Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Realty Income fourth quarter 2012 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is also being recorded today, Thursday, February 14, 2013. I would now like to turn the conference over to Mr. Tom Lewis, Chief Executive Officer of Realty Income. Please go ahead, sir.

Thank you, Katya and good afternoon, everyone. Welcome to our conference call and as Katya mentioned, we will go over the fourth quarter and our results for 2012 and a bit about what's happened since year-end. In the room with me today, is Gary Malino, our President and Chief Operating Officer, Paul Meurer, our Executive Vice President and Chief Financial Officer, John Case, our Executive Vice President and Chief Investment Officer and Tere Miller, our Vice President of Corporate Communications. As I am obligated to do, I will say that during this conference call, we will make certain statements that may be considered to be forward-looking statements under Federal Securities Law and the company's actual future results may differ significantly from the matters discussed in the forward-looking statements. We will disclose in greater detail on the company's Form 10-K the factors that may cause such differences. As is our custom, Paul, perhaps you can begin with overview of the numbers.

Thank you, Tom. So, as usual, I will walk through our financial statements briefly and provide some highlights of our financial results for the quarter and where appropriate for the year as a whole, starting with the income statement. Total revenue increased 16% for the quarter and for the year. Our revenue for the quarter was approximately $130 million or about $520 million annualized run rate at year-end. This increase reflects positive same-store rent but more significantly it reflects our growth from new acquisitions over the past year. Pro forma, for the ARCT acquisition completed in January, our current annualized total revenues as of 12/31 are now $712 million. On the expense side, depreciation and amortization expense increased by about $8.6 million in the comparative quarterly period, as depreciation expense obviously has increased as our property portfolio continues to grow. Interest expense increased in the quarter by about $6.1 million and this was due to the $800 million of bonds that were issued in October, as well as some credit facility borrowings during the quarter. On a related note, our coverage ratios both remain strong with interest coverage at 3.6 times and fixed charge coverage at 2.7 times. General and administrative or G&A expenses in the fourth quarter were approximately $10 million and $38 million for the year. Our G&A expense increased this past year as our acquisition activity increased, also because we added new personnel and our proxy process last spring was more expensive than usual. We ended up expensing $2.4 million of acquisition due diligence costs during the year. Our employee base grew from 83 employees a year ago to 97 employees today. However, our total G&A was the still less than 8% of our total revenues. Property expenses were just under $1.7 million for the quarter and…

Thanks, Paul. As is our custom, I will just kind of run through the different segments of business and let me start with the portfolio. Once again, the portfolio continued to generate very consistent cash flow in the fourth quarter. Generally the tenants are doing very well. No issues that rose with any of the tenants during the fourth quarter and we look for that to be the case here in the first quarter. Also there is nothing out there that we are looking at. On our calls, normally what I will do is talk about some of the metrics relative to the portfolio and how and why quarter-to-quarter and year-to-year, and as we have added in this release the supplemental disclosure on the closing of ARCT post year-end, I will also mention, on a pro forma basis, what that does to some of those metrics and give everybody a flavor of how we sit today and then obviously all those numbers will be integrated into our first quarter results little later in to the year. At the end of the quarter, our largest 15 tenants accounted for about 47.1% of our revenue. That’s down 270 basis points from the same period of year ago and now, on a pro forma basis, post ARCT, the top 15 have drop from 47.1% to 42.1% or another 500 basis points. So obviously the acquisition efforts relative to both normal acquisitions and ARCT has had a significant impact in reducing concentrations in the portfolio. That obviously is included in our largest 15 tenants. Cash flow coverages on the retail properties that we have in our top 15 tenants continue to be very strong at about 2.5 time for EBITDAR to rent coverage. So the portfolio continues to operate well there. From an occupancy…

So the fourth quarter was a very active quarter for us for acquisitions. As you know, we acquired 189 properties, investing approximately $447 million in acquisitions. This was third most acquisitive quarter in our company's history, finishing only behind the fourth quarter of 2006 and the third quarter of last year. The average cap rate of the fourth quarter acquisitions was 7.4% at an average lease term of 15 years. Credit profiles of the tenants we added was quite attractive. 63% of the acquisitions are leased to tenants with investment-grade ratings. These properties were leased to 13 tenants in 10 separate industries. Five of the 13 tenants are new tenant and dollar stores and health and fitness were the largest industries represented. These properties were geographically diversified located in 27 states and 80% of the fourth quarter acquisitions were comprised of our traditional retail assets. So for the full year 2012, that brought us to $1 6 billion in acquisitions activity comprised of 423 properties. This is the most we have ever completed in any calendar year and it surpassed our previous record in 2011 of $1.02 billion. The full year acquisitions were done at an average cap rate of 7.22% with a weighted average lease term of just over 14.5 years. We continue to improve our tenant credit profile, as Tom has alluded to, last year 64% of the acquisitions were leased to tenants with investment-grade ratings. They were leased to 29 tenants in 23 separate industries. Dollar stores, wholesale clubs and fitness were the largest industries represented in last year's acquisitions. We were able to 16 new tenants in four new industries. The properties were located in 37 states and 78% of the acquisitions were comprised of our traditional retail assets. About 80% of our acquisitions activity last…

Thanks, John. We are obviously very pleased with acquisitions closed for the year and where spreads are given increasing credit as John said and remain optimistic about additional acquisitions this year and what is pretty robust flow of opportunities to look at right now. I would like to note the timing of the acquisitions that came in for 2012. It's kind of interesting to examine. In the first quarter of last year, we acquired a grand total of two properties for $10.7 million. In the second quarter we acquired 145 properties for $210.8 million. Third quarter, acquired 87 properties for $496 million. Then, in the fourth quarter acquired 189 properties for $446.5 million. Couple of thoughts on that. Our acquisitions, and we have talked about this over the years, but for anybody new, it tends to be lumpy. That was the case in 2012 and we think that will continue to be the case quarter-over-quarter. I wouldn’t look at that as a trendline. They tend to bounce around during the year. It is also ultimately, the volume, as John said, the function of how many larger transaction we closed or don’t close. So far this year, we think $550 million we are using for planning purposes. It is the most we want to model this early in the year. Even though we think, at this point, the first half of 2013 will be stronger than the first half of 2012 but we will adjust that as the year goes on but that’s what our guidance is based on. Again, the big transactions are really going to drive that. The other ongoing observation is that acquisitions tend to accelerate late in each quarter and certainly later in the year. That was again the case in 2012 with $942 million of the…

Thank you. (Operator Instructions). Our first question comes from the line of Emmanuel Korchman. Please come ahead.

Good afternoon, guys. Just given John's commentary earlier on the call about an attractive environment for sellers and pricing staying flat to let's call it a little bit richer than it's been over the last couple of years. Why aren't you selling more into it? I mean, 100 million of dispositions, especially as you try to ramp up, your investment-grade portion of the portfolio seems like it's a low number.

Well, I noted it is accelerating, but you are right and we would like to do more, but one of the things that John mentioned was about 80% of the acquisitions are in large transactions and about 100% of the sales are in one-off transactions and rather granular. And if you look at what we have been trying to sell with the C stores and also casual dining restaurants, those are fairly small number, so it is a fairly labor-intensive operation and we also probably would have had a higher volume this year, but we did have a big block of properties probably another $50 million, $60 million that we just started to put on the market and then some M&A activity with the tenant started and that turns out we are getting an upgrade in some of the credit and may not want to sell it. So, I agree. We would like to accelerate it. It is a good market to do into, and if we can go well past the $100 million, we would like to do it.

Got you, and then I think you touched on this earlier. I might have missed it. the 0.1% same-store growth. Can you first of all clarify if that's GAAP or cash, and then I think you said that that would accelerate as some tenants get pulled out of the mix. Maybe if you could just repeat that for me?

Sure. Yes. It was 0.1% for the year overall and 0.4%. That is cash not GAAP, and normally will run from 1 to 1.5, and if you recall at the start last year we had to tenant issues Friendly's and Buffets, where we did have some rent reductions and during the year we disclosed both, what it would be without and with it for the year that's how you get to that 0.1% numbers, but a lot of that burned off the fourth quarter. Absent that, I think, same-store rent growth this year would have been 1.3% to 1.5%, somewhere in there. And, so with that burning off and the way the leases were structured, no tenant issues. We really anticipate the first-quarter will bounce back closer to 1.5% and then during the year run between 1% to 1.5% same-store rent growth.

Perfect. My last question, I think you mentioned something about double net properties. Maybe you could help me figure out what that would be?

Sure, it is a large portfolio. So there is a lot of everything and for the most part, it is tripled net lease but in some of these properties that we buy, the lease structure particularly contained from a developer maybe different and maybe taxes, maintenance, insurance, but we may have roof responsibilities, then it’s a new roof down the line. There could be some other things that are in there. So when it's not triple we just call it double but it is probably more like two and three quarters or two and a half. Anybody else want to add in to that?

That’s right. Most of it is on little bit of property maintenance responsibilities.

But it typically wouldn’t be anything outside of that. So you wouldn’t be responsible for taxes or anything more major than…

That can happen all the time but that’s primarily not the case with most of non-full triple net stuff that we own.

It's primarily just responsibilities with regard to roofing and parking on 90% of those.

Right

There, a minority of the properties that we think it is important to bring it up that if you see a little bit of property expenses that’s where the words coming from. But don’t see a huge acceleration.

But otherwise they are similar to the rest of your portfolio in being single tenant large (inaudible).

Yes, and we have had these issues over the years on an ongoing basis. It is just a little larger now. So we brought it up.

Thank you guys.

Our next question comes from the line of Joshua Barber. Please go ahead.

Hi, good afternoon. Tom and John, as you were mentioning that increasingly more and more of your regular acquisitions are on investment-grade properties. I am wondering why a lot of those tenants are increasingly looking at net lease financing especially given that they should have other credit availabilities? That should be there. It used to be, I guess, the trade-off for a lot of the tenants was the high-yield market or nothing or net lease financing but I am wondering why more and more of those are looking at net lease financing given the absolutely high coupons that seems to be out there as opposed to other sources of financing? Can you maybe walk us through that a little bit?

Yes, there's always been, I think, in retail, which is a smaller preponderance of it. If somebody is really trying to rollout over time using net lease financing relative to their immediate construction. So that’s has been around, and you have particularly seen it in the drugstore segment. So it's become kind of normal and then crept around more in retail. Sometimes it's with people on the street are really putting some pressure on companies to look at their balance sheet and try and unlock some value. As you know, there is a lot of those discussions today going on around the country on the Opco/propco side and when you get those discussions going, even if people don’t do it then they start looking at what's on the balance sheet and start running the numbers relative to their return on investment and other areas. I think it also started just happening a little bit going back to 2008, 2009 where even some very strong credit started looking at some issues relative to financial flexibility and coming out of that started thinking about real estate a little bit. Traditionally it was less than investment-grade. It was really early 2000, 2001, we started working a lot with private equity and bringing that up. But its a very common discussion now on the street relative to looking at the real estate and using it. So if you get to the Fortune 500 and Fortune 1,000, a lot of their real estate decisions are outsourced with a group of developers and very often there is just a decision when working with the developer that they not going to keep those assets and some of them come off that way. But I think there is just more and more talk going on about what's on the balance sheet and how you provide flexibility and use it. So we haven’t seen it like this relative to those discussions particularly in the investment-grade for as long as I have been doing this.

Okay, that’s very helpful. Thanks. Especially after the Diageo acquisition a couple of years ago and as you mentioned with increasingly a greater numbers of REITs out there with the Opco/propco structure. Is that something that you guys would look at with increasingly different asset classes that are out there? Or you would that be a lot less likely to happen?

It is it is very interesting. There is an awful lot of discussion and you know we have had a few companies announce that they are either looking at it or going to do it. Then there has been some movement in our equity and that always causes bankers and lawyers and accountants to more and more discussions and that’s kind of the phase it's at right now. Then the question is, will they get done and if they get done, what will a single tenant REIT trade out and are traditional REIT investors going to accept that or is going to trade at a higher yield? If a bunch of them get going then typically the first one's probably do pretty well and then you have to see but relative to what it means to us, I think from a tax standpoint for most of those to be done on a tax-free basis more than 50% of the equity has to remain with the company spinning off and that has to happen for a couple of years, so it would take a bunch of those, A, happening and, B, a couple of years going by. And then C, probably valuations not meeting expectations before there would be some opportunities. And given the size of the portfolio now there might be some places where we could invest. If all of that happened, given our size it really wouldn't hit massive concentrations. Absent that, we just think it's positive to, again begin the discussions are going on in boardrooms around the country about now you can add value using the real estate, and I think it will accrue to our benefit. How much? We just don't know.

I think the single tenant concept does concern a lot of people, but if that was a 2% tenant exposure for realty income I think a lot of people may just about that differently.

Perfect. And if it is an investment grade tenant or somebody that we really like an assets or special you could also make that five and six, because if you just look, I mean obviously FedEx does get the real estate off balance sheet that's 5.5%, so now we could take those on and I think in larger numbers as we get larger, but we'd step too if they are.

Nothing in the near-term by the way.

Okay. Thank you very much.

Our next question comes from the line of Paula Poskon. Please go ahead.

Thanks. Good afternoon, everyone. Two housekeeping questions. First, apologies if I missed this in your earlier remarks. What was the acquisition expense in 4Q aside from ARCT cost?

$2.4 million for the year and I just don't have it on my fingertips on what it was in the fourth quarter.

I'll follow-up offline. Then secondly, what was the difference between the impairment amounts on the income statement versus the FFO calculation?

Where you looking?

The first was provisions for impairment on the income statement, let me put my spectacles on, 28.04, and then add back in the FFO calculation was 44.72 and I am just wondering what that difference represents. I recognize that's a smaller number.

Right. I am trying to find where you are looking at in the add back, Paula, those are two we'll go figure out.

That's fine. No problem. And then just sort of a bigger picture just to sort of stay on the theme of the acquisition environment, Tom, I appreciated your color in your prepared remarks on the lines of trade diversification. And aside from your comments about continuing to want to gravitate away from those tenants that have a customer base that are paycheck-to-paycheck, how does that diversification across the line of trades stack up relative to your sort of ideal target. And, how does that compare with the opportunity set that you are seeing currently.

Yes. I mean, the opportunity set is wide, so there is a lot of things that comes across the transom that we might have done a few years ago that we are not doing and moving away from casual dining would be one. We still like convenience store, but that might be another so we could buy a lot more if we really didn't have this view in terms of where we want to take the portfolio. One of the things that's happened that's been very fortunate is a few more of the investment-grade retailers are out in the market with opportunities where they just weren't few years ago, and then also that, we've widened than that, so we can move outside of retail dealing with larger tenants, so that's really given us the opportunity to do that. I think if I could stop my fingers and make an instantaneous change in the portfolio is one of the questions was earlier why don't you go faster. We would like to, but part of this is matching up opportunities and growing cash flow and dividends with what may be burn rate on that selling a few things. So, right now there is plenty of opportunities out there, some of which weren't a few years ago and we really, really do want to migrate the portfolio, particularly up the credit curve and away from casual dining. I keep using that, but I use it because obviously have the consumers in the United States are more are middle lower income and that's where like we are currently seeing with the payroll tax and if $20 or $40 goes out of their paycheck, it goes out at other spending, because there is not a buffer.

Great. Thanks very much. That's all I had.

Our next question comes from the line of Todd Lukasik. Please go ahead.

Hi. Good afternoon thanks for taking my questions, guys. Just a few more on the acquisitions, on the $550 million expectation built in for 2013, does that includes an expectation of any portfolio deals within that 550 million, or would they all be incremental to that?

No, I think it includes portfolio transactions but it's one of those where it looks like the first quarter is going to be pretty good and then you move on from there. We are looking at some portfolio transactions but you don’t know how many come through. So, as you know, in the past we started at 250 and kind of guided up as the year went by, but given the last three years of $1.1 billion $1.7 billion. The flow, we sit here and look at each other, look at the first quarter and say, during the course of the year we ought to get there, but as John mentioned 80% last year was larger transaction. So in this, I would say, at least half is.

Okay, and then you mentioned the increase in staff and adding people to help deal with larger flow of acquisitions. Is that were the majority of the increase in staff is going and could you maybe compare the staff that’s responsible for evaluating these deals today versus what it was, say, in 2009 before you embarked on the portfolio diversification strategy?

Yes, we probably added a couple people down there in that and in acquisitions a couple people. Then it just floats around the building because a lot of this was systems and just volume. I think looking forward to this year, that’s where the differential will be. I think we may have a pretty good add this year in acquisitions once again and a pretty good add maybe five or six in the research area, be it in real estate research and then maybe an executive or two with specific expertise. Then again, I think, just looking at all the volume we added this year and moving towards capacity, you have to add ones and twos throughout the building by department. So I think this will be the year and it may not be exactly calendar that that will flow in and I am really thinking specifically in research and specific segments with some people we can bring in that have done a lot of work there and research and acquisitions, primarily.

Okay, then the $17 billion you mentioned in deals that came through your door last year. Does that include ARCT?

Yes, that does include ARCT.

Okay, and then with regards to the industry exposures you were talking about, I guess in recent history you were comfortable in then some of those industries being near about 20% of revenues. Is there a new target that you have in mind in terms of where you wouldn’t want to go beyond now? I know the C stores are around 12%. Could some industry concentration go higher than that or are you still looking to lower those across the board?

Well, we are at about 20% as the farthest we would ever go but we don’t like 20% near as much as we did, and one of the things just really watching going through the recession, while we sailed through it is those exposures you did sit and worry about, and as we get to the size in 44 different industries, which is very fortunate that you can bring that down. So I now look at 10% as being on the high side and it needs to be just because there is a particular opportunity that came along and its something we really like but we can keep them down around five that is just great the would be a great event. The exception obviously is if you end up working in an industry where you have got three or four really top light Fortune 500 type credit sitting in there. But the answer is, yes, the lower number is better.

Okay, and then last one for me. I think you guys had announced that you would do a dividend increase early this year regardless of whether ARCT closed and I am just wondering what thoughts are going forward in terms of evaluating the fifth dividend increase throughout the year and whether or not you expect that to continue to happen around the August time frame? Or whether those will be more fluid discussions throughout the year?

With the payout ratio, if you look about where guidance is up around 91, I will tell you, we are comfortable, given the size of the portfolio and the added diversification you referenced. We would like to walk that back down but it is really rose been a mid to high 80s type companies. So its not material and whether that happens over a year or two, we are open to. So I am going to first say, it will be a more fluid decision. I think the four increases or something that we would plan on. then it is going to be really taking the pulse. We recently use August. It is usually by then we put a fair amount on the books and then we have some clarity relative to how the third and fourth quarters are going to look. That gives a little ability to see what the impact of that fifth dividend is. Not so much in 2013 but 2014. So we are really not to be in a position to know until we get later in the year, but given obviously we did the increase in August $0.06 a share and then we did $0.35. We front loaded it a little bit of it but I wouldn’t want to take it off the table at this point.

Right, okay. Thank you.

Our next question comes from the line of Rich Moore. Please go ahead.

Hi, good afternoon, guys. Tom, did you guys looking at Cole at all? The Cole that is sold to, in the portfolio, but sold to the Spirit?

We look at lots of stuff, and as you can imagine given the size get an opportunity. Look, we think most everything comes across the line and that be a logical thing to do, but on everything that comes in John references the $17 billion. There is a tremendous amount we've signed confidentiality agreements on and so it's our policy not to reference transactions that we didn't do and so I wouldn't want to go beyond that, but I will tell you there has been a lot of activity in the space over the last year and I did it would be surprising if there were things we didn't look at.

Okay. Fair enough. Then do you think there are more of those kind of entities that will be coming along? I mean, is that are we done or is it just coal and ARCT, or they are more out there currently. I am just wondering if they will be making their way to market.

It's interesting a lot of that is generated by the private REIT space, where there's just a tremendous amount of money being raised through the financial advisor community for those type assets and traditionally if you go back, had this longer life which as of late, Scott, shortened up because the liquidity event is something that obviously is considered favorable by those people that would put these on the client's portfolio for a number of reasons economic being some of it and then secondarily I think it also enhances the, say, business model of the sponsor, and so I would see more coming since there's a lot being raised. And if you look at that business, where traditionally it was a lot wider relative to the property types they were dealing in a good part of businesses net lease today. I think there is more out there and then I would reference back to just a lot of the Opco/propco-type stuff. So, it's hard to what it will be property type stuff, so it's hard to know what it will be but I think there will be some larger transactions coming out there. The good time to mention, we over the years on an M&A slide and you and I have talked about this about, have had a lot of opportunities and things presented that could have been done and one of the real challenges is, underwriting in one fell swoop, big portfolio like this. We spend a lot of time underwriting on a very granular basis and this comes along and it really puts pressure on the underwriting side of it. And if you look at this particular transaction it was one where it was mostly investment-grade and it was a lot of the same tenants we work in, in areas that we had targeted and that was one of the reasons we are do it and it was also a fairly new portfolio, so the leases were long. But, with some of these as they age and they come to market, then it brings up a lot of those issues that might make it a little more troublesome for us, but we do want to look at all them.

Okay. Good. Thanks, and that kind of answers a little bit the next question I have which is going back to selling of assets, I mean, I am curious why you guys might not do a portfolio-type sale given that, I understand that there is cash flow implications, but you are obviously buying a lot of things as a matter fact. If you only about $550 million worth of stuff this year, you kind of wonder you would even have to clear the line of credit, so I kind of think you will do more than that. So if you are doing more than that, I mean, why not a portfolio transaction if there is someone that can evaluate the portfolio and then get rid of the bottom 2% of your portfolio kid of thing?

Right. While they may be our stepchild, we love our stepchild, and doing it in volume presents some issues for the ongoing cash flow stream and its consistency, which since will be monthly dividend company. That's very important. We did look at a couple of those ideas I referenced earlier about block of C stores and ended up pulling it off the market so we may do a bit more of that. And as were buying like ARCT, I have been asked are you guys going to sell part of that. We really as you know have taken the entire portfolio and do it again and stratify it, and we do have about I would say 20% of the portfolio that we would like to move up over time, but some of those are also properties that have been on the books, so the leases are little shorter and some of them have some other characteristics that make it a little more challenging in a bulk transactions. So, again, I think if people think towards the hundred-and-over number for this year, that's probably the right one.

Okay. very good. Thank you very much.

This concludes our question-and-answer portion of the Realty Income's conference call. I will now turn the call over to Tom Lewis for concluding remarks.

Great. Listen, thank you everybody for little over hour of time here. We appreciate it the busy earning season, and we will look forward to seeing you at our conferences and look forward to talking to you again next quarter, and thanks, Paul Thanks, John, and thank you, Katya.

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect.