Janeen Bedard - Associate Vice President John Case - Chief Executive Officer Paul Meurer - Chief Financial Officer and Treasurer Sumit Roy - Chief Operating Officer and CIO.

Juan Sanabria - Bank of America Todd Stender - Wells Fargo Vikram Malhotra - Morgan Stanley Todd Lukasik - Morningstar.

Good day, everyone. And welcome to the Realty Income Third Quarter 2014 Operating Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Janeen Bedard, Associate Vice President. Please go ahead, ma’am..

Thank you, operator. And thank you all for joining us today for Realty Income’s Third Quarter 2014 Operating Results Conference Call. Discussing our results will be John Case, Chief Executive Officer; Paul Meurer, Chief Financial Officer and Treasurer; and Sumit Roy, Chief Operating Officer and Chief Investment Officer.

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 any forward-looking statements.

We will disclose in greater detail the factors that may cause such differences in the company's Form 10-Q. I will now turn the call over to our CEO, John Case..

Thanks, Janeen. And good afternoon, everyone and welcome to our call. We're pleased with our third quarter results with AFFO per share increasing by 6.7% to $0.64. As announced in yesterday’s press release, we are reiterating our 2014 AFFO guidance per share of $2.55 to $2.57 so we anticipate another solid year of earnings growth.

Paul will provide you with an overview of the earnings numbers.

Paul?.

Thanks John. As usual, I will briefly comment on our financial statements and provide some highlights of our financial results for the quarter. I’ll start by highlighting a few line items in our income statement. Total revenue increased 16.6% for the quarter.

This increase reflects our growth primarily from new acquisitions over the past year, as well as same-store rent growth. Our annualized rental revenue at September 30th was approximately $912 million. On the expense side, interest expense increased in the quarter to $52.8 million.

This increase was primarily due to our two recent bond offerings, the $350 million tenure notes issued in June and a $250 million 12 year notes issued in September. Interest expense was also impacted this quarter by the reclassification of approximately one month of preferred dividends as interest expense.

Because we issued the redemption notice for our outstanding Preferred E Stock before quarter-end, we needed to reclassify the Preferred E Stock as a liability at quarter-end and about one month of preferred dividends as interest expense. This increased interest expense during the quarter by $1.2 million.

On a related note, our coverage ratios both remained strong with interest coverage at 3.7 times and fixed charge coverage at 3.3 times. General and administrative expenses in the quarter were approximately $11 million, a $5.6 million decrease from a year ago.

G&A expenses year-to-date were $35.5 million, a $4.9 million decrease from the first nine months of last year. This decrease in G&A comes from lower acquisition transaction cost, $589,000 year-to-date versus $1.7 million of transaction cost for acquisitions in 2013 as well as lower stock compensation cost.

We had a one-time unusual $3.7 million expense during the third quarter of 2013 due to accelerated vesting of our long-term stock compensation. Our projection for G&A for 2014 remains approximately $50 million. Our G&A year-to-date as a percentage of total rental and other revenues remains well at only 5.3% of revenues.

And our current projection for G&A expenses in 2015 is approximately $53.5 million. Property expenses were $12.8 million in the quarter. However, this amount includes $8.3 million of property expenses reimbursed by tenants. So the property expenses that we are responsible for were approximately $4.5 million for the quarter.

Our projection for 2014 of property expenses that we will be responsible for has increased slightly to approximately $17 million from a prior projection of $16.5 million. And our current projection for property expenses that we will be responsible for in 2015 is approximately $19 million.

Provisions for impairment includes $495,000 of impairments we recorded on one sold property and three properties held for sale at September 30. Gain on sales were approximately $11 million in the quarter. And just a reminder, we do not include property sales gains in our FFO or in our AFFO.

Excess of redemption value over carrying value preferred shares redeemed refers to the $6 million non-cash redemption charge for the unamortized original issuance costs which were paid when issuing and preferred E shares back in 2006.

Funds from operations or FFO per share was $0.64 for the quarter, this would have been $0.67 per share, but it was reduced by $0.03 due to the redemption charge on the Class E preferred shares. Adjusted funds from operations or AFFO or the actual cash we have available for distribution and dividends was also $0.64 per share for the quarter.

We again, increased our cash monthly dividend this quarter. Our monthly dividend now equates to current annualized amount of approximately $2.197 per share. Briefly, turning to the balance sheet, we continue to maintain our conservative and safe capital structure.

As you know in mid-September, we raised $250 million of 12 year bonds priced at a yield of 4.178%. Obviously we are pleased with our continued access to low cost, long-term capital in the bond market. The primary purpose of this offering was to redeem our $220 million of preferred E stock, which had a coupon of 6.75%.

So, this transaction resulted in annual cash expense savings of almost $5.7 million. Our bonds which are all unsecured and fixed rate and continue to be rated BAA1, BBB plus have a weighted average maturity of 7.5 years. Our $1.5 billion acquisition credit facility had only a $45 million balance at September 30th.

However, $220 million preferred E redemption closed earlier this month. So, the facility has an effective balance of $265 million. We did assume approximately $7 million of additional in place mortgages during the third quarter, but we also repaid $56 million of mortgage principal during the quarter.

So, our outstanding net mortgage debt at quarter-end decreased to approximately $844 million. Not including our credit facility, the only variable rate debt exposure to rise in interest rate that we have is on just $39 million of mortgage debt.

And our overall debt maturity schedule remains in very good shape with only $8 million of mortgage principal payments due in the fourth quarter of 2014 and $120 million in 2015. Our next bond maturity is only $150 million due in November of 2015 and our maturity schedule is well latter thereafter.

Currently, our debt to total market capitalization is approximately 32% and our preferred stock outstanding is less than 3% of our capital structure. And our debt-to-EBITDA at quarter-end was only 5.9 times. Now let me turn the call back over to John who will give you more background on these results..

Thanks, Paul. I’ll begin with an overall of the portfolio, which is performing well and continues to generate dependable cash flow for our shareholders. Occupancy remains consistent with the previous quarter at 98.3% based on the number of properties with 74 properties available for lease out of 4,284 properties.

Occupancy has held steady for three consecutive quarters now and is up 20 basis points from one year ago. Occupancy based on square footage and economic occupancy are both 99.1%. Based on what we're seeing today in our schedule rollover, we expect our occupancy to remain fairly stable for the remainder of the year.

The third quarter was our most active quarter this year for lease rollover activity in the portfolio with leases expiring on 81 properties. Of these assets, we released 70 to existing tenants, 7 to new tenants and sold 4 properties recapturing a 100% of expiring rents on the properties we released.

Our property portfolio management activities speak to the unique and extensive experience we have seen in our business full cycle where leases signed more than 20 years ago are rolling. Over our 45 year operating history, we have successfully executed more than 1,700 lease rollovers.

We have a team of 36 professionals, many of whom have been with the company for over a decade working in our property portfolio management department. We believe our expertise in this area is a significant asset to our company. Our portfolio continues to be diversified by tenant industry, geography and to a certain extent, property type.

At the end of the third quarter, our properties were leased to 231 commercial tenants and 47 different industries located in 49 states in Puerto Rico. 78% of rental revenue is from our traditional retail properties, while 22% is from non-retail, the largest component being industrial and distribution.

This diversification continues to enhance the predictability of our cash flow. At the end of the third quarter, our top 10 and top 20 tenants represented 37.5% and 53.5% of rental revenue respectively. The tenants in our top 20 continue to capture nearly every tenant representing more than 1% of our rental revenue.

There have been no material changes to the composition of tenants in our top 20 since last quarter. None of the top 20 tenants have investment grade credit ratings. The rental revenue from these non-investment grade rated tenants represents over half of the rent from our top 20 tenants.

Within our portfolio no single-tenant accounts for more than 5.4% of rental revenue, so the diversification by tenant remains quite favorable. Walgreens continues to be our largest tenant at 5.4% of rental revenue, which is up slightly from last quarter.

FedEx remains our second largest tenant at 5.1% of rental revenue, which is also up slightly from last quarter. Our 20th largest tenant represents only 1.2% of rental revenue and our 30th largest tenant accounts for just over 0.5% of rental revenue. We also added four new tenants to our portfolio this quarter, further diversifying our tenant base.

As far as industries, convenience stores remain our largest industry at 10% of rental revenue and have continued to decline as a percentage of rental revenue for 14 quarters in a row. Our second largest industry is Dollar stores at 9.6%, down from 9.8% last quarter.

As many of you know, there has been a lot in the news regarding the top three players in the Dollar store industry. With Dollar Tree and Dollar General competing by Family Dollar. The process remains fluid and one we continue to monitor. Family Dollar shareholders will determine the ultimate outcome here.

We would expect the FTC's ruling on any trust concerns associated with the merger to impact the outcome. We remain quite comfortable with our Dollar Store portfolio. We continue to like the deep discount orientation of the Dollar store industry as lower and middle income consumers remain focused on value shopping.

Family Dollar and Dollar General remain the dominant players in this industry. Our Family Dollar and Dollar General portfolios have an average lease term of 13 years with the unit level cash flow converge well above the overall average cash flow coverage in our retail portfolio of 2.6 times.

A Family Dollar merger with either side should not have a material impact on our operations. Moving onto property type, retail continues to represent our primary source of rental revenue, currently at 78%, with industrial and distribution at 10%; office at 7%; and the remainder evenly divided between light manufacturing and agriculture.

We continue to focus on retail properties leased to tenants with a service; non-discretionary; and/or low price point component to their business. Today more than 90% of our retail revenue come from businesses with these characteristics, which better positions them to successfully operate in all economic environments and to compete with e-commerce.

Our weighted average remaining lease term continues to be approximately 10.5 years. Our same-store rents increased 1.4% during the quarter and 1.5% year-to-date consistent with our expectations for the foreseeable future.

The industry is contributing most of our quarterly same-store rent growth for convenient stores, health and fitness and quick service restaurants. We continue to have excellent credit quality in the portfolio with 46% of our rental revenue generated from investment grade tenants.

Again, we define an investment grade rated company as having an investment grade rating by one or more of the three major rating agencies. This revenue percentage is up from 40% one year ago. We continue to generate solid rental growth from these investment grade tenants.

Nearly 70% of our investment grade leases as a percentage of rental revenues have rental rate increases in them which average approximately 1.4% annually, consistent with our historical portfolio rental growth rate. Overall, investment grade rental growth is about 1%.

In addition to tenant credit, the store level performance of our retail tenants remains positive. On average, our rent coverage ratio on our retail properties is 2.6 times on four wall basis. Moving on to acquisitions. We continue to see a very high volume of sourced acquisition opportunities.

During the quarter, we sourced over 7 billion in acquisition opportunities and year-to-date nearly 21 billion, making this already our second most active year ever for sourced transactions. There continues to be a lot of capital pursuing these transactions and we're seeing some very aggressive pricing in transaction structures in the market today.

We continue to remain selective and disciplined in our investment strategy, investing at attractive risk adjusted returns and spreads for our shareholders.

During the quarter, we completed $182 million in property level acquisitions at a cash cap rate of 7.4%, bringing us to $1.24 billion in acquisitions for the year at an initial cash cap rate of 7.1%. We're pleased with the yields, returns and spreads we're achieving. Given our low cost of capital, we continue to be able to invest at accretive levels.

Our investment spreads relative to our weighted average cost of capital continue to be well above our historical averages. So we are investing at spreads that are nearly a 100 basis points wider than our long-term average.

We anticipate closing approximately $1.4 billion in acquisitions this year, making 2014 our second most acquisitive year ever in our company’s history. Given the current environment, we’re establishing initial acquisitions guidance for 2015 of $500 million to $800 million.

As you know, it’s notoriously difficult to predict future acquisitions activity. Volumes can be lumpy and can change significantly from quarter-to-quarter. However, we continue to see a robust pipeline of acquisition opportunities.

Given the backdrop of this acquisitions environment, we are increasing our asset sales this year from $75 million to approximately $100 million to take advantage of a more aggressive market for buying; this is twice our initial expectation of $50 million at the beginning of the year.

During the quarter, we sold 11 properties for $33.5 million which brings us to 28 properties sold to-date for $53 million. These are our non-strategic assets being sold at attractive pricing. Let me hand it over to Sumit to discuss in more detail our acquisitions and dispositions.

Sumit?.

Thank you, John. During the third quarter of 2014, we invested $182 million in 49 properties located in 26 states at an average initial cash cap rate of 7.4% and with a weighted average lease term of 11.2 years. As a reminder, our initial cap rates or cash not GAAP which tend to be higher due to straight lining of rent.

We define cash cap rates contractual cash net operating income for the first 12 months of each lease following the acquisition date, divided by the total cost of the property including all expenses borne by Realty Income. On a revenue basis, 53% of total acquisitions are from investment grade tenants.

96% of the revenues are generated from retail and 4% are from industrial and distribution. These assets are leased to 21 different tenants in 15 industries. Some of the most significant industries represented are home improvement and drugstores.

Year-to-date 2014, we invested $1.24 billion in $439 properties located in 42 states at an average initial cash cap rate of 7.1% and with the weighted average lease term of 12.6 years. Of the total amount, approximately $329 million was invested in non-investment grade retail properties.

On a revenue basis, 70% of total acquisitions are from investment grade tenants. 86% of the revenues are generated from retail, 7% are from industrial, distribution and manufacturing and 7% are from office. These assets are leased to 51 different tenants in 27 industries.

Some of the more significant industries represented are Dollar stores, home improvements and drugstores. Transaction flow continues to remain healthy. We sourced more than $7 billion in the third quarter of 2014.

Year-to-date we have sourced approximately $21 billion in potential transaction opportunities, which as we mentioned last quarter would put us on pace to make 2014 the year with the second largest volume sourced in our company's history. Of these opportunities, 75% of the volumes sourced were portfolios and 25% or $5 billion were one-off assets.

Investment grade opportunities represented 48% for the quarter. Of the $182 million in acquisitions closed in the third quarter, approximately 48% were one-off transactions. 69% of the transactions closed in the third quarter were relationship driven.

We remained selective and disciplined in our investment approach closing on less than 6% of the deals sourced and continue to capitalize on our extensive industry relationships developed over our 45 year operating history.

As to pricing, cap rates remained tight in the third quarter with investment grade properties trading from mid 5% to high 6% cap rate range and non-investment grade properties trading from low-to-mid 6% to low 8% cap rate range.

As John highlighted, we had a very active quarter for dispositions and have increased our dispositions guidance to approximately $100 million to take advantage of the propitious cap rate environment. During the quarter, we sold 11 properties for $33.5 million at an unlevered IRR of just over 12%.

This brings us to 28 properties sold year-to-date for $53.3 million at an unlevered IRR of approximately 11% and a net cap rate of 8.1% on the leased properties sold.

Our investment spreads relative to our weighted average cost of capital were very healthy, averaging 224 basis points in the third quarter and a 190 basis points year-to-date, which was significantly above our historical average spreads. We define investment spread as initial cash yield less our nominal first year weighted average cost of capital.

We are continuing to make investments above our historic spreads, whilst improving our real estate portfolio, tenant quality, credit quality and overall diversification. In conclusion, the third quarter investments remained healthy at $182 million. Year-to-date we have invested $1.24 billion, while sourcing approximately $21 billion in transactions.

Our spreads remained comfortably above historical level as a tight cap rate environment in the third quarter was more than offset by improving cost of capital. We continue to be very selective in pursuing opportunities that are in line with our long-term strategic objectives and within our acquisition parameters.

We also took advantage of an aggressive pricing environment to accelerate disposition of assets that are no longer a strategic fit. We remained confident of reaching our updated investment and disposition goals of approximately $1.4 billion and approximately $100 million respectively for 2014. With that, I would like to hand it back to John..

Thanks Sumit. Regarding our capital raising activities, as Paul mentioned, we've been quite active in the capital markets year-to-date. We have raised over $1.2 billion in permanent and long-term capital to finance our business. The majority being equity with the remainder being 10 and 12 year unsecured bonds.

So, our balance sheet continues to be in excellent shape with two-thirds equity and one-third debt and that debt being predominantly long-term fixed rate. We currently have more than $1.2 billion available on the line to support future acquisitions activity so we continue to have excellent liquidity.

Regarding earnings and guidance, we continue to generate healthy per share earnings growth, while maintaining a conservative capital structure. Our third quarter FFO and AFFO per share of $0.64 represented increases of 8.5% and 6.7% respectively from the period one year ago.

As mentioned earlier, we are reiterating our 2014 AFFO guidance per share of $2.55 to $2.57, representing earnings growth of about 6% to 7%.

We are anticipating another solid year for earnings growth next year and we are initiating 2015 guidance with AFFO per share from $2.66 to $2.71 implying year-over-year growth of approximately 4% to 6% over the midpoint of our 2014 range; and FFO per share of $2.67 to $2.72 which at the midpoint of the range represents an increase of approximately 4% over the midpoint of our 2014 range.

Our focus continues to be the payment of reliable monthly dividends that grow over time. During the third quarter, we declared the 77th dividend increase since the company’s listing in 1994. Over this 20-year time period as a publicly traded company, we’ve grown the dividend by a compounded average annual growth rate of 4.6%.

We remain committed to the durability and consistent growth of the dividend. Our payout ratio year-to-date has been 85.5% of our AFFO which is a level we continue to be comfortable with.

As I am sure many of you saw in our separate press release yesterday, we’re pleased to announce Steve Sterrett, CFO of Simon Property Group as the 8th Member of our Board of Directors and 7th independent Board Member. We welcome Steve to Realty Income and look forward to working with him as a Member of our Board.

Steve has spent 26 years at Simon Property Group, the largest real-estate company in the world and has spent the last 14 years as the CFO building a reputation of excellence in the industry. His depth of experience and relevance in our industry will enable him to be a valuable contributor to our Board.

Finally to wrap it up, we continue to be pleased with our performance for the year. We’re seeing healthy volumes of acquisition opportunities and we’re on track to have our second most active year for acquisitions in our company’s history.

We will remain selective and disciplined with regards to our investment strategy and we'll continue to acquire high quality properties quite accretively with our cost of capital advantage and at attractive risk adjusted returns for our shareholders. At this time, I would now like to open it up for questions.

Operator?.

Thank you. (Operator Instructions). Our first question comes from Juan Sanabria with Bank of America. .

Hi, good afternoon guys.

I was just hoping you could give us a little color on the 2015 acquisition guidance, sort of how you came to that number and then background on any spreads or cap rates we should thinking about with regards to that number? And just optically, I know you've kind of stated and stressed that you want to be selective, but just how we should be thinking about that versus the number you put out there for 2014 for the year?.

Okay Juan. Let me just spend a moment on acquisitions. We continue to see inactive pipeline of sourced acquisition opportunity, so there is good transaction flow. And as we said, our investment spreads are well above our historical average. But there is also a lot of capital pursuing these opportunities.

So, it has been competitive and we remain disciplined and selective with our investment strategy. We're seeing some very aggressive pricing out there among some of our peers and structures, looking at replacement cost; we're seeing assets trade sometimes at 50% above the replacement costs.

We’re seeing properties that have rents that are well above market rents trading at aggressive pricing. Then we’re seeing some pretty aggressive structures as well.

So we’re seeing for instance and some of the casual dining transactions that have crossed our gas, we’re seeing them get dine at very high coverage ratios, ratios we’re not comfortable with. So we’ve been in this business a long time and I think we have a pretty good idea of what’s going to work and what’s not going to work long-term.

Clearly, given our cost of capital, we could do these transactions and initially that would be quite accretive. But when you look at them over the long-term, if they’re not structured and priced properly, you’re going to have some low IRRs and pay the price on the residual, and they could actually the value destructive to our shareholders long-term.

Our range for acquisitions for 2015 reflects the environment we’re in today. As you know that environment can change significantly from quarter-to-quarter even month-to-month. I mean if an aggressive buyers out there that all of a sudden slows down or exits the market that could have a material impact on our volume and potentially pricing.

So at this point, predicting acquisitions guidance year in advance is always difficult. And we’ve always wanted to be accurate, but not over promise. Historically, we’ve exceeded our initial guidance. If you look at last year, we had $1 billion acquisitions guidance number in October of 2013 for 2014 and we're going to exceed that by about 40%.

But as usual, we'll just have to see how that year shapes up next year, but one thing we're not going to do is abandon our investment discipline simply to generate volume. Let me speak to your second point in that spreads and cap rates. Sumit addressed that on the call, but investment grade cap rates we see them get a little tighter.

Investment grade is running from the mid 5s to the high 6s and non-investment grade the low 6s all the way up to 8%. As far as spreads go for the year, we've invested spreads of 190 basis points above our weighted average cost of capital. In the third quarter that was 220 basis points.

And given our cost of capital today, we're looking at 240 basis points, which are near our all time record spreads. So, they remained quite attractive, but again we've got to look at this business beyond just what it's going to do over the next quarter or next year and we're looking at 10 or 11 year average 13 year or 14 year average lease terms.

So, hopefully that answers your question..

Definitely very thorough. Thanks John. And just a quick follow-up if you don't mind.

Given how aggressive pricing is, what’s the viewer on dispositions for 2015 is it anything big to the numbers?.

We've assumed for 2015 $50 million for now and we're going to watch that pretty closely. We started out this year assuming $50 million and we're going to end up selling $100 million approximately. So, the environment continues to be heated.

We're going to go ahead and move some assets, some additional assets off our watch list and take advantage of the strong bid in the market. And I think pricing will improve here in the next few months is my prediction in terms of disposition.

So, in the model we have $50 million, but we’re going to watch that pretty closely and if the environment continues to look like it does today, we could see increasing that up to $100 million..

Great. Thank you very much for the time..

Okay. Thank you..

Our next question comes from Todd Stender with Wells Fargo..

Hi, thanks guys. Sumit you gave cap rate ranges for investment grade and non-investment grade, tentative properties. Were those for the properties you acquired in Q3? Just want to get the range of cap rates you acquired because the blended 7.4 yield I thought was pretty high even though it worth payable to land over 50% investment grade..

Yes. So, Todd those were the ranges of assets that we saw transact in the market. We didn’t -- I don’t believe we bought anything in the low or mid 5% cap rate range.

The main reason for the yield that we were able to achieve in the third quarter of a 7.4 was being driven by 18% of the volume was coming from our build-to-suit development funding, as well as some of our forward commitments, which typically has been a much smaller portion of the total acquisition volume, it’s been right around 3%, but in the third quarter that represented closer to 18%.

And clearly the mix of investment grade and non-investment grade also played a part in why we were able to achieve the higher yield..

That’s helpful. And then just kind of just switching gears, can you share how some of the re-leasing discussions went with tenants? It looks like while you renewed 77 leases, just looking back at the Q2 results, about 50, only 50 leases were coming due in the second half of the year.

So, I just want to see, the tenants comfort level in renewing leases ahead of time, it looks like a fair amount of those were maturities not coming due just yet?.

That's exactly right. I mean we're always looking for, Todd, managing our rollover and if we can enter into discussions that are advantageous for us and our tenants to re-lease early, we will do that. So, that's why you see that 77 number versus what was scheduled to roll in the quarter. So, we're pleased with that and we'll continue to do that.

We're just trying to stay in front of these maturities and our leases and stay in front of them a couple of quarters or longer if we can even..

Is there a comfort level with tenants anything that you can, any trends are developing that tenants are able to renew or their willingness to renew it little early, anything there?.

Yes. Well, I think in general our tenants are in better shape than they were certainly five years ago; their operations and balance sheets are much stronger; they are more likely to renew. So, we're leasing of the lease rollovers we're executing, 90% are going to the same tenant; 10% to a new tenant.

If you look at the history of the company that's been more 70% to the same tenant and 20% to new tenant and then 10% sold. So, those statistics show you that the tenants are more comfortable renewing their leases on the properties and staying in those properties.

And it’s a function of a better economic environment, but we also like to think it’s also a function of better underwriting, better tenant selection, site selection on our part having learned from 45 years history in this business..

Thanks John.

And just was there cost or what was the cost associated with retaining and attracting new tenants; have you guys put out a TI number?.

Yes. We are -- that will be in our supplemental. So we spent 125,000 in tenant improvements in the third quarter to re-lease 16.3 million in rental revenue. So that number is de minimis, it usually is dominants; it runs from less than 1% of revenues up to maybe 2%.

So, it’s never a material number, but we’re actually including that in our supplement going forward..

Great. Thank you..

Thank you, Todd..

Our next question comes from Vikram Malhotra with Morgan Stanley..

Thank you. Sumit, could you just give us, sorry, I apologize if I missed this.

But for the acquisitions that you’ve taking for next year, what are the cap rates you’re assuming or the range of cap rates?.

We’re assuming 7% for next year..

Okay..

Year-to-date we’re at 7.1%. The 7.4%, if we were very pleased with but that’s little higher than what we’re expecting given the current market conditions..

And then just given the numbers you quoted on market cap rates between investment grade and non-investment grade, would you expect next year to be a little different in terms of just composition between the two for deals that you do?.

No. I think listen, a lot of it is going to be a function of what's going to be available out there. And I think we've stated this in previous calls as well. We don't target a particular composition with regards to investment grade versus non-investment grade when we're looking at acquisitions.

This particular quarter it just turned out where investment grade represented only 53% whereas year-to-date it's closer to 70%. So, we're going to look at opportunities that present themselves. There is a lot of discussion around certain retail asset classes that tend to be more non-investment grade in nature.

So it's very difficult to predict as to what the composition of that 500 million to 800 million that John has mentioned is going to turn out to be at the end..

Okay.

And then just maybe on the competition for deals, as you mentioned, it's obviously increased but maybe looking out into '15, maybe just give us your high level thoughts on did you see that competition changing in any way? I know new regulations on the non-traded side don't kick in for a while but could that be a factor as you get towards the year end or could there just be other factors that may make the environment just more competitive or less competitive from your standpoint?.

Well, we continue to compete with the other public companies and certainly the non-listed REITs. As you've said, the capital raising has slowed down a little bit there but there is still a lot of equity in those entities.

We compete with mortgage REITs and institutional investment managers who are running money for sovereign wealth funds, pension funds, endowments looking for yield. So we bump in to some of them as well. I think that the last few quarters have been some of the most competitive we've seen.

And there is certainly some activities out there in the sector that would lead me to believe that the competition could become a little less than tense next year. Again it’s impossible to accurately forecast, but our sense is some of the more aggressive buyers maybe stepping back a bit from the market. So that would be the case.

We certainly feel better about the higher-end of our acquisitions range..

Okay. And then some -- okay, okay.

Just last clarification is on the timing of these acquisitions, is there anything different we should assume for next year versus just normal seasonality that we see during the year?.

They’re normal, they’re lumpy and they’re really driven by portfolios. And again like last year 2013 we did $1.52 billion in property level acquisitions, the last quarter was a $140 million. This year the first quarter was $650 million and this quarter was a $182 million.

You’re going to see that lumpiness because it’s associated with the amount of acquisitions that get done through portfolios. So, I think that will continue. So, we’ll have some heavy quarters and some light quarters like we always have..

Okay. Thanks guys..

Thank you..

Our next question comes from Todd Lukasik with Morningstar..

Hi. Good afternoon guys. Thanks for taking my questions. Just wondering if you could comment on the weighted average remaining lease term for the portfolio overall. And I guess let’s say 5 or more years ago I kind of assume that was going to fall in the range of 12 years or longer generally. And I think now it’s around 10.4 years.

And just if you can comment around that I guess the change in properties that you guys own now may influence that, but also whether or not you manage to that number and what you'd expect it to be in five or ten years or how that will likely trend?.

Yes. Well, I mean when you've got $15 billion in assets and each year passes the lease-term actually declines by year and it's offset partially by acquisitions. And so, if you're acquiring a $1.5 billion at 13 years, you're not going to fully offset the decrease in lease-term on the existing portfolio.

On rollovers, you are typically -- if the rollovers go to the same tenant, they are five year lease-terms, if it's a new tenant it's closer to ten years. So, it's a natural evolution for a season that lease company like ourselves to see that lease-term overtime decline.

We still focus on average lease-terms of 11, 12, 13, 14 years that’s what we're seeing, that's what we're doing. But you’ve got to remember on the rest of the portfolio, they're getting a bit shorter. And I think one of our strength is to effectively execute lease rollovers.

We've executed over 1,700 lease rollovers in our company's history, recapturing nearly a 100% of the expiring rent. And we've got a team of almost 40 professionals dedicated to that effort that they have been with the company; many of them 10 to 20 years.

And that’s where I’ve said this before where the rubber meets the road in the business, that’s where you really need to be able to execute and reserve value. And there are not a lot of net lease companies out there that have that expertise and that extensive experience.

So, we’re very comfortable with our ability to extend the shorter lease terms and the longer lease terms that eventually need to be addressed as those leases expire. I mean some of the leases, we handled this quarter, we looked at and they were put in place 25 years ago. So again we’d have a very long-term perspective.

Does that help Todd?.

Yes, it does. That’s great. Thanks for all that color. And then just a follow-up question on the acquisition guidance for next year.

I’m curious, if you are also expecting that the acquisition volume that source is going to be lower or whether you expect that to be relatively constant; you guys are just going to a little bit choosier about what you actually try to close?.

It’s continuing to be active in this quarter. We would expect transaction flow in terms of sourced acquisition opportunities to be strong again next year; all indicators were pointing to that it will be. 2013 was a record at 39 billion. This year, we’re already a 21 billion, which is our second best year ever just nine months into the year.

So I think that we’ll continue to see that momentum, but again we’ll continue to be selective and disciplined in what we buy. There are a number of discussions going on with respect to sale leasebacks with corporate board; corporate management teams; activist investors.

We don't know how many of these are going to end up playing out but it's just one or two or three hit, you could see some very big sourced volumes that could lead to higher acquisition.

So that activity in terms of activist investors and corporate boards and management teams scrutinizing their real estate holdings and making sure they’re properly and efficiently managing their real estate is accelerating. So there are more discussions.

Unfortunately we're involved in those discussions and that really could impact source opportunities next year there to monetize some of that real estate. .

Okay, great. Thanks a lot for taking my questions..

Okay, Todd. Thank you..

And this concludes the question and answer portion of Realty Income's conference call. I will now turn the call over to John Case for concluding remarks..

Just want to thank you and thank everyone for joining us today. We look forward to speaking with you next quarter and we'll see a lot of you next week in Atlanta NAREIT. So we look forward to catching up with you then. Take care everyone..

And this conference will be available for replay beginning today at 6:30 pm and will end November 14th at 1:59 am. You can access the replay by dialing 888-203-1112 or 719-457-0820 and using the access code 3015859. Again you can access that replay by dialing 888-203-1112 or 719-457-0820 and using the access code of 3015859.

Thank you for your participation. This concludes today's call..