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

Juan Sanabria - Bank of America Merrill Lynch Collin Mings - Raymond James & Associates Nick Joseph - Citigroup Todd Stender - Wells Fargo Securities, LLC Rich Moore - RBC Capital Markets Dan Donlan - Ladenburg Thalmann & Company Inc. Chris Lucas - Capital One Southcoast, Inc..

Ladies and gentlemen, welcome to the Realty Income 3Q 2015 Earnings Call. As a reminder today's conference is being recorded. And at this time, I would like to turn the conference over to Janeen Bedard. Please go ahead, ma’am..

Thank you all for joining us today for Realty Income third quarter 2015 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 laws. 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 welcome to our call today. We are pleased with another solid quarter and our position as we move in to the end of the year and the beginning of 2016. Our AFFO per share annual growth during the quarter was 9.4% and a record quarterly amount of $0.70.

As announced in yesterday's press release we are raising and tightening the range of our AFFO per share guidance for 2015 from $2.69 to $2.73 to the new range of $2.72 to $2.74 given the company strong year-to-date performance and continued scalability of our business platform. A very high percentage of our revenue continues to flow bottom line.

We are also introducing our 2016 AFFO per share guidance of $2.85 to $2.90 representing annual per share growth of 4.4% to 6.2%. I will now hand it over to Paul to provide additional detail on our financial results..

Thanks John. As usual, I’ll provide a few highlights of our financial statements for the quarter and began with the income statement. Total revenue increased 9.8% 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 30 was approximately $992 million. Interest expense increased in the quarter to $64 million. This increase was due to the $250 million 12-year notes we issued in September of last year and $250 million term loan issued at the end of last quarter.

As well as the lower amortization of mortgage premiums as our outstanding mortgage balance continues to decline. We also did recognize a non-cash loss of approximately $5.2 million on interest rate swaps during the quarter.

As a remainder, we enter into an interest rate swap on the new term loan we issued in June with led to the larger non-cash loss this quarter. On a related note our coverage ratios, both remained strong with interest coverage at 4.2 times and fixed charge coverage at 3.8 times.

Both of these metrics are pro forma for the paydown of the credit facility balance with proceeds from our common stock offering earlier this month. General and administrative or G&A expenses were approximately $10.9 million for the quarter. Included in G&A expense this quarter is approximately $70,000 in acquisition costs.

And reminder that we include these acquisition costs in our calculation to both FFO and AFFO. Year-to-date our G&A as a percentage of total rental and other revenues is only 5.3%. We estimate this 5% will remain our approximate one rate for G&A for the remainder of the year.

As efficiencies in our business model continue to drive improving EBITDA margins. Property expenses which were not reimbursed by tenants totaled $3.4 million for the quarter. Year-to-date our property expenses as a percentage of total rental and other revenues is only 1.5%.

We estimate this 1.5% will remain our approximate one rate the property expenses for the remainder of the year. As these expenses have continue to come in lower this year with lower portfolio vacancy, faster releasing of vacant properties, lower property insurance premiums and fewer one-time maintenance expenses.

Provisions for impairment of approximately $3.9 million during the quarter including impairments on one property held for sale, one held for investment, and two sold properties. Gain on sales were approximately $6.2 million in the quarter and just a reminder we do not include property sales gains in our FFO or AFFO.

Adjusted Funds from Operations or AFFO or the actual cash we have available for distribution as dividends was $0.70 per share for the quarter, a 9.4% increase versus a year ago. We again increased our cash monthly dividend this quarter and now it equates to a current annualized amount of $2.286 per share.

Briefly turning to the balance sheet, we’ve continued to maintain our conservative capital structure. In September, we established an ATM or at-the-market equity distribution program to offer and sell up to 12 million shares giving us the ability to issue equity capital on an opportunistic basis.

Through quarter-end, we had not yet issued any equity through this program. During the quarter, we did raise $152 million of equity capital through our direct stock purchase plan.

And earlier this month we raised $517 million in net proceeds in a common stock offering, we used the proceeds to pay down all outstanding borrowing on our $2 billion unsecured revolving credit facility. Our bonds which are all unsecured and fixed rates and continued to be rated BAA1, BBB+ at a weighted average maturity of 6.5 years.

We again did not assume any mortgages during the quarter. We did pay off some at maturity so our outstanding net mortgage debt at quarter and decreased to approximately to $695 million. Not including our credit facility, the only variable rate debt exposure we have is on just $15.5 million of mortgage debt.

And our overall debt maturity schedule remains in very good shape with only $2 million of mortgages and $150 million of bonds coming due for the balance of this year and our maturity schedule is well laddered thereafter.

Currently, our debt to total market capitalization is approximately 28% and our preferred stock outstanding is only 2% of our capital structure. And our debt to EBITDA ratio after the equity offering is approximately 5.1 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 overview of the portfolio which continues to perform well. Occupancy based on the number of properties was 98.3%, a 10 basis points improvement from last quarter. At the end of the quarter we had 74 properties available for lease out of 4,473 properties on our portfolio.

Economic occupancy was 99.3%, and occupancy based on square footage was 99%, increasing 10 basis points and 20 basis points respectively from last quarter. We continue to see an active leasing environment and expect our occupancy to remain around current levels for the end of the year.

We had leases expire on 95 properties during the quarter and we re-leased 97 properties. Additionally, five vacant properties were sold during the quarter, so our vacant property count decreased by seven properties relative to last quarter.

86 properties were re-leased to existing tenants and 11 were re-leased to new tenants, we recaptured 99% of expiring rents without any spending on tenant improvements as it’s typical for us. We have a lot of experience in the theory of our business. Over the last 20 years we have re-leased or sold more than 2,000 properties with expired leases.

Our same-store rent increased to 1.1% during the quarter and 1.3% year-to-date, we expect annual same-store rent growth to be approximately 1.3% this year and next year. As many of you know the timing of our rent increases are irregular and will vary from quarter-to-quarter. 90% of our leases have contractual rent increases.

So we remain pleased with the growth we are able to achieve from our properties, approximately 75% of our investment grade releases have been only growth that averages about 1.3%. 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 236 commercial tenants operating in 47 different industries located in 49 states and Puerto Rico. Our diversification contributes to the stability of our cash flow 79% of our rental revenue is from our traditional retail properties.

The largest component outside of retail is industrial properties at 13% of rental revenue. That was really not much movement in the composition of our top tenants in industries during the third quarter. Walgreens remains our largest tenant at 7% of rental revenue and drug stores remain our largest industry at 11% of rental revenues.

We continue to have excellent credit quality in the portfolio with 44% of our rental revenue generated from investment grade-rated tenants. This drops from 48% last quarter due to the completion of Dollar Trees acquisition or Family Dollar in July which is now rated BB.

This percentage will continue to fluctuate and will be positively impacted by two pending acquisitions of our non-investment grade-rated tenants by investment grade-rated tenants.

The store level performance of our retail tenants remain sound, our weighted average rent coverage ratio for the retail properties continues to be 2.6 times on a four wall basis and the median is also 2.6 times.

Moving on to acquisitions, during the quarter we completed $124 million in acquisitions and we continue to see a high volume of sourced acquisition opportunities. Year to date we had sourced $24 billion in acquisition opportunities and we are on track for our second most active year ever for sourced volume.

We remain disciplined in our investment strategy acquiring less than 5% or $1.1 billion of the amount sourced year-to-date. A large portion of the acquisitions completed so for this year occurred earlier than we had originally expected which had a positive impact on our 2015 earnings growth.

We continue to expect approximately $1.25 billion in acquisitions volume for 2015. Our initial guidance for 2016 acquisitions is approximately $750 million which possibly reflects our typical flow business and does not account for any large-scale transactions. I’ll hand it over to Sumit to discuss our acquisitions and dispositions.

Sumit?.

Thank you, John. During the third quarter of 2015 we invested $124 million in 47 properties located in 22 states at an average initial cash cap rate of 7% and with a weighted average lease term of 10.9 years. On a revenue basis 35% of total acquisitions are from investment grade tenants.

52% of the revenues are generated from retail and 48% are from industrial. These assets are leased to 18 different tenants in 13 industries; some of the most significant industry is represented transportation services, motor vehicle dealerships and quick service restaurants.

We closed 10 independent transactions in the third quarter and the average investment for property was approximately $2.6 million. Year-to-date 2015 we invested $1.1 billion in 195 properties located in 36 states at an average initial cash cap rate of 6.5% and with the weighted average lease term of 16.7 years.

On a revenue basis 50% of total acquisitions are from investment grade tenants. 87% of the revenues are generated from retail and 13% are from industrial. These assets are leased to 35 different tenants in 18 industries. Some of the most significant industries represented our health and fitness, drugstores and quick service restaurants.

Also 35 independent transactions closed year-to-date, three transactions were about $50 million. The transactions will continues to remain healthy, we sourced more than $4 billion in the third quarter, year-to-date we’ve sourced more than $24 billion in potential transaction opportunities.

Of these opportunities, 62% of the volumes sourced were portfolios and 38% or approximately $9 billion were one-off assets. Investment grade opportunities represented 36% for the third quarter. Of the $124 million in acquisitions closed in the third quarter, 77% were one-off transactions.

We continued to capitalize on our extensive industry relationships developed over 46-year operating history. As to pricing, cap rates remain flat in the third quarter with investment grade properties trading from around 5% to high 6% cap rate range and non-investment grade properties trading from high 5% to low 8% cap rate range.

Our disposition program remained active. During the quarter, we sold eight properties for $21.5 million at a net cash cap rate of 7.2% and realized an unlevered IRR of 14.2%. This brings us to 22 properties sold year-to-date for approximately 52 million at a net cash cap rate of 7.6% and realized an unlevered IRR of 13%.

Our investments spreads relative to our weighted average cost of capital were healthy averaging 212 basis points in the third quarter, which were above our historical average spreads. We define investment spreads as initial cash yield less the nominal first year weighted average cost of capital.

In conclusion the remain confident of reaching our acquisition and disposition goals of approximately 1.25 billion and 65 million respectively for 2015. With that I'd like to hand it back to John..

Thanks, Sumit. We’ve been active on the capital markets during the year to need our capital needs. Year-to-date we have raised approximately 1.2 billion in equity capital at an average per share price of approximately $48.50. This includes the $517 million equity offering earlier this month at Paul mentioned.

Our balance sheet is an excellent shape with plenty of liquidity and financial flexibility. Our sector leading cost of capital continues to allow us to drive earnings growth while investing in high-quality assets. We increase the dividends paid this quarter by 4% on a year-over-year basis.

We’ve increased out dividend every year since the company’s listing 1994 growing the dividend at a compound average annual rate of just under 5%. Our AFFO payout ratio in the third quarter was 81.4% which is a level we are quite comfortable with.

The rapid our portfolios performing well and we are pleased with where we stand as we ahead into the end of the year and into 2016. We continue to realize the efficiencies associated with our size in the economies of scale of our net lease business. We believe our EBITDA margin is the highest in the sector at 93%.

We continue to see high volume of acquisition opportunities and our balance sheet is an outstanding condition of exceptional financial flexibility to fund future growth opportunities. At this time, we would like to open it up for question.

Operator?.

Thank you. [Operator Instructions] And we will go first to Juan Sanabria with Bank of America Merrill Lynch..

Hi, good afternoon guys.

Just with your 2015 guidance, what factors are driving the still relatively large delta as we approach the end of the year and apply for the fourth quarter? I was wondering if you can give us a sense for what you expect dollar-wise for a percent in the fourth quarter?.

So the large Delta with regard to FFO is a result of swap and the impact that has on FFO and we don’t see that one in AFFO. So it is very difficult to predict forward curve.

So you see that it did have a $4 million impact this year it could go down from there so you wanted to make sure we love to range bought out the handle, what we though would be reasonable in terms of movement there..

And then any color on percent rent for the fourth quarter? Any expectations you're thinking about?.

Over the trailing 12 months we’ve received around 4 million in percentage rent, larger quarters are post quarter typically, fourth quarter won't have a large percentage rent we are not expecting the fourth quarter to have a large percentage rent figure in it.

So but again those are irregular and we can give surprise as we were in the second quarter with regard of percentage rents. So go ahead..

Just one more quick question on guidance. For 2016 the AFFO is actually higher than FFO.

Is that related to swaps again? Because normally it's the inverse, at least if you look at 2015?.

Yes, Juan it is related to that and Paul do you elaborate on that?.

Yes, so one piece of that is the swaps and making some assumptions to account for potential non-cash gain or loss there. The other issue is less mortgage premium amortization because our mortgage balance has gone down significantly as you can see over time.

And then the third piece would be a little bit less capital expenditures spend that we projected for next year.

Great. A last more bigger picture question.

With the Walgreens-Rite Aid merger, any thoughts on potential store closures, given overlaps that may be required as per the FTC and competition? And then do you expect the management team to maybe look at any real estate monetizations?.

Let me take a crack at that one. Obviously we view the merger as a net positive for the company, we believe it's a credit and value enhancing event, Realty Income is likely to improve the credit quality, or definitely will improve the credit quality of the portfolio with an additional 1.8% at least of our rent becoming investment grade rated.

S&P affirmed the BBB rating yesterday but did put Walgreens on negative outlook, which is normal in these M&A situations. As you recall, when we bought ARCT we were put on negative outlook while S&P waits to see how you execute and finance the transaction.

There will be no impact on our revenue as a result of the impossible divestitures, Walgreens will have the contractual obligation to pay the rent through the term. The pundits in the market over the last two days have estimated that anywhere from zero to 400 stores could be closed, so that's quite a range.

But on our Walgreens assets we have an average lease term of 13 years. On our Rite Aid assets we have an average lease term of nine years. And there’s really little property overlap and the two portfolios of the 58 Rite Aid locations we own, 15 of those and within a two-mile radius of a Walgreens store and the average lease term is about eight years.

So we feel really good about that and we’re pleased with both companies performance. We’ll take our - depending on acquisitions between now and the end of next year, it will take our exposure - percentage of revenues from Walgreens up to somewhere in the high eights probably, right around 9%.

But if we are going to have a tenant, that’s a little higher that we typically like the concentrations to be. But if we’re going to have a tenant there we like that it’s Walgreens. And from a drugstore industry perspective there will be no change and our exposure will still be at around 11%..

Okay, thank you very much John..

Okay, thanks, Juan. I appreciate it..

And we’ll go next to Collin Mings with Raymond James & Associates..

Hey, good afternoon, guys..

Hey, how are you doing Collin?.

First question for me, looks like that the industrial mix picked up a bit during the quarter, obviously relatively low acquisition volume compared to the last few quarters. Can you talk a little bit more about that? It looked like the FedEx exposure ticked up a little bit..

Yes, so as you know, the acquisitions compositions and amounts vary quite a bit quarter- to-quarter. This quarter we had 52% retail and 48% industrial and there was a FedEx in there. So we did check on some additional revenues from FedEx.

It's going to fluctuate in the second quarter we had well in excess of 700 million in acquisition and we had quarters where they’ve been close to zero and quarters where they’ve exceeded billion dollars. It’s certainly volatile.

But there's really nothing to read into that, when we look at what we’ve done year-to-date 87% has been the retail and we continue to have 79% of our revenues come from retail property. So you are not going to see that number change much. So it's better than average and it’s just relevant here in the third quarter. .

Okay. And then I guess you touched on this in those remarks, but given the deceleration in the pipeline, again obviously some larger deals in the second quarter.

You still feel pretty good about where your pipeline stands right now and not really any meaningful change in the composition of it? Is that fair?.

Yes, that’s very fair. We are going to have our third best year ever in terms of consolidated acquisitions. We are going to have our second best year ever in term of sourced acquisition opportunities.

So there is a lot of momentum in the business and I wouldn't characterize this declining momentum might characterize the typical fluctuations quarter-to-quarter and acquisition volume. So again it's very difficult to predict, but we are certainly comfortable with where the business is and the momentum we have..

Okay, and then as far as just on the ATM recognizing it is going to fluctuate depending upon where the stock price is, but what should we think about and how aggressive you might be looking to deal with that in any given quarter?.

Yes, I mean we are probably be at 1% or less of our equity markets cap in a quarter, it's not something we're going to used to replace offerings with that it allows us to matching on their acquisitions, be more opportunistic with regard to raising equity and to fund that equity at a much, much lower cost than we do a typical offering, but we will continue to do offerings such as we did post third quarter end..

Okay, that's helpful. And then one last one for me and I'll turn it over. Bigger picture, any changes to the watch list? Or anything else we should be aware of on that front? I know the last couple quarters you've referenced it being pretty stable. Just touch on that real quick..

Yes, it’s pretty stable at 1.1% and not everything on there we’ll end up selling so we are as you heard slipping inside, ramping up our dispositions a bit on what we had originally planned for this year from $50 million to $65 million.

We are achieving excellent results on our sales and these are – some of them have issues associated with them perhaps credit, real estate issues, coverage issues, industry issues and some we are just selling because we have maybe some concentration issues and you don’t want to reduce our concentration levels, but the fact that we are able to sell these year-to-date at a 77 cap rate, 72 cap rate in the third quarter and achieved an IRR unlevered 14%.

I think kind of shows you the quality of our portfolio because we are calling off kind of the lower quality assets in general. So I hope that shows the market that we will get a strong portfolio if that's where those properties we want to dispose of the trading..

Okay.

On that point, as you referenced that cap rate, is it safe to say as you think about the 2016 guidance that you threw out there, that the dispositions that you look to complete in 2016 would likely be at a similar cap rate to what you've done here in 2015?.

I would think so I mean we budget something little bit more conservative in the high seven and close to 8%, but again it’s going to be a function of the macroeconomic environment and which is more than enough. We are able to – where interest rates in the macroeconomic environment will be next year..

But I think overall yes I think it’s safe to say we’ll continue to execute the levels we executed at this year..

Great, appreciate the detail..

Okay, thanks a lot..

And we will go next to Nick Joseph with Citigroup..

Thanks.

The $750 million of acquisitions in 2016, what investment spread is assumed in guidance?.

Yes, we are looking at cap rates that are probably right around what we are achieving now so they are consistent with – we are assuming there are no material changes in cap rates today. So assume those sort of high sixes area, in terms of spreads Paul you want to hit on that in terms of cost of capital.

I think we will continued to be in the area north of our long-term average of 150 basis points or 140 basis points will be in the upper 100s maybe up to 175 basis points..

Thanks and then just going back the mix between retail and industrial in terms of the acquisitions. Do you expect a similar mix to this year..

Overall, I think that safe to say, again we see for more opportunities on the retail side and retail oriented 79% et cetera earlier about revenues are coming from our retail properties and do not expect that the change materially next year..

And then finally, can you touch on the initial cash cap rate difference between what you've seen for retail acquisitions and industrial acquisitions this year?.

Sumit, do you want to handle that?.

Yes, sure that’s a very difficult question to answer because it definitely depends on the tenant, on the length of the leads on what kind of especially on the retail side on what kind of an asset it is, but if you what think in terms of an investment grade tenant with 15-year, 20-year lease with growth, they trade right around where in the same ZIP Code and it is very difficult to say that one asset class trade that higher price.

Now when you obviously translated on a price per square feet basis et cetera industrial we are looking at high quality industrial assets right around that $70, $75 per square feet ZIP Code and in retail once again depending on whether it’s a Walgreen’s or whether it’s a similar investment grade rated lets called Dollar General they are going to have a different range, anywhere between 175 to 225 to 250..

Thanks that’s helpful..

Thank you..

We’ll go next to Todd Stender with Wells Fargo..

Thanks.

For Sumit, for the properties acquired in the quarter, can you give us the range what the lease terms were? The average was 10 years, so that's in line with your existing portfolio, but to look at anything on the shorter side?.

Yes, look I think we did have some in the high single-digits and a lot of them bunched around that area from the high single-digits around 13, 14 there were a couple of assets that had not 15-year lease that’s part of the reason why we were able to get a slightly better yield..

You’ll see sometimes in smaller portfolios you might have an average lease yield – an average lease term Todd 12-years but we are going to have some maybe seven, eight years and there certainly in larger portfolios as well.

So we target 10-years and above its typically the natural lease terms range from 10 to 25 I think year-to-date but just under 17 years which is a good number for us. And that continue to focus on that in the long-term range in area to be in..

That's helpful.

Was it just the one FedEx you acquired in the quarter?.

Yes, that’s correct.

Okay.

Can you help us with pricing? As a comp, what the cap rate was? Length of lease? And was this more of a FedEx ground facility?.

It was the FedEx ground that we are not allow to give an specific details on that transaction were subject to confidential reality agreement with FedEx with regard to this specifics and pricing..

Okay, no problem. For Paul, when you look at your cost of equity, certainly you have the overnight markets open to you. You have the ATM in place, although you haven't tapped it. But the direct purchase plan, you've raised a fair amount of equity this year through that.

Is there a low-cost, like an ATM-equivalent cost, to raising that amount of equity?.

Yes, its actually our cheapest form of raising equity, closer to 1% average cost there of issuance compare to an ATM with this going to be more like 1.5% to 2% and then your overnight offering there going to be more than that obviously.

So it is a product that will remain and utilizing with largely with existing shareholders as well as part of that, their ability to reinvest. But not to any significant amount. As John mentioned we’ll be doing a little bit of that activity in quarter going forward. But any larger equity raises would be dependent upon acquisition volume..

Great, thanks.

Lastly, when you look at the Rite Aid properties, if you were to assign a Walgreens cap rate to those going forward, do you guys look at it in terms of how much cap rate compression happened at one fell swoop?.

Yes, I mean if you look at the market today, there's about a 50 to 75 basis points differential between where Rite Aid and where Walgreens would trade. So you’ve got yield of anywhere depending on other factors 50 to 75 basis points higher on a Rite Aid and you got a Walgreens. So you expect that to condense based on Walgreens acquisition..

Great, thanks John..

Thank you, Todd..

And we’ll go next to Rich Moore with RBC Capital Markets..

Hello, guys, good morning or good afternoon.

Did you pull back at all on your acquisition activity due to the softness that we saw in both the debt and equity markets in the third quarter?.

No, we didn’t I mean this is just a function of the opportunities we saw that met our investment parameters. And there’s a lot of volatility from quarter-to-quarter and the amount and quality of acquisition opportunities we see. So, we are very pleased with where our own balance sheet is. We got a lot of financial flexibility and significant liquidity.

So we did not specifically pull back on the acquisitions activity as a result of some of the volatility we saw on the marketplace..

Okay, great, thanks, John. I'm curious, Paul, on the bonds that you're doing or that you might do. Are these going to get bigger do you think? I think of you guys having $5 billion of debt roughly, that kind of thing, and 10-year laddered maturity. So I'm thinking of larger bond transactions when you do them.

The last couple seemed smaller and I'm wondering are you going to carry more on your line of credit? Or are you going to do a bigger bond transaction going forward you think?.

They may get bigger at times of course, as we get larger as a company, you could certainly see larger issuances certainly in the minimum of $250 million to be index eligible something we would always pursue. But at point in time when you go to issue the bond it really depends on what your needs are at that particular time.

And if you don't have say $500 million cash needed at that moment, you are not going to issue $500 million bonds that’s happened a few time. And furthermore we haven't quite seen any pricing improvement having a slightly larger offering size.

If we would start to understand that you get a little bit better pricing from the debt investors for a larger liquid offering, that something we made and pursue more..

Yes, it’s been an interesting conversation we’ve had and certainly something we’ve studied Rich and that is do you get paid for larger more liquid offerings and certainly a lot of our fixed income investors would prefer those and say that you do.

But when you look at the case studies available and we work with our bankers, you don't see a pricing advantage. But that being said larger company as Paul said, doing larger transactions. I think you’ll see our average transactions certainly grow beyond $250 million. And you could see some $0.5 billion bond deals in our future..

Okay, is there a negative to going to market too often? Like if you had to do $1 billion and you did four, one each quarter of $250 million, is that a negative?.

If that was scenario, for example, I think the preference would be to do say, two $500 million rather than four $250 as your fixed income investors would prefer the larger liquidity in each particular issuance, but you can't always project what your needs are going to be in the state of the bond market, the acquisition deal flow timing and that sort of thing of course.

.

Okay, gotcha. And then I wanted to ask you guys, too, about development if I could. I'm trying to figure out exactly -- when I look at the supplemental -- exactly what's happening with development. If I was on page 13, you have investment in 18 development properties in the quarter.

Then when you look on page 15, you have 11 properties currently underway.

So I'm assuming seven were delivered in the quarter? Is that correct?.

That’s correct..

Okay, and then as you look forward, that remaining investment on page 15, the $58 million, how should we think about the timeframe over which that's going to occur? On top of that, how many more we might add on a quarterly basis, new properties to the list?.

Yes, so as of right now, as it says on page 15 we’ve got $58 million of additional commitments to spend and based on the pipeline the next quarter we don't expect to add any new additional development so that number should remain pretty static of course we are going to stand off of that 50 and so you would expect that to go down.

In the event, we do get back with some tenants et cetera with regards to redevelopment et cetera. That’s the only reason why that $58 million will change..

All right, so I should pro rata that $58 million over the next year? Or I guess it's through January, so I guess through the next quarter or so..

I have the run rate today, yes..

Okay. All right, good and thanks guys..

Thanks Rich..

And we’ll go next to Dan Donlan with Ladenburg Thalmann..

Thank you and good afternoon..

Hi Dan..

Hey. I was wondering if you guys could touch a little bit on the operating expenses and why that continues to come in below your expectations. Your recovery ratio seems to be fairly high relative to what it has been historically..

Yes, with regard to – are you telling that with regard to G&A or property or both..

Frankly both, but just on the property operating expenses, 1.5%, that's a lot lower than what it has been historically..

Yes, so really we realized probably $4 million to $5 million in savings due to fewer defaults this year and lower vacancy I think an improved stronger portfolio it’s reducing our property expense obligations that the company is responsible for.

We are also helping to drive that is much quicker resolution of lease rollovers improved our property insurance premiums as well to become a larger company with scale on.

On the G&A front, if you go back and kind of our headcount about three years ago we got some pretty significant additions and headcount and year after that they were fairly significant. And we are really positioning the company to handle the growth that we had anticipated and it would continue. Those hiring have fallen each year.

We’ve put really skilful people in place I think and having more efficient organizational structure and more efficient systems which allow us to have better G&A margin. So there are some other items related to that, but that's what it's really about.

So when we budgeted this year, we budgeted some headcount and did not end up having to add to the company which helped us come in at $2 million to $4 million below where we thought we were going to be on that item. So that's what really is driving the property expenses and G&A expense margins..

Okay, so you're not handing out jelly of the month club, end-of-year bonuses or anything like that, I guess?.

That’s right..

So just kind of curious, Paul, on the leverage. At 5.1 times on net debt to EBITDA, looking at my numbers, it seems to be the lowest you've been in quite some time.

Is there any type of concerted effort on your part, or on the Company's part, to maintain a lower level leverage than you have over the last couple of years? Or is it simply a function of timing?.

Its really a function of timing, I am not Paul obviously but I want to talk about this sort of philosophy.

We are comfortable with the company two-third equity, one-thirds debt right now we are closer to 70%, 71% equity today little more conservatively capitalizing that saw an attractive opportunity to executed in overnight offering at pricing that would be attractive and highly accretive to our investments and we had a use for the proceeds and we want to precision the balance sheet and a very clean and look and ready to find our anticipated acquisitions going into 2016.

So this is not a level, this is not a new level that really represents the change in leverage policy for us Dan just a average of the recent launch equity offering..

Okay, understood.

Is there any type of -- is there any seasonality to 2016's acquisitions? Do you think they'll be more front-end loaded or more back-end loaded or ratably over the year?.

Which we could answer the question this year we thought there going to be more back end loaded giving a couple of larger portfolios we will working on and when those tenants want into close and then two changed and all suddenly we went from expecting back end loaded acquisition here that switch to front end loaded acquisition here.

Its really difficult to predict, so in model right now we just add that 750 million based on a pro rate structure throughout the year. It wont happen that happen that way. There will be quarters where there’s big numbers and there will be quarters where there small numbers.

Unfortunately I'm not smart enough to tell you which quarters are going to be big and which quarter are going to be smaller..

Okay, fair enough. Then from a portfolio standpoint, has the private letter ruling that's gone away, the IRS or FCC or whoever it is, has said they're going to stay away from this stuff, this op-gov prop-co type of structure that people have done.

Have you seen any increase in inbound calls to you guys because of this change in policy from the government?.

Yes, we continue to be involved in a number of conversations on that front. We did interpret that as a net positive. Because if you are going to monetize real estate, the IRS has taken that stance, then you sale-leaseback, financing, transactions with companies like ours is the appropriate and best execution we believe.

Has there been a sea wave of additional discussions? No, but there is been a slight uptick and we continue to be fairly optimistic that one or two of those will hit and be significant.

Okay, thank you very much, appreciate it..

Okay, thank you..

And we’ll go next to Chris Lucas with Capital One Securities..

Good afternoon, guys.

John, following up on a couple of the last questions, on the philosophy side, I guess I was wondering if you might be able to remind us what your thoughts are in terms of max category exposure that you would be willing to take and max single tenant exposure that you guys would take?.

Sure, Chris. So what we’ve said single tenant is that we’re comfortable in the mid single-digit range, so call that count of up to 7%, under certain circumstances we would be comfortable going above that, but over the long run, we would like to manage that exposure back down because the diversification is highly important to us on our strategy.

So you’ll see that we kind of assuming that the Walgreens-Rite Aid transaction closes, we’ll have a tenant that’s in the upper eights in terms of percentage of revenues.

So that will be a tenant that we look very, very closely at it in terms of increasing our exposure in fact we would not want to increase that exposure unless there was just something exceptional in terms of an incredibly attractive investment opportunity and then we have discussions with our team here and with our board to see if we even wanted to do that.

On the industry side it's always been, kind of in the lower double digits, sort of 10% to 12% range and we want to remain in that area and right now we are in that area but the diversification is something that we think is important in our type of business..

Okay, and then you talked a little bit before about the spread differential between the Walgreens and the Rite Aid leases.

Other than credit and obviously lease term length, but are there lease items that are also included in that price differential?.

When you say lease items..

Go ahead, sorry..

Yes, there is more growth in the Rite Aid leases, and there is the Walgreens leases. So I don’t know that's what you were asking about or not, but there are some minor differences in terms of the two types of leases but not major..

Okay.

Then going back to Dan's question about the private letter ruling arena, have you guys looked at the infrastructure business at all as an opportunity that Realty Income might look at?.

We are seeing so many opportunities and the investments that fall with our investment parameters today that's not something we are really looking at.

We do have a group and team here that we're constantly looking at what other alternatives in terms of properties may makes sense for us to pursue, but we are really comfortable with where we are right now and we certainly don't have any plans to go into the infrastructure business..

Okay, and then last question, probably for Paul.

On the EBITDA or coverage ratio, can you give us a sense of what percentage revenue is actually included in that calc?.

What percentage of revenue is actually….

Yes, I'm assuming it's not 100% of the revenue that you're collecting, right? It's some proportion of the tenants that report that information to you?.

Well, I’m sorry. Yes, I thought you are talking about debt to EBITDA ratio percentage..

Yes, so we get that information from kind of the majority of our retailers..

That’s just under 70%..

70%. Yes, and so that’s where that’s coming from, so it’s not 100% and it’s around 70%..

Great, thank you, guys..

Thank you. End of Q&A.

And ladies and gentlemen that does concludes the question-and-answer portion of Realty Income’s conference call. I’d now like to turn the call back over to John Case for concluding remarks..

Thanks, Aaron. We appreciate everyone joining today and look forward to seeing most of you in a few weeks at NAREIT. Have a good afternoon and thanks again. Take care..

And this does conclude today’s conference everyone. We thank you for your participation. You may now disconnect..