of our property was about $1.68 million and the average cap rate was just down 8.6%. And out of those, during the year, we acquired and closed on 20 of the 112 transactions, about 357 properties, as I mentioned earlier for 533 million, the average cost for property that we acquired was about $1.5 million, the average cap rate 8.6%, and so I think that works out to about 13.5% of what we worked on. So it clearly was a very, very active year.

In 2007, again about [$4 billion, about $533 million], about 13.5% that compares to in '06 working on about $5.2 billion, acquiring $770 million, or about 14.8% in '05 going through about $3.5 billion and buying 14% of that in '04, about $2.6 billion and buying $215 million or about 8% of that. I think the highest percentage here we've had was '03 where we went through about 1.4 billion and bought $372 million.

But as you can see, while the overall volume we worked on was down a little bit in '06. the volume historically was still pretty high, and the percentage was pretty much right inline with the 14 then have to 15% generally what we are looking at we've been buying over the last six years or so. We've tried to remain selective and really watch credit and put those things in the portfolio we bought, the lead we will get will be paid on.

Relative to the acquisition environment, generally and kind of how we see things at the balance for 2008, it is most certainly an interesting acquisition environment out there today. And in cap rates in the fourth quarter that closed and those that we contracted for in the fourth quarter, but were closed on the first quarter of 2008, will remain pretty flat. I think the 86 number is pretty good for planning purposes.

And obviously, we still have a lot of capital from the bond issuance or cash to fund those the cost of 6.77%, so we should be able to maintain good spreads. I would say that on current negotiations, the world has really changed and in just the last few weeks, relative to how the markets look, I think capital has really dried up in the debt markets for lot of the people that are out there acquiring properties today are trying to sell it. I think a lot of the net lease buyers that would have been working on larger transactions over the last couple of years have exited the marketplace and so competition out there has really come down, relative to those people that are out in the marketplace and looking for transactions.

I think there are some people out there looking to sell properties and do some transactions in the next few months and they are really seeing that the process is working differently. And there are much fewer buyers out there for them. And I think there are bunch of people out there who thought they had a transaction pending and we are running a process that some of the transactions have really flown away from them as they get close to closing and it has really had an impact on the market.

My best guess, looking at deal talk out in the marketplace on larger institutional transactions, I think there has been some movement in cap rates, maybe in the 35, 60, 70 basis points in the price stock just over the last month or so which is pretty substantial as the institutional transactions lagged the one off market. I think for developments, properties for future delivery, quotes were getting much harder to come by for the people who have projects some of which they have committed to that really come out for delivery 6 to 12 or 18 months down the way and if they are going to build them, they are going to have to do so in a moving cap rate environment.

And then I think probably the one we noticed the most is in the one off market kind of the 1031; one property being sold at a time and anecdotally kind of a high 6 to 7 '07 cap rates on individual properties that we saw out there in the 1031 market over the last couple of years or so have really moved. And the things that we see coming in the door today where people are selling one-off properties have moved into the high 7s and the 8s. So there maybe as much as 50 to 100 basis points movement on cap rate in those one-off transactions in the 1031 market.

And I really think that is also based on the fact that it’s a decent quality retailer and the price point is attractive out in the market today. If it is in a secondary market or say a tertiary market or let’s say kind of third rate retailer or if there is anything where it looks a little funny, then I think cap rates may even move more. Much of it came through I think credit spreads, gapping out in the bond market today.

Now, obviously that’s a kind of a current look as to what we've seen in the last three four weeks and most of you know that there has been very little capital market activity out in the CMBS market or in financing a real estate and it obviously can move back, but if financing stays the way it is, I’ll tell you it wouldn’t surprise me to see cap rates out in the second quarter and in the third quarter, maybe up about 9% in the above range on transactions. So I think it will be really interesting to see how this transpires and again I am talking about pretty good product in decent areas at good price points, but it is very much in transition today, in real time.

We were thinking about this and going back and looking at cap rates from a historical perspective and I was trying to take a look at the cap rates we bought out and then look at high yield data in the marketplace and where it was priced on a yield basis. And it’s interesting that from about 1969 and 1993, we bought pretty much in a 10.5 to 12 cap rate range and during that period of time, you're really looking at the high yield index with a low yield of about and nine and three quarters, 10ish and then during some dark periods getting very high. 94 to 96 you started seeing cap rates come in to 10.5 and 11, high yield was priced at 9.5 to 11. 97 to 99 cap rates came down and for few years there were pretty solid and almost everything seemed to get priced at around 10.5 and the high yield index was running 9 to 11.

In 2000 to 2002, high yield bumped up in the 12% to 14% range. I think that had an impact on caps and we were back to 10.5 and 11, but it was really just in recent years in '03 and '04 when cap rates fell down into the 9, 9.5 range, high yields dropped from about 13 to 8.5, and in the last three years, a lot of us have got used to watching in this market 8.5 caps when we had the high yields in the 7% to 8% range.

And I really think what's driving this is the changing general financing market and also high yield. High yield today, you're looking at 10 plus in the yield range, and I really think in the second half of the year or maybe out in the second quarter, you'll see cap rates in these types of products moving up to about 9%, and I think it will be very interesting to see.

In terms of us, for 2008, we've used a $250 million in acquisitions in our guidance. We think we will do a lot of that in the first half of the year and have a pretty good first quarter and most of that are pretty good spreads using the cash up that we have sitting on the balance sheet from our bond offering. And that should give us a very comfortable start to the year. And then it’s really kind of a guess beyond that. I'm not sure I would put out much capital than yesterday.

I think we're seeing price stocks up in the 9 and my sense is that you will see those things that were contracted for in the fourth quarter, that are delivered in the first quarter, we acquired probably being in the high 86, but then I think in the second quarter you might see it move beyond that. And it's our observation that any time you are seeing cap rates move like this, it's probably a good time even though we have cash allocate and we have obviously a lot of room on the credit facility and kind of watch things for or month or so and only act very selectively, we didn’t get high rates and I think moving out beyond using the cash, I really watched cap rates and saw where you can match fund and so I think it is a good time to make sure that you are not catching the falling knife and you are taking advantage of some moving cap rates.

And so I think it could be at worst case an okay year, right in guidance with acquisitions, because we are going to be off to a good start or it could get very interesting if other forms of capital are not available and there are people out there that are looking to do some things. And obviously, with the cash on the balance sheet and the credit facility there is a lot of room for us to do that if we wanted to do it.

Another way to say it is I think we pre-funded the acquisitions for the first quarter and some of the second quarter by the $193 million sitting on the balance sheet and beyond that will be interesting to see, but I think we will have a good year.

Let me move on to Crest Net Lease for a moment, most of you that follows know that Crest is our subsidiary that buys and then sells properties that we started 8 years ago. It has been a very good performer for us and helping us buy large portfolios and then sell off some positions, so we can keep our diversification. However, we all say it is a very different business. Our core revenue is very, very predictable of long-term leases and Crest really comes from some carry on spread on inventory, but mostly from property sales and its pretty volatile.

We did, from a historical standpoint for everybody, we started Crest and in 2002 did $0.04 a share, in '03 $0.06 up to $0.10 in '04, $0.03 in '05, $0.02 in '06 and then in '07 here had about $0.11 a share in Crest. So it is fairly volatile and based on sales. And that $0.11 was really a function of a higher starting inventory during the first quarter of 2007 and then a high level of sales throughout the year.

We started 2007 with 60 properties in inventory in Crest that had a value of about a $138 million and we added most of it in the fourth quarter of 2006. We sold, during the year, 62 properties for a $123 million, had gains on sales of about $12 million and made the $0.11 of share. During 2007, we bought only about 32 properties for $30 million in Crest. So we really, over the course of the year, paired inventory pretty dramatically from where we started last year with a $138 million

At year end here, we have had only about $56 million of inventory and that’s 30 properties and that’s less than we had in '06. And we anticipate cutting that pretty dramatically here in the first quarter where we have a fairly active level of sales and we also anticipate no acquisitions in Crest in the first quarter. And I’ll tell you that the activity has been excellent in Crest, I think that we have either properties closed under contract or with LOIs out of the 30, all the 7 of the properties that are in our inventory to-date. So I think at the end of the first quarter you will see the inventory in Crest was down pretty dramatically and through the second quarter (inaudible) to not much in Crest at all.

Spreads have been very good though on sales we averaged in '07 about 113 basis points on our property sales and we still have a pretty good spreads. I think last year we were anticipating closer to 50 to 75 basis points. So it’s a pretty spread year wise on those sales.

Again guidance for this year we've put in guidance only between $0.02 to $0.07 a share in Crest, versus the $0.11 last year. We think a good part of that will be made in the first half of the year and on much lower inventory levels after that which I very much like having a little bit or no inventory here in what seems to be uncertain market.

With cap rates moving up, I think that this type of business will carry more risk than it has in the last few years and we really intend to minimize the use of Crest in 2008. If cap rates rise obviously in that business, you can loose your spread or go negative on it, and I'm very vary of adding large inventory there, so happy to have it down and we'll continue to get it that way, but very pleased we have lot for sale there.

Let me move on to the capital market side of the business. Paul mentioned we have no balance on the $300 billion credit line, 193 million in cash. We also have the Crest sales that will be bring capital back into the company and also have probably around $37 million we're estimating in free cash flow for the year. So I think that we're well capitalized and given where we see acquisition levels right now, I don't really think that we'll be out in the capital market going on in the near future. I think it's interesting because I think cash is becoming more valuable, over the last few years cash has been kind of a commodity and real estate was very valuable. So I think you're seeing a bit of a reversal here and having on hand is becoming valuable and there are lot of properties moving out at commodity level today.

Relative to dividends, as Paul mentioned we've increased the dividends over the last 41 quarters in a row. We continue to be comported keeping the payout ratio about where it is, and given that with FFO growing this year absent anything on foreseeing we think we'll be able to grow the dividend again here in 2008.

Paul covered FFO and so I won't go too much into that. It was a very good in FFO for the company overall. Core FFO grew at a decent clip although it moderated in the third and fourth quarter, again as Paul mentioned because we kept a fairly large amount of cash on hand which caused us few cents in the short-term. We also have some moving cost into our new building here, but I think taking that capital on the balance sheet, getting it out over the next year good spread we will get the benefit of that for the next 12 years or so and I think it will help us relative to FFO.

Let me talk a bit a minute for about our guidance, it is unchanged this quarter. We are looking at $1.94 to $2.0 a share, which we think is reasonable at this time of the year. That would equate to somewhere around 3% to 6% FFO growth, on what we think a fairly moderate assumptions relative to acquisitions and capital. And again, we look for Crest to decline in that from $0.11 down to 227, and that means we anticipate a very good growth in the core portfolio this year. Our guess is somewhere around 6% plus.

Anyway, that’s our best estimate and kind a review of operations of now, I will just say in summarizing, the portfolio is in good shape, acquisitions had a good year. It was a great year for FFO growth. The balance sheet, which I think at this stage in the marketplace is probably the most important issue for any company, is in great shape and we do not have a lot we are obliged to do in that and we are happy to have the cash on hand.

So that will wrap up our comments and if we can have the operator come back, we would be happy to entertain any questions that people have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first call comes from Dustin Pizzo with Banc of America Securities. Go ahead please.

Sumit Preet - Banc of America Securities

Hi, this is actually [Sumit Preet] for Dustin Pizzo.

Tom Lewis

Yeah. How are you Sumit?

Sumit Preet - Banc of America Securities

Pretty good. I wanted to know what the… I have questions on coverage ratios. You can tell me what the coverage ratio is on Buffets portfolio, and also maybe the coverage on your top ten tenants?

Tom Lewis

Yeah. I won't comment specifically on the coverage ratios due to confidentiality agreement with FAS, but I can give you some good background that I think will get you where you need to go. As of 12/31, our largest then out of 15 tenants did about 55% of our revenue as I mentioned earlier The average cash-flow coverage in the portfolio was about 2.72 times. And if you didn’t look at the overall, then out of that at 2.72 I think the lowest coverage that we had out of the top 15 was a 19 coverage. The highest was the 419, and again a 2.72 average. I will tell you that 19 was not a restaurant company, it was in another industry, So it felt -- the coverages on our portfolio felt somewhere within that grouping, which is very strong.

We've been working since right after the end of the year here updating that, and we have seen the coverages move a little bit overall in the portfolio. But still for the top 15, just getting in some numbers last week on a couple of the tenants, and we do these updating and rolling throughout the year because we get the information at different times. I think the average, when we calculated the last week, was 264, and I think the spread was 170 to about 420, and I would say again the 170, which was lowest then. It was not a restaurant company. So that will give you an idea of where we sit on coverages.

For those of you that aren’t familiar with that, that is looking at the EBITDA of the stores that we own in our portfolio and the ramp about basically get how many times coverage that's a possibility that store is of rent. And to give an idea that 20 coverage, you need about a 50% decline in EBITDA to get a one-to-one coverage. And if you look at two six times coverage -- that means on average there is about a 61.5% decline in EBITDA would take on the properties in our portfolio to get to a break-even.

Sumit Preet - Banc of America Securities

All right. And also do you have any retailers that are maybe in your watch list with bankruptcy risk?

Tom Lewis

Yeah, we've got a few I think the ones that we have out there fairly well known, but (inaudible) on it obviously. We also have Hollywood Video on it, which I think is movie gallery, and then there is just after that a couple of small tenants. I think there is a restaurant that had three units, rejected one, if a deal where it was a $2 million land and building, and we only bought the land under it so we get the building for free so that one we anticipate we'll get better than 100% or run out of it.

And then the ones I mentioned earlier was a small convenience change were got our property back and then the movie gallery, and so there is really not a huge amount on there right now, and outside of those on the watch list, I think people are doing pretty good.

Sumit Preet - Banc of America Securities

Alright, thank you.

Operator

Thank you. Our next question comes from Philip Martin with Cantor Fitzgerald. Go ahead, please.

Philip Martin - Cantor Fitzgerald.

Good afternoon, everybody.

Tom Lewis

How are you doing?

Philip Martin - Cantor Fitzgerald.

Just a bit on Crest, and Tom you made some very good comments on Crest, and I just wanted to dig a little bit deeper here. I understand that you need to be very environmental with Crest and how much inventory you have out there for sale given it's being tough for the potential buyer. But does being wary with Crest, which again I think is appropriate, does that impact or negatively impact your ability to do acquisitions?

Tom Lewis

That's a great question. We've used Crest very effectively with acquisitions. They do very large ones and remained diversified, so I say it might keep us from going out today and taking on a very, very large acquisition. But what we did during I think two or three quarters last year, and what we did during the first quarter or the fourth quarter, and we are doing the first quarter this year. Since they are not huge acquisitions, we are going in and really sitting down with the tenants and structuring them so that we can take them all on balance sheet and we have a high-comfort level because they are really don't want to put those things out there with Crest.

And let me kind of walk through that again because I think it is important. Crest has worked great for us. We've I think since 2000 bought and sold 240 properties there and made a lot of money on it, and it’s been great and very, very profitable. But before we all get carried away with that kind of flip business, I think it was an environment where we all should have done very well. It's been a very easy environment. We have all been into declining cap rate environment really from 2003 to 2007. Cap rates fell about 150 to 200 plus basis points, which meant you are out there buying these things holding for 6 to 8 months then selling them, and while you are holding them, your inventory is getting marked up. Your spreads are a little wider than you thought, and so even when you make a mistake it pretty well works for you.

I would also note that if you look at that period, think back on how easy financing was, versus where it is today and that's a double edged sword that makes your buyer easier for him to finance the transaction, but also means that the in the 1031 market there were a lot of gains that were had by people who were selling, who ended coming out and buying Net Lease properties. So I really think it was a period in the business, which we obviously took advantage of where pretty much everybody who got in it was looking like a world class athlete out there.

And I think if you are looking at, look at it in a rising cap-rate market you have the reverse, your spreads are going to get squeezed. If they loop too much, you can loose your spread and go negative on the spread. And if you look at the impairment rules from an accounting standpoint, you go negative on the spread. It’s a mark-to-market business, so there is really more risk in that business than it looks like in good times, and so it’s just something as we look at our business today to get down with just a few properties in there.

And then also probably out of the business, so we get clarity and better financing. I think it makes a lot of sense. So that’s basically what it is. So that means maybe I wouldn’t do a $350 million deal where I have to put $60 million in Crest, but I might do it at $60 million $80 million or a $100 million or $120 million, but it will be back with the retailers structuring at where we are comfortable maybe eliminating some assets from the deal with them, but in this environment where capitals hard to come by, we're finding the retailers are willing to work with this on that and happy to have the capital.

Philip Martin - Cantor Fitzgerald.

Okay. So it sounds like the retailers are loosening up a bit here and allowing you maybe the cheery pick a bit to help get at least part of a deal done, and is there a potential to work with, let’s say, the number-two bidder on a deal, or maybe you come out victorious on the bid, but the number-two or number-three bidder, maybe they take some other properties, i.e. take some of other risks that you don’t want is there that that type of negotiating and structuring potential out there?

Tom Lewis

I think there is, but then again you're down just a couple or three players that we see showing up today, and I am not sure it’s a few, but larger transactions, but I think that potential exists out there. But it really is telling over the last month or so as we've been talking to people how you probably had 5 or 6 people in the food business that were out there doing a lot of us withdrawn, and the couple of the people that were doing larger portfolios they really haven’t been out there active currently. And as you know any time you're running some type of process, and you have 5, 6 bidders, it goes really well, and when you get down the one it’s a different process, so --

Philip Martin - Cantor Fitzgerald.

That’s right.

Tom Lewis

So it’s really different today, and given the cap rates are moving. I think it’s kind of like you saw in housing, when prices started going down, people don’t like the [sticker shot], so they back off, transaction volume drops, they back off until they have to do something, and then they are kind of trying to capture price that they tend to like the market and then you see rates moving or prices moving pretty fast, and that's really been what we've seen lately. We started talking to somebody and you can see the price stock move fairly quickly as people have been exiting the market. And I don't want to say this is a fourth quarter event it's really a January event, and it's really the last three- or four-weeks event.

Philip Martin - Cantor Fitzgerald.

Okay. Well, I know it's a very fluid environment, that's for sure. Last question I had is just with respect to the first half of the year here -- well, really the first half of '08. It sounds like it's going to be a reasonably robust year in terms of acquisitions, and again a very fluid acquisition and lending environment. What's driving these acquisitions, or maybe a better way to ask that, what are the different drivers today versus a year ago driving these transactions and driving the robust growth that you're going to have in the first half?

Tom Lewis

Yeah, I think the growth in the first half was really having some low-price capital in the fourth quarter that we could put out, and that will get us off to a very good start. I think after that with us it's kind of sitting back, and I want to watch the market for a while here, and we if we did that for a couple of months, we could step back in and wouldn't have to a tremendous amount of business to hit what we've got in our guidance of $250 million, so we could have a lot of patients here. I think what's driving the market, last year there was a lot of M&A. You don't see those transactions being announced, but there is some that's still haven't been financed.

Secondarily, if you look at M&A activity over the last four, five years a lot of that was done with mortgage financing and other types of financing that was not long-term. And so I think you're going to see some of that burning off and a need to refinance into a market where rates aren't as attractive, but quite frankly I think that volume will decline relative to the number of deals but participants will decline pretty substantially, and then its a question of when can you get price stock stabilized. It’s a lot like looking at the unsecured bar market out there for reach today. You can get quotes from the desk, but I think whoever is out there early on, the price discovery is going to be really interesting. And so I think there is going to be a little bit of game of chicken going on for a few months here with some price discovery, and then I think it will be just a thing people coming out and need to do something in the market place, and I think there will be enough of that really from deals done in the past or deals that need to be refinanced. It really won't take a lot of M&A activity to cause a number of transactions to happen.

Paul Meurer

Phil, you have heard it say for couple of years now that we felt like our primary competitor in the market was the debt product, maybe even as opposed to other net-lease providers, and so Tom's comments on some level of lessening competition doesn’t just include the net lease providers, but the debt product becoming more difficult for the retailer and the private equity firm involved to access on a cheap, cost-effective basis. Whether there will be a leverage-loan bid from Wall Street or CNBSS product or even a bank-financing product. So they have a near-term obligation in some nature it makes the [Telly's] backed capital an intriguing option for them to consider and perhaps will help us as the balance-year progresses.

Tom Lewis

And I would say Philip, I can have three scenarios: scenario number one, and I will give it a one third rating, which is we do a fair amount here in the first and second quarter, and then we sit back and through the balance of the year just do a little bit more and do the two fifty if the market stays very unstable. I would give a third waiting to saying that it stay really tough out there, and we are able to go out and do a little bit beyond that, but it’s a very good rate. And then I would say a third of it, who knows? Maybe things get back to normal, you come in the second half of the year, and it’s kind of like the few years. Although I am not sure I would wait that one a third.

Philip Martin - Cantor Fitzgerald

Okay. Well, thanks for the comment, and given your strong position, you have to be pretty excited about the opportunities that maybe out there, but it’s certainly important to kind of take a step back and pause a bit actually in this environment, so thanks again.

Tom Lewis

You bet.

Operator

Thank you. Our next question comes from Anthony Paolone with J.P. Morgan. Go ahead please.

Anthony Paolone - J.P. Morgan

Thanks. Good afternoon. On the FAS yesterday, they had announced like 50 some odd store closures. Do you know if you all were affected by that, or were the numbers you gave out current?

Tom Lewis

I think they are current, Tony. At the filing they had all of our properties open and operating, and we've been watching, and I believe that still through of a 116 we own in the portfolio. I have not checked this morning, it’s kind of fluid. So I maybe off by one or two, but I really don’t think so, we haven’t been notified of any of our properties in the portfolio being closed. We have someone there in the court everyday, and we have some more working on this. They did put out a case for anybody else to see last night, but they called 52 stores over the last couple of days before that.

They have 626 stores so in a re-organization. It doesn’t surprise me that they might take that action, but we believe the majority of 116 of our stores are good stores and profitable. I can also say that they did by the way early in the bank schedule rejected on a schedule b24 properties -- none of those were ours, but that was a few weeks ago. I will say also that they are current with their lease payment on all of our properties and that includes this month, which is February, which means the payment it’s just last week, and I think a good way to absorb it, it doesn’t make sense to pay rent one week and then close the store a few days later or they close them altogether if they are profitable stores. And again based on the analysis that we have our own, I think we're going to fairly well here with a 116 stores there will be a few things happening on a few of them.

Anthony Paolone - J.P. Morgan

Okay. And with respect to the 24% of your revenues coming restaurant, today's biggest can you maybe tell us Q3 and Q4 might be, or just even like how big those are?

Paul Meurer

Yeah, relative to size, I'm taking a second here. I won't if you know is our policy do the name remain, but we have another restaurant chain it's about 4.5%, and then I think the next one is 3%, then next one it 3% and then it falls below 2%, so it's pretty well diversified.

Anthony Paolone - J.P. Morgan

Okay. And then just from an accounting point of view, maybe Paul, give us a sense as to if retail environment gets more difficult, and you start to see some of that stuff happening? How does it work in terms taking credit reserve to stronger revenues?

Paul Meurer

We have actually on a regular kind of basis accrue essentially a bad-debt expense figure to largely account for that based on kind of historical experience. I did mention that the property expense line item for us for example, we don't expect to be increased or if it will or increase slightly. The way you play that out thinking-wise is you get something back, it's vacant, and you actually get handed the keys back let's say you then become responsible for the taxes maintenance and insurance of that property. And then you have that carrying cost for that time, and so you get another tenant in there. And so that would increase your expenses a bit, but we're already kind of budgeting for that a bit. We always do, if you will, to have a handful of the situation in any given year.

And then on beyond that the only other piece you might see if you had any further firm-maintenance issue is your capital expenditures might go up a little bit? If for some reason that made sense that you needed to put a few dollars in it to get a new tenant in, to retro fit it for different type of use or something of that nature. But again we don't expect the expenses to be very large.

Tom Lewis

And there is not, Tony, there is not a lot of large accruals relative to rent. The rent comes in every month, then you get it or you don't get it. If you don't get it, you know what the situation is. If it is, the re-organization typically you will get administrative rent during the period, so when you get it back and then you just hook the current revenue on the property. So any accruals really is -- there may be some percentage rents due at the end of the year, but they are fairly small. So if there is not really a lot you have to reserve there. It is pretty much current-pay business.

Anthony Paolone - J.P. Morgan

Okay. But for instance, your '08 guidance and budgeting, then you would have just a normalized amount of bad debt reserves being taken out of your P&L already?

Tom Lewis

Yeah, but again it’s very, very little. What we do have in there for guidance is what we are looking at property expense you get a run rate for vacancy, you run it up a little bit, you look at taxes, maintenance, insurance, but it is not a big number.

Anthony Paolone - J.P. Morgan

Okay. And then last question, thinking out a little bit further: if the capital markets would remain difficult, and the time that you spend a lot of money in the first half, you start going to the back half. How do you think about your business in terms of finding out what's capital rate do you look to secured debt or just what do you do?

Tom Lewis

Yeah, our way of looking at it has always is pretty conservative. We do not look to secure debt. We have unsecured way of preferred and we have equity. I don't think we want to put any unsecured debt on the books. We have someone room with preferred that markets is open, but you would want to look at the rate see where it is, and really make sure when you are doing a transaction that you are mass funding what you are doing so that you maintain your spread, and I think that’s going to be the theme going into the late second quarter and in the balance of the year is it’s really going to be a mass spread discussion with your tenant, because putting a lot of acquisitions on the books on the credit line and then thinking that five or six months down the road you're going to go out and do your capital markets event, I think its really, really putting yourself out there and probably not a smart way to run the business. We have a lot of capital right now, but even relative to what we have on the line, I think it will come to a point where we're going to have to be having cap rates above where we see current loss to capital looking at equity or looking at preferred, and we'll just operate in that manner and only put capital out when there is a big spread. There is no sense putting capital out just to put it out if you are not going to get paid to do it.

Anthony Paolone - J.P. Morgan

Okay. Thank you.

Operator

Thank you. Our next question comes from [Andy Gigiowel] with Citigroup. Go ahead, please.

Andy Gigiowel - Citigroup

Hi. Can you go over - I am not sure if you have this information, but do you know the rent coverage for the Buffets that they have announced at their closing, and maybe how that compares Buffet’s overall coverage?

Paul Meurer

We only have rent coverage on our property, and because since they are not the one to closes we don’t, but you can pretty well assume that when our retailer and I will speak generically, you are also Buffet’s is in chapter 11, and they are closing stores the vast majority of them are down around one and below.

Andy Gigiowel - Citigroup

Okay. Great.

Paul Meurer

Typically why they closed them because they are generating a lot of EBITDA above rents then obviously for the creditor committee and the corporate makes sense for them to operate those properties so that they can capture that cash flow.

Andy Gigiowel - Citigroup

Okay. And then just more logistical, but how is the administrative rent-period work, and given that this is going to take about couple of quarters to sort through, how can we be comfortable with the tax rate, and in the meantime Buffet’s will continue to pay their rent, or is that something that up in the air? I know that there is a administrative rent period, but I'm not sure logistically how that works out.

Tom Lewis

Sure. The logistics is from the day they file to when they reject a property, they have to pay administrative rent, and so they do so and once they reject, they rejected it, you get the keys back, and they don't pay it anymore.

So it's really the way and rather than talk about Buffet’s and bankruptcy here, chapter eleven reorganization generically is during that period they pay administrative rent, pay the rent, recurring on it, and then they either accept the lease in which case you keep getting paid, and you get paid post bankruptcy and in the future and nothing happens, or you get reject, and at that point you get your keys back and you are back to the property.

Under the new bankruptcy law, it was passed a couple of years ago, I think the initial period they have to make the decision with the real state is 120 days. I don't think they can go into the court, and if they can show a good reason to the judge, he can give them another 90-day extension, but that is the period that they have to reject or accept.

Obviously, I think there could be another 90-day period after that, but at that point I think it would take consent of the landlord under reorganization laws. So essentially once you are in, it's administrative rent unless it's rejected, and then you are off with it, and I'll just say once again given that we have very profitable units for the most part on the portfolio. We anticipate that we'll get paid.

Andy Gigiowel - Citigroup

Right. Is there any possibility that administrative rent is not there to cover the current rent, or is that just not an option?

Tom Lewis

Yeah. Generally that's the chapter-seven liquidation in an eleven. As soon as you file, there is some financing that usually can be arranged, and there usually is capital available, and that's really part of process that you have it available because they really need to. Eleven a lot of times, the people are going into because they need to have their vendors be able to shift the stuff so the store is remained opened, so that is the idea and in eleven they reorganize around the profitable stores, may have to be able to make their payments during their process to do so.

Andy Gigiowel - Citigroup

Okay. And then given that you feel comfortable with your current Buffet’s exposure, I guess, is there a possibility that Buffets comes back during those -- we are in chapter eleven, can we renegotiate the rent, how does that process potentially work?

Tom Lewis

I will stay away from commenting on Buffet’s, and I'll comment on 15, 16, 17 once we've done over the last 20 years, and the process. Typically what will happen is they will file, and then there is administrative rent, and then they go through a process first of all of hiring people to work with them on looking at their stores, and very quickly they will get an idea of what the profitable stores are that they know that they are going to keep, and they get administrative rent. They kind of push those off to the side. They then analyze all the other stores and they then they start going back to the landlords and talking about their situation and trying to negotiate lower rent.

But in the end it really comes to the point where when you have a store that's not generating any EBITDA. They will most likely reject it because it doesn't pay them, and this our opportunity to rationalize the real estate. However, if there is a moderate amount of the EBITDA that's been generated by the store, they probably, if they can have it produced or want to keep the store open and capture that, and so there might be some negotiations going on, but it really is between the two parties as to whether they can come to than agreement.

And then on those stores that are very profitable, if the landlord knows they are very profitable, then obviously the negotiations takes on a very different tenure.

But that is fairly typical in all of these gone we've gone through, and we kind of going back four or five years, there will be a call made here, and the guy making the call for the real estate consultancy they hired knows I had a portfolio management [my car goes] hi Dick, how you are doing? I'm doing good. And how is the family. May I give you my speech, and he does and then we give them our speech, and then we start talking about how profitable the stores are and we get down to what's really going to happen. And it really the starts we are dealing itself is a function of how the stores look and how profitable they are and we've been through this many times.

Andy Gigiowel - Citigroup

Okay, that makes sense. And then maybe you went through this earlier and I missed it, but on guidance you do have a large cash balance, and LIBOR has come down. I guess, what's the offset to the lower LIBOR or with lower LIBOR probably assumed increase this guidance. You could just give a little color on that?

Paul Meurer

Yeah, LIBOR is what we borrow on our line, and we haven't had any borrowings on the line, and we've had a lot of cash sitting around. So, the really differential with the cash fitting around, as we issued the borrowings at a 677, and then we've had the money parked basically in short-term treasuries that have yielded early in the fourth quarter 4%, and now we're down around 2%. So, we really don't have cost relative to borrowing day, but it's the negative spread between the cash that we are holding on the balance sheet. And so we did it out and that's a couple of quarters worth, and then we'll get the benefit of actually having fixed our borrowing cost maybe 100-plus basis points below what we'd have borrowed today, and we get that benefit for the next 12 years.

Andy Gigiowel - Citigroup

So, I guess what -- had you assumed that the short-term market rates would have come down and therefore impacted your interest net income. I guess what's the offset to the lowest-interest income is it the fact that when you [refi] the $100 million later in '08 that you are going to pay that down on the line and that will be lower interest expense.

Paul Meurer

Yeah (inaudible) it's the opposite. We don't have a nickel on the line.

Tom Lewis

You have no borrowings.

Paul Meurer

No borrowings whatsoever on the line, and a $193 million of cash sitting on the balance sheet, where we got that cash from issuing bonds in September, and we're paying 6.77% on an average balance of $230 million during the fourth quarter. And then we've taken that cash average balance $230 million, put it in short term treasuries, and that has yielded us about 3%. So, there has been about a 370-basis point negative spread on the $230 million average during the fourth quarter.

So, that reduced our FFO during the first quarter by a couple of cents and to the extent, we've balances during the first quarter, we'll reduce that. But then as soon as obviously we buy properties, all of a sudden now we're getting an 86-cap rate of that money and we're paying 6.77% and the spread reverses, and obviously we'll have a much lighter spread than if we had not raised all that money in September, and we're out trying to raise it today if we could.

Andy Gigiowel - Citigroup

Right. I guess just to clarify on what I'm asking is because rates have come down the interest income is less. What's offset the lower interest income?

Paul Meurer

The offset the interest income is lower so we're receiving less, but we're still paying out the 6.77 however we're buying the bunch of property.

Tom Lewis

It's investment in new properties.

Andy Gigiowel - Citigroup

Okay. So, is it higher cap basically you're saying that the cap rates on your acquisitions are increased based upon your previous expectations?

Paul Meurer

No it's just that we're putting the money out earlier than we thought…

Andy Gigiowel - Citigroup

Okay.

Paul Meurer

We're going to put it out. And generally as you know, we plan in our guidance $250 million acquisition we kind of weighted equally throughout the year at the end of each quarter. But if we put a fair amount of that out early in the year the impact, particularly when the cash would have been sitting on the balance sheet it's pretty dramatic relative to the FFO.

Tom Lewis

This may help answer your question [in details]. When we sat here on November 1, and gave you estimates we assumed that what we would earn from an interest-income standpoint, and raise investment of that money would be lower in '08 would go down from where they are kind of the 4% we were earning in the fall.

Andy Gigiowel - Citigroup

Okay, great.

Tom Lewis

Because we already assumed that at that time does that help answering you---

Andy Gigiowel - Citigroup

Yes, that answers my question. Thanks a lot.

Operator

Thank you. Our next question comes from David Fick with Stifel Nicolaus. Go ahead please.

David Fick - Stifel Nicolaus

Good afternoon.

Tom Lewis

Hi, David.

David Fick - Stifel Nicolaus

Most of my questions have been answered. I do want to go back one of our phase question, and I recognized that both you feel you've it in hand and that you're fairly well protected. But can you just review for us when you entered into that acquisition and what your underwriting thought process was at the time without the help of a base?

Paul Meurer

Yeah I - again, given the confidentiality agreements, it's going to be mindful of that David. But it was a pretty typical one for us. We started working on that in early '06 -- it was closed in late '06. It was an M&A process that was going on whereby our phase was being hold, and we had talked to several potential acquirers and looked fairly deeply at the portfolio at the company, at the possible combinations with a various buyers relative to business plan number of various financial structures and different prices for the real estate.

As that process went on we did not -- one of the buyers, we worked with did not win the process another buyer won, and they had a sale-leaseback provider, and we talked to that provider, and we took part of the portfolio, and they took part of the portfolio, we had done that before with another transaction. And as we did the final due diligence coming in really through late fall, what we're looking at was the combination of the Ryan's and the Buffets. We were looking at obviously when you get an M&A combination, somebody would have hoped for cost savings.

We're also looking at the restaurant industry, which we actually thought would weaken and took our position on that. Time of buying the real estate what we thought was a very attractive price. Replacement costs we figured that was $2.8 million to $3.5 million a copy, and if you just do the math on what we announced relative to buying, we were in it about $2.6 million.

We thought the rents were reasonable, and we thought that the cash flow coverages on the property we'd be able to buy would be significant enough that if there was a downturn that we'd be protected or said in another way that the margin of safety was significant enough, where we'd be in good shape if adverse circumstances availed itself and they have.

David Fick - Stifel Nicolaus

But clearly if you would seen a VK coming you are going to put yourself in front of that?

Paul Meurer

No, let me stop you there, David. I'll tell you in our underwritings, we assume in every underwriting given that we're going to owned properties for 20 years that management will change, balance sheet will change and at some point there can be an event. Now, if we think the event is imminent, we do view the underwriting differently. But it was underwritten from a standpoint of seeing that happen. I'd recall for you back in 2000, we did a good size transaction with Regal Cinema, understanding that at some point that they might have a filing which they subsequently did. In this case, we did not think there would be a filing. We thought that they would be able to operate the business. But that is something that is inherent in the underwriting of these assets, when we do them.

David Fick - Stifel Nicolaus

Okay, thanks.

Operator

Ladies and gentlemen, this now concludes our question-and-answer session. And I'd like to turn the conference back over to management. Go ahead please.

Tom Lewis

Great. As I know, it's the busy earning season for everybody, and we really appreciate the time and effort that you have put in. And we look forward to talking to you at upcoming conferences and on future calls. Thank you very much. And thanks much for your help.

Operator

Ladies and gentlemen, this concludes the Realty Income fourth quarter 2007 earnings conference call. You may now disconnect. Thank you for using AT&T conferencing.

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