Good day ladies and gentlemen thank you for standing by. Welcome to the Realty Income second quarter 2010 earnings conference call. Today's presentation all parties will be in a listen only mode. Following the presentation the conference will be opened for questions. (Operator Instructions). This conference is being recorded today Thursday, July 29, 2010. I would now like to turn the conference over to Mr. Tom Lewis, CEO of Realty Income, please go ahead sir.

Thank you Elisa good afternoon everyone and welcome to the conference call where we will review our operations and results for the second quarter and as I am always joined by some people in the room here, Paul Meurer, our Executive Vice President, Chief Financial Officer, Mike Pfeiffer, our EVP and General Counsel; John Case our EVP and Chief Investment Officer and Terry Miller, our Vice President, Corporate Communications. And as I always do also during this conference call, we will make certain statements that maybe considered to be forward-looking statements under Federal Securities law, the company’s actual future results may differ significantly from the matters discussed in any forward-looking statements. And we’ll disclose in greater detail on the company’s quarterly and on the Form 10-K, the factors that could cause such differences. And Paul will start by reviewing the numbers of the quarter.

Thanks Tom as usual let me walk through the financial statements briefly and provide a few highlights of our results for the quarter beginning with the income statement. Total revenue increased $83.5 this quarter versus $81.3 million during the second quarter of 2009. Rental revenue increased 2% overall reflecting new acquisitions over the past year, and some positive thanks to the rent increases for the quarterly period. On the expense side depreciation and amortization expense increased by $742,000 in the comparative quarterly period as depreciation expense naturally increases as our property portfolio continues to grow. Interest expense remains flat at around $21.5 million; we had only $26.9 million in borrowings on our credit facility at quarter end. And on a related note our coverage ratios remain strong with interest coverage at 3.5 times and fixed charge coverage at 2.7 times. General and administrative or G&A expenses in the second quarter were $6.65 million up from last year but flat from the first quarter of this year. As we mentioned last year due largely to recent hiring and our acquisitions and research department, our current projection for G&A for 2010 is about $26 million or about 7.5% of total revenues. Naturally this will be impacted a bit by the level of acquisitions during the course of the year. Property expenses decreased to under $1.7 million in the comparative quarter and these are the expenses associated with our taxes maintenance and insurance expenses which we are responsible for on the properties we have available for lease. Income taxes consistent income taxes paid to various states by the company and they remained at around $300,000 during the quarter. Income from discontinued operations for the quarter totaled approximately $1.3 million real estate acquired for resale refers to the operations of Crest Net Lease. Crest…

Thanks, Paul. Let me just start with the portfolio and run through the business. The portfolio continued to do pretty well on the second quarter, generally we are hearing from tenants their business have stabilized a bit and we are not hearing much about problems from the tenants relative to the portfolio. At the end of the quarter, the 15 largest tenants get about 54% of revenue. As you know we focus on trying to earn the more profitable properties with tenants and on the top 15 tenants the average cash flow EBITDA per store level was roughly 2.44 times. The rent would then fade and we think that's why occupancy has remained fairly high. We ended the second quarter with 96.2% occupancy and 90 properties available for lease out of our 2350 properties. That occupancy level is down about 50 basis points from the first quarter and about 40 basis points versus the same period a year ago. It's primarily due to getting back 14 Hollywood videos on the last day of the quarter and then some exploration leases also towards the end of the quarter. So then we have 24 new vacancies and then had 11 vacant properties that were leased or sold. And that's the reason for the slight decline in occupancy, it's still very high but off a bit this quarter. Same store rents in the portfolio increased 0.1% during the second quarter, that compares to 0.8% in the first quarter and 0.5% in the same period a year ago, so little lower in same store rent also. And if you kind of look across the different industries we are in relative to where the contribution, either declines or increases came from 8 and our other category and industries had declining same store rent. The tire…

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

I forget if you just, quarterly sales, financials from your tenants booked, what's been the progression in unit levels, [casual] coverages over the past year or so. Have you see a bottom or an inflection in that metric?

You know it's been pretty stable but it's throughout the last couple of years, but it's not the way you want to see stability. What happened is we were up around a 2, 7 forecast low coverage on the top 15 if you go back three years ago and it was dropping down into the 2-3s, 2-2s and if you look at the nine tenants that had credit events, one of the things that we did with them is adjust rents and the rents were adjusted down to get the cash flow coverage back up to a good level. At the same time though, we were able to put in the majority of the leases, some type of recapture clause of the business increases we can get part of that. So I think what you would have seen Jeff is kind of 274 down into the 2-2s and 2-3s but with the adjustments that took it back up into the kind of the 2-4 level and that’s kind of where they sit today as 2-4-4. So we saw the real down draft going back over 18 to 24 months, but really over the last. I think starting in the third quarter last year, we started to see them flatten out and a few have seen the they're in the docking chain continuing to slide a bit but that was offset by the ones going up.

And if I could switch gears and ask a few questions on Diageo, by my math, it goes right from the first deal that you guys had done where the operating income of the actual assets, the property rent if you will. You know is it enough to, justify the rent that was paid to you guys, it certainly makes you more realigned on the credit of the entity. Fortunately, that’s wrong in this case. Is the catalyst sort of deal implied and your just not seeing attractive pricing elsewhere in the traditional net lease business, that’s why you guys went after it or?

There are transactions out there and I think, we have looked at the wine business a number of years ago and as we did our due diligence, we ended thinking that there were relevantly few opportunities because of kind of how we have to underwrite the business and I’ll go into detail if you want me to but the long and short of it is when this came up, given the work that we had done a few years ago and kind of the criteria we had come up and said, there’s only going to be a couple or three players that we would probably want to do something whether it is in this industry. We identified and again, this is a few years ago kind of constellation brands, Diageo and Fortune brands and then Fortune brands sold their business to someone else and when this came with Diageo, we knew who they were. We absolutely knew the assets both the vineries and the vineyards ahead of time and given where spreads are and where we thought we could work, we thought it’d be a nice addition. But it really does rely to a great extent on the credit and the due diligence as you know, we’re normally looking what you related to that the EBITDA on the real estate that we’re buying is generated for the tenants that they have to have the real estate to do it and typically if you look at this business, you can tie EBITDA to a vinery and the wine they produce and sell but its harder to do with the vineyards because a lot of the grape juice really is grown. It is bought rather than grown and so hypothetically in chapter 11, if you have a vinery with some vineyards, what…

I’m curious, are there provisions in the spring and say are required in order to maintain certain credit metrics or penalties compelling to do so and what was the reaction from the rating agencies, because there is a chunk your dealing with and you guys normally go after?

Right. We’ve done a number of deals this size, so we’re comfortable with that but the reaction from the rating agencies was very positive given who the tenant is and how their business and given these brands and these assets and so I think the reaction was very positive there. None of our leases that I can remember require the tenant to maintain certain credit statistics, that is relevantly unheard of in the triple net lease business and I think its just kind of a non starter. But in this case, given these particular assets and I’ve spent a great deal of time up in that area and if you follow this business. In Napa, California freezes over 90% of the wine in the US Napa is one of 16 areas in California and it produces only about 4% of the wine in the US. But if you look at the prices that they get for the grapes and the wine up there, the average price for a ton of Tavern A grapes last year in California was about a $1,078 and it ranged anywhere from $300 at the lowest turn, that’s the lowest for the 16 reasons up to Napa, where it $4,777 a ton. And so, when you start looking up into that area and you start looking at the growth in new vineyards and Napa is not even about 1% a year because they put restrictions on it and a lot of the premium brands operate up there and there’s a minimum amount of vineyards for those premium brands to buy. We got a little more comfortable and I think they did too with a particular assets that we bought and also that they’d been in production. They said that these were the vineyards now for 25 to a 100 years and I think then coupling it into those two brands and one’s a 100 year old brand and the other one’s a 40 year old brand and that’s got them comfortable relative to what we’ve purchased and what we’ve paid but then it really, and this has been said by a lot of people and its true, then it really is a credit story getting a very long term lease with a very good company.

And then just a last question, normally a quick one, and I just look into the answer but did you guys consider buying a long term hedge on Diageo credit? You know aside from maybe Tom increasing his consumption of wine?

We did increase the consumption of wine and since you wanted a short answer, the answer is no.

Our next question comes from the line of Tayo Okusanya with Jefferies & Company. Please go ahead.

Yes, good afternoon Tom. Lets take up the questions. In regards and different resale categories involved in, do you talk usually about categories where you thought overall underlined trends for the tenants who are principally strong and the categories where there was some weakness, even if that stuff is not on your watch list at this point?

Sure, let me take a minute and try and do that. I think if you divide up our portfolio, the majority of it is basic human needs, low price points and that’s done better than stuff that’s at the higher end. So I’ll start with really kind of a negative side. It is a small component in the portfolio, little over 2% of rent which is a tenant that is in the RV business and that was just a really, really business that got hit terribly hard over the last couple of years, given the consumer durable and high ticket. And if you look at industry volumes, in 2008 the volume of RV sales in the United States went up by about a third and then it did again in 2009. And so that was an area that we were pretty deeply concerned with and we went in and worked with the tenant on some rent relief. That business has not gotten back up to peaks, but it’s stabilized, guess for this year is shipment. That were down as well, it’s 159,000 units, they are going to be up over 200,000. So but that's one we continue to watch, but we were fortunate that our tenants there kind of has several lines of revenue. One is the sale of RVs, the other one is that they do sell pretty much, it's an RV superstore that they sell anything to people who use RV and then they also have a service component. But that's one that’s been tough. Restaurant, is another obvious one, that's about 20% of rent and if you look at our portfolio, about 8% of the 20 or almost half is fast food and that has held up relatively well as the consumer traded down. But not as…

Well, that's helpful. And then with Diageo, just kind of given the cap rate you guys provided for you second quarter acquisition. I guess it's safe to assume that you have done close to a 7.5 cap as well?

Yes, they were the majority of the acquisitions there. And it is lower, but again being to step in and finance it with the bond offering was very attractive and I think the arbitrage between where the long-term debt of the same tenant is trading and where the transaction was done made it pretty attractive.

And then rent coverage of 2.04, could you talk a little bit about the discretion of that number at this point, is this still pretty much, everything all kind of tied close to that number or is it the range kind of broaden out a bit.

That's pretty a good bell curve. I would say going back two three years ago, the lowest out there was about a two which was extraordinarily comfortable. Today we are looking at about a 1.59 on the low side and 3.53 on the high side. And there are really only a couple of tenants in the top 15 that are down into the 1s, but you can be somewhat comfortable when you get 1.5 above because as we have now done over 1067 rollovers at the end of leases, our experience has been if you got a 1.5 coverage, you have the tenant that is making enough money on that unit where they are going want it. And that's the bottom tenant is just really right around 1.5.

That’s the RV guy or no?

No.

Okay.

I can't discuss their financials and EBITDA, or they weren’t given to me.

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

On the Diageo acquisition, Paul what was the charge actually, the acquisition expense on that within G&A?

Not very high, so it will be disclosed in our Q that comes out later today, but for the second quarter, our total acquisition related expense is that for FAS 141R that we needed to expense was $40,000. Those numbers are going to be quite variable, it's going to depend on particular transactions in terms of who pays for what expenses. Whether there is transfer taxes involved in different states. So we have a portfolio that involves multiple states and for whatever reasons there is lots of expenses that we need to pay for it as opposed to the tenant taking care of. It could be a much higher number. In this case, that was not the case. Diageo had already done a lot of work to prepare for the offering.

That's another way of saying that the G&A was actually in people and the things we are trying to do here to grow the business, not really on the property expense side.

Tom as I understand you really don't have any bankruptcy concerns at the moment other than obviously Hollywood?

Right, while being in the credit business, you are always concerned, but no there is nobody right now that's on the watch list that we think is eminent or we see some substantial problem with and that’s a very different case in the last three years whether it be a couple of three names sitting on the watch list at any given time.

Thinking about Hollywood for a second. How would you characterize those locations considering I usually think about Hollywood is having pretty strong, that sort of industry even having strong locations to release. I mean would you characterize these in that manner, maybe stronger than the typical tenants that you have or is that not true?

Well that’s interesting. Normally, you wouldn’t think that and when we bought these, there was a huge amount of development, these lease were brought 10 or 11 years ago by both Blockbuster and Hollywood and so we looked at a lot of units and selected just one package, bought at one time and off the top, these are about 8,000 sq ft buildings, are on one to two acres of land. We paid a $1 million to a $1.4 million and they are mostly outpad types to (inaudible) good traffic. Rents when we brought them were about 16 a foot and they’ve grew to 19 a foot and when they had their Chapter 11 a couple of years ago, the recovery rate was pretty good and they weren’t that difficult to lease. The problem in the business right now is while they are good assets, there is an awful lot of video stores to release out there. If you just take Hollywood and then just some of the other change that would have problems. So there’s really blood on the market, we’re seeing good activity but I think the rent spreads are going to drop pretty dramatically there and we have received 23 of these, we’ve got 18 back to date and I think we’ve got five to go and we have a lot of activity, but that will be a hit there, but we’ve gotten out the numbers.

On the restaurants, it sounds like you are pretty actively bringing that down. Is that accuracy, you are going to probably sell off more of the restaurants in the next few quarters?

We are selling a little bit and if we get anything new, it would be with an existing tenant and one little unit here or there but essentially not buying and we are selling a few but the other thing is if you look at the two tenants that are still in the same store comp numbers, one of them is a restaurant and that’s where some of the rent came down.

Ok I got you and then as far as acquisitions go, any particular category, obviously beyond wines, is exciting for you?

You know its pretty broad based, I would be surprised if we’re not back into some of our existing areas that we’ve invested in on the next few acquisitions. We’re out looking a couple of three new things that will comment on when we finally get something or work on but my chances probably the balance of the year will probably be back in kind of the core stuff.

Our next question comes from the line of (inaudible). Please go ahead.

What do you think happens with area finance?

I don't know and I wouldn’t speculate. We obviously knew Chris and Mart very well and some a lot in the last couple of years. We’ve talked to them a little bit, but haven’t been deeply involved and obviously, we wouldn’t comment on anything we were looking at, be an individual or a larger type transaction. I’d only go back and this is, its not on spared, its generic. We’ve been offered a lot of companies over the years and generically, its kind of difficult to do M&A in our opinion in this business and that’s the function that we spend so much time on underwriting and then when something comes along to have to underwrite a large package all at once is problematic and that’s been the case, I actually I don't know.

But you won't comment, I guess, what you’re working on. Will you comment on what you’re not working on?

No because then if we weren’t working on something and you asked me, I said yes. Next time when you ask me if we were working on something, then you’d be able to identify it. So I think if we are working, it is yes, it’s no comment and if we weren’t, it’s no comment and if we were looking at it, but not interested, it would be no comment and if we weren’t looking at it but interested, it’d be no comment.

You’ve made a couple of hires in 2010, obviously bringing John on board. Should we read in any way, shape or form into that as you are starting to have succession planning costs? Does that have any bearing on the hires you’ve made?

Interesting there is no relative to me, no succession thoughts at the moment, so no. But relative to the hires we make ,yes. Well one of the things that we’re doing is we have a strategic planning program and a major emphasis of that is leadership development and that’s really looking at the company and doing an organization chart for five years from now and 10 years from now and trying to look at where are people that are in the organization today, that are likely to move away over that period of time and then looking inhouse and developing people and then also going outside to get some talent, either for that reason or variety. The advance in general you might looking to go anywhere in the new future, the answer is no and I don’t think any of our senior officers are in that mode at the moment.

Our next question comes from the line of Andrew Fenton with Credit Suisse.

I was just thinking as the economy picks up, do you see activity at Crest picking up or do you think that stay dormant?

If it does kind of only on a marginal basis, we got Crest obviously because we saw a lot of risks there and the timing worked out perfectly and Crest was really valuable since we started in 2000, when it was competitive atmosphere and we bought large portfolios and wanted to sell off part of them. There are a lot of people who have exited our business, probably more than the deal flow has dropped and so to date, we haven’t had to buy a lot in a transaction that we didn’t want to own and we haven’t had to do it and so as long as we don’t have to do that, that was the only reason we were using Crest. It wasn’t a side business to make a buck. While we made money, it was really so we could work on large transactions and sell off a bit. If down the road it became the case where we needed to do that, I think we’d take a long hard look about our confidence in the economy and in the number of buyers out there for that type of property, before you’d add much inventory because I think it’s a lot riskier business than it looked like for about seven eight years, we were aware of that. We were in a period of declining cap rates and it made anybody who flipped or did this type of business. Later, it looked like a very easy business, but in normal times with relatively stable cap rates, it’s a tough business and an easy business to get caught in. So we’d like to minimize what we do there unless we’re absolutely forced to, based on competition and acquisition.

This concludes today’s conference call. I will turn the call over to management for concluding remarks.

Well thank you very much everybody and in the end, a pretty solid in the portfolio. Now let’s see if we can start moving the top and bottom line and thank you for taking the time to be on the call and we’ll talk to you next quarter, thank you.