Janeen Bedard – Vice President, Administration Executive Department John Case – Chief Executive Officer and President Sumit Roy – Executive Vice President, Chief Operating Officer and Chief Investment Officer Paul Meurer – Executive Vice President, Chief Financial Officer and Treasurer.

Juan Sanabria – Bank of America Todd Stender – Wells Fargo Richard Moore – RBC Capital Markets Vikram Malhotra – Morgan Stanley Nicholas Joseph – Citigroup Cedric Lachance – Green Street Advisors Todd Lukasik – Morningstar.

Good day and welcome to the Realty Income Fourth Quarter 2014 Operating Results Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Ms. Janeen Bedard. Please go ahead, ma’am..

Thank you all for joining us today for Realty Income’s Fourth 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-K. I will now turn the call over to our CEO, John Case..

Thanks, Janeen, welcome to our call today. We're pleased with our fourth quarter results with AFFO per share increasing by 4.8% to $0.65 and 2014 AFFO per share increasing by 6.6% to $2.57.

As announced in yesterday’s press release, we are reiterating our 2015 AFFO per share guidance of $2.66 to $2.71 as we continue to anticipate another solid year of earnings growth. Paul will provide you with an overview of our financial results.

Paul?.

Thanks, John. As usual, I will briefly comment on our financial statements and provide some highlights of our financial results for the quarter and the year starting with the income statement. Total revenue increased 14.5% for the quarter and 19.6% for the year.

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 December 31 was approximately $920 million.

On the expense side, depreciation and amortization expense increased to $96.5 million in the quarter, as depreciation expenses obviously increased with our portfolio growth. Interest expense increased in the quarter to $59.1 million.

This increase was primarily due to our two recent bond offerings, the $350 million tenure notes we issued in June and a $250 million 12 year notes issued in September. On a related note, our coverage ratios both remain strong with interest coverage of 3.8 times and fixed charge coverage of 3.4 times.

General and administrative or G&A expenses were approximately $15.6 million for the quarter, and $51.1 million for the year, both were decreases from last year, due to lower acquisition transaction costs, as well as lower stock compensation cost.

Overall, our total G&A in 2014 as a percentage of total rental and other revenues represented only 5.7% of revenues. Our projection for G&A expenses in 2015 is approximately $55 million or about 5.5% of revenue. Property expenses which were not reimbursed by tenants totaled $4.2 million for the quarter and $16.8 million for the year.

Our current projection for property expenses that we will be responsible for in 2015 is approximately $20 million. Income taxes consist of income tax paid to various states and cities by the company and they were approximately $1.1 million for the quarter and $3.5 million for the year.

Provisions for impairment of approximately $2 million during the quarter includes impairments we reported on one sold property and two properties held for sale at December 31. Note that approximately $510,000 of this impairment is recognized in discontinued operations on the income statement.

An accounting treatment that is necessary because the property was held for sale at the end of last year when the discount accounting rules changed. Gain on sales were approximately $25 million in the quarter and $42 million for the year and just a reminder, as always we do not include property sales gains in our FFO or AFFO.

Funds from operations or FFO per share was $0.64 for the quarter, a 4.9% increase versus a year ago and $2.58 for the year, a 7.1% increase over 2013.

Adjusted funds from operations or AFFO or the actual cash we have available for distribution and dividends was $0.65 per share for the quarter, a 4.8% increase versus the year ago and came in at $2.57 for the year, a 6.6% increase over 2013.

Dividends paid increased 2.1% in 2014 and as previously announced last month we declared a 3% increase to our cash monthly dividend which was paid to shareholders this month. Our monthly dividend now equates to a current annualized amount of approximately $2.268 per share.

Briefly turning to the balance sheet, we’ve continued to maintain our conservative and safe capital structure. As previously disclosed, we regained our $220 million of preferred e-stock, which had a coupon of $6.75% back in October.

Recall it in mid-September, we issued $250 million of 12-year bond prized at a yield of 4.178% to pre-fund this preferred redemption. This transaction overall resulted in annual cash expense savings of almost $5.7 million. Obviously, we are pleased with our continued access to low cost long term capital in the bond market.

Our bonds which are all unsecured in fixed rate and continue to be rated Baa1 BBB+ have a weighted average maturing of 7.2 years. Our $1.5 billion acquisition credit facility had a $223 million balance at December 31 and currently we have $382 million of borrowings on the line. We did not assume any mortgages during the quarter.

We did pay off some of the maturity to our outstanding net mortgage that at year end decreased to approximately $836 million. Not including our credit facilities the only variable rate debt exposure to rising interest rates that we have is only just $39 million of this mortgage debt.

And our overall debt maturity schedule remains in very good shaper with only 120 million to mortgages and 150 million of bonds coming due in 2015 and our maturity schedule as well laddered thereafter. Currently our debt to total market capitalization is approximately 30% and our preferred stock outstanding is less than 2.5% of our capital structure.

And our debt to EBITDA at year end was only 5.8 times. Now let me turn the call back over to John who will give you more background..

Thanks, Paul. I’ll begin with an overview of the portfolio, which is performing well and continues to generate a tenable cash flow for our shareholders.

Occupancy increased 10 basis points from last quarter and 20 basis points year-over-year to 98.4% based on the number of properties with 70 properties available for lease out of over 4,300 properties in our portfolio. This is the highest our occupancy has been since 2007.

Occupancy based on square footage was 99.2%, a 10 basis points improvement from last quarter and 20 basis points year-over-year. Economic occupancy was also 99.2%, a 10 basis points improvement from both last quarter and year-over-year. 2014 has been one of our most active years every for lease rollover activity with leases expiring on 220 properties.

Of these properties, we released 173 to existing tenants and 30 to new tenants, recapturing 99.3% of expiring rents on the properties that were released. In addition, we sold 17 vacant properties during the year.

In the fourth quarter we experienced 54 lease rollovers, of these we released 40 to existing tenants and 10 to new tenants recapturing approximately 97% of expiring rents on the properties that were released. Eight vacant properties were sold during the fourth quarter. Our same store rent increased 1.7% during the quarter and 1.5% in 2014.

The industry is contributing most to our quarterly same store rent growth or convenient stores, health and fitness, and quick service restaurants. We expect same store rent growth to remain at about 1.5% for the foreseeable future. Our portfolio continues to be diversified by tenant, industry, geography, and to a certain extent property type.

At the end of the fourth quarter, our properties released 234 commercial tenants in 47 different industries located in 49 states in Puerto Rico. 79% of our rental revenue is from our traditional retail properties, while 21% is from non-retail properties, the largest component being industrial and distribution.

This diversification continues to enhance the predictability of our cash flow. We continue to focus on retail properties leased to tenants with the service, non-discretionary and/or a low price point component to their business.

Today, more than 90% of our retail revenues come from businesses with these characteristics, which better position them to successfully operate in all economic environments and to compete with e-commerce. At the end of the fourth quarter, our top 10 and top 20 tenants represented 37% and 53% 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 were no changes to the composition of our tenants in our top 25 since last quarter. Nine of the top 20 tenants have investment grade credit rating.

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 our rental revenue. The diversification by tenant remains favorable.

Walgreens continues to be our largest tenant at 5.4% of rental revenue, unchanged from last quarter. FedEx remains our second largest tenant at 5.1% of rental revenue, which is also unchanged from last quarter. Convenience stores remain our largest industry at 9.8% of rental revenue, down 20 basis points from last quarter.

Our second largest industry is Dollar stores at 9.5%, down 10 basis points from last quarter. As many of you know, the competition between Dollar Tree and Dollar General to purchase Family Dollar recently ended with Family Dollar shareholders approving the merger with Dollar Tree. Family Dollar is our fifth largest tenant at 4.5% of rental revenues.

We view this outcome as an incremental positive given the minimal portfolio overlap Family Dollar has with Dollar Tree and there will be no impact on our tenant diversification metrics.

The FTC [ph] is currently reviewing the merger, but we remain confident that the performance and long lease duration of our Family Dollar locations should ensure that the divestitures have no impact on our rental revenue.

We continue to have excellent credit quality in the portfolio with 46% of our rental revenue generated from investment grade rated tenants. Again, we define an investment grade rated company that’s having an investment grade rating by one or more of the three major rating agencies. This revenue percentage is up from 40% a 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, which is consistent with our historical portfolio of rental growth rate.

Overall, investment grade tenant rental growth is about 1%. In addition to tenant credit, the store level performance of our retail tenants remains positive. Our weighted average rent coverage ratio on our retail properties is 2.6 times on a four wall basis, and importantly the median is 2.7 times.

Moving on to acquisitions, we continue to see a very high volume of sourced acquisition opportunities. During the quarter, we sourced nearly 4 billion in acquisition opportunities and for the year we sourced 24 billion, making this our second most active year ever for sourced transaction.

There continues to be a lot of capital to pursuing these transactions and we continue to remain selective in our investment strategy, investing at attractive risk adjusted returns and investment spreads for our shareholders.

During the quarter, we completed $158 million in property level acquisitions at a cash cap rate of 7.1%, bringing us to $1.4 billion in acquisitions for the year at an initial cash cap rate of 7.1% as well. Our investment spreads relative to our weighted average cost of capital continues to be well above our historical average.

Today, we are investing at spreads over 250 basis points above our weighted average cost of capital. Given the active environment we’re seeing, we are raising our 2015 acquisitions guidance. We now expect acquisitions volume of $700 million to $1 billion, an increase from our initial acquisitions guidance for the year of $500 million to $800 million.

As expected, we had a very active quarter for dispositions as we sold 18 properties for $53 million during the fourth quarter. During the year, we sold 46 properties for $107 million more than double our initial expectation of $50 million at the beginning of the year.

And we are again reiterating our initial disposition guidance for 2015 of approximately $50 million. Now, let me hand it over to Sumit to discuss in more detail our acquisitions and dispositions.

Sumit?.

Thank you, John. During the fourth quarter of 2014, we invested $158 million in 82 properties, approximately $1.9 million per property located in 26 states at an average initial cash cap rate of 7.1% and with a weighted average lease term of 14.6 years.

As a reminder, our initial cash cap rates or cash not GAAP which tend to be higher due to straight lining of rent. We define cash cap rates as 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, 32% of total acquisitions are from investment grade tenants and 68% of the revenues are from non-investment grade retail tenants. 87% of the revenues are generated from retail, and 13% are from industrial and distribution. These assets are leased to 23 different tenants in 19 industries.

Some of the most significant industries represented our quick service restaurants, grocery stores and drugstores.

For the year 2014, we invested $1.4 billion in 506 properties which equates to approximately $2.8 million of properties located in 42 states at an average initial cash cap rate of 7.1% and with the weighted average lease term of 12.8 years. Of the total amount, approximately $434 million was invested in non-investment grade retail properties.

On a revenue basis, 66% of total acquisitions are from investment grade tenants. 86% of the revenues are generated from retail, 8% are from industrial, distribution and manufacturing, and 6% are from office. These assets are leased to 62 different tenants in 32 industries.

Some of the most significant industries represented are Dollar stores, home improvement and drugstores. Of the 80 independent transactions closed in 2014, only three transactions were above $50 million. Transaction flow continues to remain healthy. We sourced approximately $4 billion in the fourth quarter.

For 2014, we have sourced more than $24 billion in potential transaction opportunities. 2014 was the year with the second largest volume sourced in our company's history. Of these opportunities, 82% of the volume sourced were portfolios and 18% or approximately $5 billion were one-off assets.

Investment grade opportunities represented 49% for the fourth quarter. Of the $158 million in acquisitions closed in the fourth quarter, approximately 33% were one-off transactions. 88% of the transactions closed in the fourth quarter were relationship driven.

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

As to pricing, cap rates remained tight in the fourth quarter with investment grade properties trading from low 5% to high 6% cap rate range and non-investment grade properties trading from high 5% to low 8% cap rate range. As John highlighted, our disposition activities remained active.

During the quarter, we sold 18 properties for $53.4 million at a net cash cap rate of 5.7% and realized an unlevered IRR of just over 12%. For 2014, we sold 46 properties for $106.6 million at a net cash cap rate of 6.9% and realized an unlevered IRR of 11.6%.

Our investment spreads relative to our weighted average cost of capital were very healthy averaging 211 basis points in the fourth quarter and 195 basis points in 2014, which were significantly above our historical average spreads. We define investment spread as initial cash yield less our nominal first year weighted average cost of capital.

In conclusion, the fourth quarter investments remained solid at $158 million. For the year 2014, we invested $1.4 billion while sourcing more than $24 billion in transactions. Our spreads remained comfortably above our historical level as a tight cap rate environment in the fourth 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.

As John mentioned, we are raising our acquisition guidance for 2015 from $500 million to $800 million to $700 million to $1 billion. With that, I would like to hand it back to John..

Thanks, Sumit. We continue to generate healthy per share earnings growth while maintaining a conservative capital structure. Our fourth quarter FFO and AFFO per share of $0.64 and $0.65 represented increases of 4.9% and 4.8% respectively from a year ago.

Our 2014 FFO and AFFO per share of $2.58 and $2.57 represented increases of 7.1% and 6.6% respectively from a year ago. We are reiterating our 2015 FFO per share guidance range of $2.67 to $2.72, an increase of 3.5% to 5.4% over 2014 FFO per share.

As mentioned earlier, we are also reiterating our AFFO per share guidance of $2.66 to $2.71, an increase of 3.5% to 5.4% over 2014 per share figures. Our focus continues to be the payment of reliable monthly dividends that grow over time.

We have increased our dividend every year since the company’s listing in 1994 growing the dividend at a compounded average annual rate of 4.7%.

Our track record was recognized last month with our addition to the S&P High Yield Dividend Aristocrats index, which measures the performance of companies in the S&P composite 1,500 that have increased their dividend every year for at least 20 consecutive years.

We are one of only six REITs included in this index and we remain committed to consistent growth of the dividend. Our payout ratio was 84.5% based on the midpoint of our 2015 AFFO guidance which is a level we continue to be comfortable with. This compares similarly with our 2014 AFFO payout ratio of 85.3%.

Finally to wrap it up, we are pleased with our performance for 2014 and we remain quite optimistic for 2015. As reflected in our increased acquisitions guidance, we continue to see healthy volumes of acquisition opportunities but we will remain selective and disciplined with our investment strategy.

We remain well positioned to execute on opportunities with just over $1.1 billion available on the credit facility today. Additionally, our cost of capital advantage continues to support our ability to drive healthy earnings accretion for our shareholders. At this time, I would now like to open it up for questions.

Operator?.

Thank you. [Operator Instructions] We’ll take our first question from Juan Sanabria with Bank of America..

Hi, good afternoon guys.

Just a question on the strategy with regards to your industrial exposure, how should we be thinking about that either growing or staying the same as a percentage of the pie going forward and what kind of pricing are you seeing for those assets specifically? And is it really just to an investment grade focus on those types of assets?.

Yeah. One, we continue to focus on exclusively investment grade industrial. And at the end of the year, last year we had about 14% of our acquisitions came from industrial and distribution. We are still predominantly retail, 86%.

We are seeing a bit of cap rate compression in the marketplace and that includes industrial, but we are actively seeking Fortune 1000 tenants with investment grade ratings and mission critical or significant locations with investments at/around replacement cost, at/around long-term - at/around market rents with growth with the long-term lease.

So that’s typically the profile of what we are seeing and cap rates for that product range from probably the mid 5s right now to the high 6s. But we will continue to do that, but it will represent a minority of our investment activity..

Okay.

Should it grow at a piece of a pie or kind of hold steady from the current levels?.

Right now it’s holding steady and I think over the near to intermediate term, it will hold steady to grow at slight bit..

Okay, thanks.

And I just wanted to ask about the increase in your acquisitions guidance, is there anything in particular that drove that? Are you feeling or seeing more portfolio deals or is it more one-off relationship transactions? And just sort of tangential follow-up, I think you noted the fourth quarter had some quick service in restaurant deals.

From memory, I think you guys have been a little bit cautious on casual dining restaurants.

Any change of tact there may be with the lower oil price or is it just specific to those deals in the fourth quarter?.

With regard to QSRs, we’ve been fine now for quite some time.

This company started in 1969 with an investment in a Taco Bell and over the last five years we’ve invested $2.2 billion in non-investment grade retail where we are underwriting to four wall cash flow coverages, quality tenants, high traffic quality locations and we’ve never gotten away from that though.

We supplemented it with the investment grade strategy but we continue to be very active. The most active we’ve been in our history over the last five years in buying on investment grade retail. So we will continue to do that going forward.

As far as acquisitions guidance, the first part of your question, we’re seeing both more one-off and small portfolio sourcing opportunities as well as some larger portfolios.

So the driver in our acquisitions guidance change has been more activity, continued brisk sourcing activity, it’s given us more confidence for the year and therefore we raised the midpoint of our acquisitions guidance by $200 million.

I’ll add that we did not adjust our AFFO per share estimates because we believe this incremental activity will be more backend loaded and we’ll have more of an impact in 2016 and 2015..

Thanks, John. Appreciate the color..

Okay. Thanks, Juan..

And we’ll take our next question from Todd Stender with Wells Fargo..

Hi, thanks guys.

Just to get a sense of any trend that stick out for the $4 billion of sourced deals that you looked at in Q4, what was the mix of property types and any characteristics may be you can point to and was any of this located overseas maybe what your appetite is for international right now?.

Yeah. So virtually all of it was domestic and 90% of it was retail properties. So that will give you a good overview of what the servicing activities look like.

Sumit, do you have anything to add on that front?.

No and there was a large portfolio that we saw that had some international assets there as well, but it was a very small piece of the pie, the $4 billion..

Okay, that’s helpful.

And just looking at the sources of capital right now, you tapped this stock purchase plan and DRIP I believe might be in there too for $100 million in the quarter, is this truly a capital source? Should we be thinking about your ability to may be tap a $100 million a quarter if your stock performs well?.

Something we implemented about a year and a half ago, the waiver discount program and it’s been very successful for us. We did issue $100 million in the fourth quarter. We also get a little bit of activity on our DRIP as well. Going forward, it’s something that we will opportunistically access.

It’s an efficient way for us to raise equity, the cost of that equity is about 1.3% versus a little over 6% for a regular way offering. So it’s cheaper for the company and it allows us to match fund some of our acquisition activity.

So we will continue to utilize it where it makes sense in the future, but we also won’t abandon regular or equity offerings..

Is there an authorization for that John or is there a limit of how much you can do or does the board weigh in on how much they want to issue?.

Yeah. The board has to authorize it and may have – and we have authorization of up to 6 million shares which should last us for a while..

Okay, that’s helpful.

And I may have missed this getting on late, but what’s holding it back from increasing your guidance given the $200 million increase in your acquisition guidance?.

Yeah. I was just talking to Juan about that. It’s really timely. The incremental acquisitions we believe will close late in latter part of 2015 so they will have an greater impact on our 2016 AFFO and FFO versus 2015. So we felt comfortable leaving our guidance where it is..

Great. Thank you..

Thanks, Todd..

And we’ll take our next question from Rich Moore with RBC Capital Markets..

Hi, good afternoon or may be good morning guys.

I’m curious on the line of credit, you guys added $150 million, was that just to pay off mortgages that came due? Is that what that was?.

No, it will be….

Since the end of the quarter, Paul?.

What’s that? Since the end of the quarter, yeah. It would be primarily used for acquisitions during the first quarter..

Okay. So that was $150 million of additional acquisitions.

And do you have additional acquisitions under contract?.

Yes, we do..

Okay, great. Thanks.

And then I was curious guys, the development and expansion properties I know it’s not terribly many but it look like you delivered nine in the quarter, do I read that right out of the supplemental? And then how do you think about these properties going forward with 2014, it seems that are left to although it get just finished and go away and you don’t have any more of these coming or do you do this periodically?.

No, we’d like to maintain a fair amount of activity in that effort. The returns are about a 150 basis points higher in terms of initial yields and what we realize on acquisitions. Currently, we have $45 million in development underway of which we funded just over $12 million of that.

About half of that is new development, about half of those assets are redevelopment and expansion of existing properties, but it’s been a very attractive business for us from a return standpoint. And we actually like to see that Rich grow to a couple of $100 million which we think is just fine on a balance sheet of our size, $16 billion in assets..

Okay. Got it..

I’ll just say there will be a consistent theme of the business and continue..

Okay, great. Thank you.

So did you deliver $9 million in the quarter, is that right? Did I understand that correctly when I look at the supplemental?.

Yeah.

Sumit?.

Yeah. Part of it is, we are constantly putting in redevelopment dollars. So at any given time, I think there were 23 assets for the quarter where we invested those $13 million. But in terms of actual delivery, those would only take into account new development and we don’t actually have that stat in front of us..

Okay.

So when you talk new development by the way you’re talking built-to-suits I assume?.

That’s exactly right..

Okay..

Yeah. I mean it’s important to note that all of the tenants in place and none of this is speculative development..

Okay.

Who are the kinds of tenants typically just out of curiosity?.

It ranges from some of our health club tenants, our distribution sector tenants, some general merchandisers and a couple of theaters on the expansion and redevelopment side..

Okay, great. Thank you very much guys..

Thanks, Rich..

And we’ll take our next question from Vikram Malhotra with Morgan Stanley..

Thank you. Just a quick question on competition, some of your peers have mentioned more or increasing levels of competition from some of the non-traded folks over the last few months.

Just wondering if you are seeing any incremental or may be even lower competition at the granular side and may be in the portfolios or may be at the portfolio side in terms of [indiscernible]?.

Yeah. We’ve had one major player obviously step back from the market and they played at the granular level as well as on larger portfolio. So we are seeing a bit of an impact from that, but nothing too significant.

What we’ve seen is more foreign institutional capital come into the market and really with greater debt we have seen return of the 1031 buyer. So the individual buyers are much more active today for granular assets and more aggressive than they were just a year ago.

So some of what we’ve seen go away around the non-traders aren't quite as active as they were a year ago. It’s kind of been offset mostly but not entirely by the return of the 1031 buyer and more foreign institutional money coming into the sector on the higher quality properties..

Okay. Thanks. And then just on your watch list, we’ve heard in the retail space in general whether it’s in strips or in malls, there have been some tenants that have been under pressure, some have closed stores.

I’m just wondering if your watch list has changed in anyway perhaps by category or any tenant over the last quarter or so?.

Not really. When you look at our watch list, you have a pretty healthy portion of that coming from two industries and that’s casual dining and child day care. Our watch list continues to represent about 1.5% of our revenues, it’s not that large.

And as we watch those properties, we’ll make decisions whether to sell those leave them on the watch list or return them to the regular portfolio. So we haven’t really seen any changes in the composition. We’ll say that overall the tenant base continues to perform quite well. There is enough economic growth activity out there.

The consumers are in better shape. We really by and large have no significant tenant issues right now. So they are as healthy as they’ve been in quite some time..

Okay. Thank you..

Thank you..

And we’ll take our next question from Nick Joseph with Citigroup..

Thanks. I appreciate the color on the updated acquisition guidance.

What this guidance assume for the cash cap rates and investment spreads for the 2015 acquisitions?.

Yeah. The initial cash yields are right around 7% and on the investment spreads, we are assuming something consistent with what we did last year, so averaging right around 195 basis points..

Great. Thanks.

And then across your portfolio, what do you expect the net impact of lower oil prices to be on your tenants?.

Well, we are actually seeing a little of that. We had decent percentage rents in the last year in January and we are seeing the consumer with more disposable income stemming out. While we do own convenience stores, about 9.8% of our rental revenues are from convenience stores.

They continue to perform well and inside sales have picked up which is where their margin is, and where they make most of their money. On gasoline sales, their profit is fairly fixed irrespective of price. So the same store portfolio continues to perform well.

So we are seeing it, I think we’ll continue to see it as long as these prices hold where little extra money in the packets of consumers will help the Dollar Stores and the C-stores, some of these other areas..

Great. Thanks..

Thank you..

[Operator Instructions] And we’ll go next to Cedric Lachance with Green Street Advisors..

Thank you. When I look at your cap rates throughout the year in 2014, it remained relatively stable. They’ve always been around give or take 7% on the acquisitions. By contrast, the investment grade tenancy that were acquired in each quarter declined, so from 85% to 30% from the first quarter to last quarter.

Would you say that you are purposefully trying to keep your initial yields around 7% and therefore are now willing to do more non-investment grade tenants or is it just a function of what was on the market during the year?.

It’s a function of what’s on the market, which assets are offering the best risk adjusted returns. When you look at pricing, it’s not only impacted by investment grade or non-investment grade, it’s also impacted by how much development that we do in the period, what are the average lease terms.

So you look at the fourth quarter, you will see lease terms that were longer than they were in the third quarter and that’s reflected in the cap rate. The longer lease terms are going to be at more aggressive cap rates.

And then on the development side, it constituted more activity in the third quarter and that’s reflected – those are higher yields and that’s reflected in our average cap rate for the third quarter. So it’s really hard to sort of extrapolate trends there because the mix shifts each quarter.

I think it’s better to look at the long-term trend and while we did see some cap rate compression last year and towards the end of the year, it slowed down, Cedric. So I think that 7% on average, it’s been right around there for the first part of 2015..

Okay. So you talked about foreign capital entering the fray or being more interested in the higher quality properties.

Have you thought about forming joint ventures with that capital in order to go after some of those lower yielding assets?.

We haven’t approached any of them at this point. I think what you are seeing is a lot of capital looking for yield flowing into U.S. some of it’s coming into the sector and there is a fair amount of that capital deployed.

So I am not sure that looking – these are well heeled sovereign wealth funds and other foreign institutions that don’t really need a capital partner..

But they may need an operating partner or a partner that may identify acquisitions a lot better than they can, is there a role for you to play?.

Yeah. Most of these are working through U.S. based institutional investment managers that run net lease money. So they bought these properties before they sourced and they identify them. So they are not working without a U.S. asset advisor and the fact that it’s not leased.

They don’t feel that they need as much of an operating partner as they would if they were in a more actively managed portion of the real estate business. But it’s something that could make sense at some time..

Okay. And then just a final question in regards to cost of capital, I think your investment spreads versus where you’ve able to invest historically are certainly at a high point or very close to high point. By contrast I’d say your acquisition guidance for 2015 is fairly conservative.

Given that the spread is so wide or at least so wide as it is today, why not be a very aggressive buyer at this point in time and capture the benefit of that spreads in large numbers?.

Our consistent theme has been to remain disciplined with regard to our investment strategy. And so we are really pursuing assets that fit our investment strategy.

We are talking about 10, 15, 20 year leases and we want assets that are going to perform well over the long run, not necessarily just offering attractive spreads a day, potentially be an issue down the road.

So we see transactions getting done that are aggressively structured from a pricing, coverage replacement cost, market rent standpoint and we are not going to chase those transactions because we think there is some risk in downside intermediate term and longer term to those types of transaction.

So we are really approaching it with a long-term view here and we think our investment strategy is something that will serve the company well over the long run. So clearly given our cost of capital advantage relative to the rest of the sector and our availability of capital, we could acquire a lot more than we’re acquiring.

But again, we don’t want to deviate from the assets that make the most sense for us and we don’t want to get overly aggressive on the structures either..

Okay. Thank you..

Thanks, Cedric..

And we’ll take our next question from Todd Lukasik with Morningstar..

Hey, good afternoon guys. I just had a question on releasing activity and I’m assuming in the quarter and in the year that, that was all retail assets. I guess it looks like around 2018 you’ll start to see more of the non-retail assets up for renewal.

I’m just wondering do you guys had any expectations at that time in terms of what will happen to releasing spread if you expect it to stay the same or may be go up or go down a little bit..

Well, we would expect the leasing spread to be similar to what we have in the existing portfolio maybe a little bit higher. We get to – in 2018 I think it is our first non-retail property role and I think that as we do our long-term planning, long-term budgeting, we are assuming a recapture rate of right around 100%.

We would hope that it would be a little north of that Todd but we will see when we get there..

Okay.

And then just a question with the re-leasing to the new tenants, is it fair to assume that the majority of those leases that do end up going to new tenants are leases that are up for initial renewal as oppose to subsequent renewal or is that something that spread out across both of those?.

It is a little bit weighted towards initial renewals, yeah..

Okay..

That’s a good question, yeah..

Okay, great. That’s all I have. Thanks..

Okay. Thanks, Todd..

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..

Thanks, Taylor, and thanks everyone for joining our call today. We look forward to speaking to you at some of these conferences coming up over the next few months. Have a good afternoon..

This concludes today’s conference. Thank you for your participation..