Ladies and gentlemen, thank you very much for standing by, and welcome to the Realty Income first quarter 2008 Earnings Call. During today's presentation all parties will be in a listen-only mode, and following the presentation the conference will be open for question and answers. (Operator Instructions). As a reminder, this conference is being recorded Thursday, May 1st of 2008. I will now like to turn the call over to, Tom Lewis, CEO, of Realty Income. Please go ahead, sir.

Thank you, Michael. Good afternoon, everyone, and welcome to the call. Our purpose is to review the first quarter operations, and give you some color for the balance of the year. With me in the room today is, Gary Malino, our President, Chief Operating Officer, Paul Meurer, our Executive Vice President, Chief Financial Officer, and Michael Pfeiffer, our Executive Vice President, General Counsel, and Tere Miller, our Vice President, Corporate Communications. And as always, I am obligated to say 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 the forward-looking statements, and we will disclose in greater detail in the Company's quarterly 10-Q, the factors that may cause such differences. And as we always do, we'll have Paul start, and kind of do an overview of the numbers. Paul?

Thanks, Tom. As usual, I'm going to comment on the financial statements, provide a few highlights of our results for the first quarter, and start with the income statement. Total revenue increased 17% for the first quarter as compared to the first quarter of 2007. Rental revenue increased to just under $82 million in the quarter, primarily as a result of new property acquisitions. On an annualized basis, our current total rental revenues are now approximately $330 million. Same store rental revenue increased 1.5% for the quarterly period, and other income was approximately $1.5 million for the quarter. On the expense side, interest expense increased by about $11 million during the quarter as compared to the first quarter of last year, and this of course was due to more bonds outstanding as compared to a year ago, specifically the $550 million of 2019 notes that we issued last September. We had zero borrowings on our credit facility throughout the first quarter. And on a related note, our interest coverage ratio continues to be strong at 3.2 times, while our fixed charge coverage ratio was 2.6 times. These numbers are a little bit lower than usual, due to the interest expense on the excess cash from our September bond offering. Depreciation and amortization expense increased by almost $4.9 million in the comparative quarterly period, as depreciation expense has increased as our portfolio continues to grow. General and administrative, or G&A, expenses for the first quarter were about $5.5 million, representing only 6.6% of total revenues for the quarter, and we continue to expect G&A expenses in 2008 to remain at or below 2007 levels. Property expenses increased on a comparative basis to just over $1.2 million for the quarter. These expenses are primarily associated with the taxes, maintenance, and insurance expenses…

Thanks, Paul, and I will run through the different areas of the business. Let me start with the portfolio. As you can see in the release, we ended the quarter at 97.4% occupancy and 61 properties available for lease, out of 2375 that we own in the portfolio; that's off about 50 basis points from the last quarter. 15 of the new vacancies came from credit default from a couple of tenants. That's not a significantly large number, given that we have almost 2400 properties, but it's an increase nevertheless. I think everybody is aware of the Buffets filing involving 116 of the properties that we own, that today comprises about 6.7% of our rents. We are in the middle right now of working on that and negotiating and it will continue to unfold. We believe we'll be able to give everybody pretty much a full report probably on the second quarter conference call, perhaps on the third, but hopefully the second. And then, we can report I think with a lot of clarity as to exactly what happened, where the revenue stream ends up, what we got back and where we see it being leased. I think overall, relative to Buffets, their business continues to be challenged by the economic headwinds. And while we believe that we own profitable properties with Buffets, I think it's safe to say the margin of safety that we had has been eroded somewhat, but we continue to believe the vast majority are profitable. That will probably impact what we thought we would be receiving from Buffets somewhat. But we've built that into the guidance which you see here, and that is not the total reason for the change. We will have some brief commentary in the Q that will disclose that. They have…

(Operator Instructions) The first question comes from the line of Jeff Donnelly with Wachovia. Please go ahead.

Thanks, Tom for the additional color there. A question, actually concerning the pursuit of the line, I guess I'm kind of curious, what's the motivation here, is it the extension, is it the cost of the line, are you looking to increase your capacity? I guess how are you kind of balancing those as you make your decisions?

I think really it's taking a look and saying the most important thing is continued long-term access to capital, and that's probably more important than price. So it is really recasting the line for additional term, even if it costs a bit more or we're doing it a bit early here. I just think it's a smart move in this environment. If you are wrong, it costs you a couple cents, and if you're right, then it will be one of the cheapest things you've done.

And then, I know you touched on some of these things in your remarks. But I'm curious, what specifically moved you to put Crest on hold, and I guess wind that down now versus, say, three to six months ago? I'm not trying, like a second guess or decision. I mean, hindsight is always 20/20. But the market's beginning to get a little more volatile and I think you were talking about rising cap rates in mid-2007, and I guess, why not the decision back then?

It's interesting, we really added inventory heavily at the end of the fourth quarter of '06 and coming into '07. Quite frankly, we had some discussions here, at that point, you could see the cost to insure residential mortgages jumped from 24 basis points to 36 to 360 basis points to 1100, and that was really the first time you saw some stress in the credit markets. And we did talk about it and went down and said, hey, look, I would like to get the majority of the inventory out under contract or have a lot of clarity by June of last year. And so we really didn't buy anything, really, in the first and second quarter, and we were moving down that way. In the third quarter, we happened along two particular transactions where we did need to use Crest. Fortunately, in both of those they were relatively good brand names, well known. The properties were in good SMSAs and the price points were $500,000 to $1.5 million. So we gulped and put the other $30 million into Crest in the third quarter, thinking they would sell quickly. Fortunately, that inventory has really moved fast. And so it was back again in the fourth quarter after that, saying let's not use it. And we really did want to reduce it, but we made a tactical decision there. Quite frankly, as we move towards the end of the year here, I wanted nothing in Crest then. And I think the other thing that you kind of think through when you've got this type of business, a lot of the things that are easy to sell the fastest. And so it kind of makes the headline look of sales and profits and everything look real good in that flip business. And a lot of what gets left in the inventory are your rougher type properties. So we also wanted to move ahead pretty aggressively with those. And I think it's all worked out for us. But quite frankly, I would've liked to be out a little earlier, Jeff.

And let's just say you are successful in winding down the inventory by the end of the second quarter. I'm just curious I know, Crest is not exactly a particularly large entity, at least when it comes to personnel headcount. But what happens there, I guess the gentleman and whoever else works there that is Crest Net Lease, do they sort of stay on staff and Crest runs a very small loss? How does that look, I guess in the second half of the year?

Well, since Cary is probably listening in, as you know from coming by, Crest really has only two people that work full time there, and one of them is kind of a leased employee from Realty Income. So there's only one, and that's the person who does the works selling the properties. And he has been one of our acquisition officers. He's very savvy on a real estate basis. And at the same time that that's happening, we're obviously doing more work on the portfolio and doing some sales. So his skills can be very easily used there, as well as the additional administrative support we use in the activities going on. So it's really just a couple of people and not a major allocation. Expense is fairly small, and obviously moves with the transaction volume. So it has very little impact. There is also a mortgage we took back, and I think the interest from that mortgage alone will keep Crest profitable and at very little expense. So I don't think there's a lot to be done there. Any of you that follow us, come by the office some time, and we'll walk you by there, and it will take about a second and a half to walk by Crest's offices.

And just one last question is, I know you kind of went through the reasons for the $0.10 a share reduction. But I guess drilling into the $0.04 specific to the core portfolio, can you tell me how much of that $0.04 was specific to; I'm trying to parse it out, how much of it was specific to Ryan's closings that have already happened, maybe closings that you might anticipate from Ryan's? And then beyond that, how much of the $0.04 is just from events that haven't transpired that you are assuming will happen?

Sure. I can tell you that of what's closed to date, all of that was in our first quarter numbers, and none of this $0.04 is that. So that is a little bit of Buffets, but we think there will be some additional, and I'd prefer not to parse it out exactly, because obviously if we are in negotiations there, that provides a lot of information. The balance, though I would say, was probably 50% stuff that really is happening real time right now in the second quarter, and the other half what we anticipate will happen the balance of the year.

That's helpful. Thank you.

Okay.

Thank you, sir. The next question comes from the line of Philip Martin with Cantor Fitzgerald. Please go ahead.

Good afternoon.

Hi, Philip.

Hi, Phil.

A couple things here, first of all, how conservative have you gone here with this, I mean, obviously from your commentary, Tom, you've scrubbed through this pretty thoroughly, and considered a lot of factors. Do you think you have conserved enough at this point, knowing what you know?

It's interesting, I try to mention, this is what I think will happen. I haven't try to say, hey, as long as we're going to knock the number down here, let's take an extra nickel or something, so we look good later. It literally will not surprise me at all to be at the bottom end of that, and I think middle and upper can also happen there, too. Obviously, what's changed for us over the last 30 days is, I mentioned to Jeff, I had a view relative to Crest. But we kind of feel stronger about that. But it's really watching the last 90 days out in the economy. And I think you can see it is really throughout the portfolio. You look in convenience stores, which are actually pretty healthy, but you start seeing $0.02, $0.03 come off the gas margin. You start seeing a 3.5% or so or drop in sales in the stores, where a lot of the profits are made, and you can tell it's that consumer on a marginal basis. And you can look through restaurants and see prices, see a consumer still eating out, but migrating from the $18 ticket to the $16 ticket to the $12 ticket. And really, it's just really more intense. I can say that we see it a lot more here and think its happening than it was 90 days ago. So that's probably it. But we think that number that we're putting out there is what will be achieved. I wouldn't get too excited above that unless acquisitions really open up or some big deal comes along. And my sense is it would be late enough in the year where the FFO isn't really going to hit a lot this year, probably be next.

Okay. And what percentage of your portfolio would fall under the 1.5 times EBITDA coverage?

Okay. I'd make it EBITDAR and include rent. But I'm not sure I can really answer that. That top 15 number, kind of the bottom guy is 1.7, and the other ones on up. I think if you get into the ones behind that, they have similar coverages, but maybe a little bit less. So there is that out there, Philip. And what we did is went through the tenants to say anybody that's close to the line relative to their leverage and see some decelerating operations, which properties have lower coverage, those would go. But even though there are some at the 1.5s, if the tenant is very strong they can probably take a fair amount of stress before anything happened. So it's out there, but there's not a huge amount of the 1.5 and below.

The tenants where you -- in the anticipated or expected vacancies, where were their coverages? Kind of all over? I know coverage and tenant-specific, they don't necessarily go hand in hand.

Philip, this is Paul. Between one and two, so meaning profitable.

Okay.

Certainly profitable, making money. But balance sheet, operational issues, and as we've said before, even with something, say, 1.25, once they get into -- let's say they go into a bankruptcy situation. They may still walk from a property of that nature that's even slightly profitable as part of their overall strategy. They may pull out of certain states to make their G&A more simplistic or their strategy better. So if we look at all those kinds of factors, too, with each of those tenants and said even if it's profitable, they may pull out of it, that means downtime, that means property expenses, but it also means actually we can release the things. And so it's more of an '08-type impact.

In terms of just replacement value, I mean at least it's nice to think that if you have to go through one of these situations, a weaker economy, where there's stress on tenants, that you're pretty well protected from an asset value standpoint. When you look across your portfolio and you compare where you own that, on a gross basis, versus replacement value, can you give us some indication of where you stand relative to replacement value?

I think we're below replacement costs. Obviously replacement costs have moved up. I think replacement costs are going to come down a bit here. But I would think we are below, but I'd also caution one of the real new [answers] of net lease is if you get away above replacement costs, obviously whatever risk you have as much larger staying below replacement costs really helps you. But when you get into a situation where you do have some vacancy, you can assume the once you get back the ones that were stressed and if they were not great performers for somebody else, they are not going to be a great performer for the next guy. And so it's going to be doubtful that you're going to get ramp and equates back to replacement costs. So when you get into these situations, I'm not sure replacement cost is a focus number. But when you are acquiring, it's just one of those good anchor of value price points you try and throw there to make sure you're not getting too far away from reality.

Okay. Exactly. It's a backstop.

Right.

My last question, and you touched on it in your commentary, but in terms of -- now, I know there are several reasons for delaying some growth here, and I think the main one is to just be patient and let things ride out and to potentially wait for better pricing, better transactions, et cetera. But how much of this is really that you don't want to increase Crest's exposure? And I know you mentioned that the deals that are out there, you are possibly able to cherry-pick a little bit more. But how much of delaying some of your growth here is really related to not wanting to put really anything in Crest and have that exposure?

None whatsoever. In the last two quarters, I can tell you that there really haven't been transactions we've passed on because we didn't want to use Crest.

Okay

In each case, we have been able to talk to the people and rework the portfolio and get some out and buy. So I don't think there's any at all. What it is? It is, I mentioned cap rates moving, and that's one reason. And then the second reason is, it's kind of funny -- one week we're all in a huge credit crisis, and the next week everybody feels so much better. But I'd just as soon leave the balance sheet where it is right now, with no balance on the credit line and some cash sitting around and knowing I've got free cash flow coming in. In the long-term view, which is how we try and manage the business, a quarter doesn't matter all that much. But if you get into a real tough credit environment, I think not only will you be so happy you do that, it's far worth the quarter you kind of laid back a bit. And then secondarily, it will leave you in position; then if there's some stratification between those that have balance sheets and those that don't, you might have some opportunities. So it's really just a call for that, and we'll clearly say we might be wrong with it, but that's what we're going to do.

No, it sounds like a good plan, at least in my opinion. Okay. Thank you very much.

Thank you. Your next question comes from the line of Michael Bilerman with Citi. Please go ahead.

This is Ambika with Michael.

Hi, Ambika.

Hi. Could you go through the anticipated releasing cost of releasing this vacant space and what kind of timeframe you're assuming -- I think you said six to nine months -- and how should we think about historically what it's been and what you are anticipating in the future?

I would use nine months. I wouldn't use six. Now, some will be done in three and then some will take much longer. But I would lay it right on that. Relative to increased expenses this year, Paul, in our guidance?

Yes, it's really the taxes, maintenance, insurance, the additional let's call that carrying costs that you eat during that timeframe before you release the property. It's a little bit of a double hit, right? You have no rent for a bit. Then you recover close to all of it or some of it, or most of it, in most cases. But in the meantime, you're also paying the property expenses. So this year, we estimate property expenses at around $5.5 million. You're seeing that already start to present itself in the first quarter. Property expense number, for the most part, is going to be a little bit larger than that run rate if you multiply that by four. That compares to about $3.5 million in 2007. So that's about $0.02 a share, and that's part of the $0.04 that we're looking at. So when we talk about a little bit of a loss from vacancy issues in the portfolio, it's not just about downtime with rent. Some of it is related to the property expenses.

Okay. Great. And then if we're thinking about AFFO, how should we think about the CapEx associated with refitting the space for a new tenant?

You know, we really don't foresee a lot more of CapEx on that. That's a very good question. For everyone's benefit out there, CapEx for us has typically been a very minimal issue. In 2007, it was about $1.8 million, 2006 less than $1 million, 2005 $1.5 million, 2004 $1 million, et cetera. So, it's kind of been in that $1 million, $1.5 million range. We have estimated already CapEx a little bit larger than that. But that was for some strategic ideas we had for putting some more money in properties to release them. As it relates to these specific new vacancies, as it relates to, say, bankruptcies and that sort of thing, a few more dollars, but that's not a big issue for us. In addition, we have small straight-line rent. It's never been a big part of our rental income stream. Our AFFO, on a quarterly basis, has typically been $0.01 or higher than our FFO. And we absolutely expect that to be the case. It was in the first quarter, and we expect that to be the case as the year progresses. So I think AFFO this year could be as much as $0.04 or higher, and actually as much as $0.06, perhaps, if you choose to add impairments back when you compute AFFO. And I know a lot of analysts do that differently.

Okay. That makes sense. And then I guess what gets you comfortable with the fact that the CapEx will be low? Are you far along in your discussions for re-tenanting these assets?

Well, I think, and I will let Tom augment this. But I think, to give the example for Ryan's, we obviously not too long ago did inspections on those properties, a year and a half to two years ago, if you will. And we found them to be not only in good locations, but in excellent shape -- in some cases, excellent shape from a physical standpoint, and that really hasn't been the issue relative to operations or what have you. So we don't see a lot of dollars. When we actually do an acquisition up front, we certainly look for deferred maintenance items, negotiate those issues up front, either have those repairs made or make sure there's dollars set aside for that. And that purchase, to use that example, was so recent that it's not like there's a whole bunch of maintenance or CapEx issues that we have identified right away.

Yeah, Ambika. This is Tom. As you go through the -- when we scrubbed it and we did our list of vacancies, either there has been with one tenant a major renovation effort not long before they started running into problems. And the other ones, the assets are relatively new. So, unlike lease rollover, where you might expect it at the end of 20 years, these assets were in very good shape. So that's not a big component of it.

Okay. Great. Thank you.

Thank you. The next question comes from the line of Chris Lucas with Robert W. Baird. Please go ahead.

Good afternoon, guys.

Hi, Chris.

Hi, Chris.

Just one quick question, what is the pace of acquisition for the first quarter, was it early, mid, late quarter? How would I think about that?

I think we thought it would be early, and then it became mid, and then it became late, just like all quarters. It seems like all of these things end up closing towards the end of the quarter every quarter.

Okay. So I should think about it more as a quarter-end kind of event?

That's kind of how we look at it. And it's just funny, because as you get into doing a deal, everybody kind of sits around. Even if they are private and it's a seller, they still report quarterly numbers to somebody, and somehow getting it done by the end of the quarter is what happens.

It's funny, Chris. As you look at the yields that a lot of those deals were done at, the 8.7, you should think of that as early-quarter metric, because this was kind of a yield agreement that we came to with the tenant late last year. But the transaction itself, as Tom said, as is typical for whatever reason, tends to be loaded towards the end of the quarter, and that's where the volume came in, in terms of where you'd plug it into your model. But in terms of where you think cap rates kind of are, think of that 8.7 as more of a January cap rate, not a March cap rate, if that makes any sense.

Yes. I guess just a quick follow-up. You mentioned the AFFO adjustments. When is the Q going to be out, Paul?

It will be out this afternoon.

Super. And then my last question -- are you guys seeing any development opportunities come back to you because of poor local sponsorship and the inability to sort of finance the developments through the pipeline or through the completion?

You know, we are hearing of some. I've got a phone call to return right after this on an opportunity. But to be perfectly frank, we do not want to do much in the way of development opportunities. We've cut that down quite a bit over time. And I think it's really a function of finding, over and over and over again, absent a couple of tenants that are extraordinarily strong, that when you're doing development we don't know what the EBITDAR is on that unit until it stabilizes two years later. And that way, we can end up with some of the ones that don't work out. We'd just as soon buy them existing where we can see that stabilized cash flow coverage up front.

Okay. Thanks a lot, guys.

Thank you. The next question comes from the line of [Michael O'Royne] with Sun Capital Advisors.

Actually, my question has been answered. Thank you.

You bet.

Thank you. The next question comes from the line of Stephanie Krewson with Janney Montgomery Scott. Please go ahead.

Hi, guys. Somewhat related to Ambika's questions earlier, just looking at the Buffets restaurants, being a Delaware native I may be one of the only sell-side analysts that's actually ever been in one. But they're kind of specific boxes. How fungible do you anticipate those boxes being, or I mean, could you just give some further detail on your thoughts as to who would re-tenant that space?

Yeah. It's going to be a restaurant. And I think one of the issues there that we've come back with, and I think maybe it's one of those in the underwriting that I don't know that we missed -- I know that it came up in discussion, but I probably focused more on this time -- those are 10,000 square foot units. They are very big lots. That's great. However, a lot of the users are in the 6000 to 8000 square foot range. So you're probably going to get some of the people where your rent is a bit lower. With that said, a lot of them, close to half, were either Lowe's or Wal-Mart type outpads. So I think there's…

Exactly.

…a variety of people that would want to do them. But I think you may see some local restaurants. I think you may see some smaller chains. In some cases, we may end up with somebody that has one restaurant, wants to open a second, and sees this as an opportunity. And we may not want it in the portfolio but we would encourage that guy to get an SBA loan or something along those lines and try and sell it to him. And a lot of those guys are owner-users. So I think it's just generic restaurants, and it's generally going to be the 6000 to 8000 square foot type user.

Great. Thanks.

Thank you. And we've have a follow-up question from the line of Philip Martin. Please go ahead.

Yes. One last quick question. Would you envision any scenario where you may sell some of the Buffets where the leases have been affirmed, et cetera?

I think that's one of the things you can always consider. But that's obviously a post-reorganization. One thing, and this is not specific to Buffets when you go through this. It's not a lot of fun and you don't want it. However, coming out the other side, generally the balance sheet is significantly in better shape than it was before, and you have that opportunity.

Okay. So from the location standpoint, you're pretty comfortable with these locations and the re-leasing and re-tenanting, if it comes to that, with more of the properties?

Yes. With the ones that are affirmed and coming out the other side, I'm very comfortable they can be sold, in terms of the re-leasing and re-tenanting. And it's just not a lot of fun, but it's something we do for a living.

Yeah. Okay. Thank you.

Thank you. At this time, there are no further questions. I'd like to turn it back over to management for closing remarks.

Great. Listen, I apologize for the length of the call late in the day. I really appreciate the time and appreciate the attention on what was an interesting quarter. Thanks a lot.

Thank you, sir. Ladies and gentlemen, this does conclude our conference today. You may now disconnect. Thank you for using AT&T Teleconferencing.