UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2001, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 1-13318
REALTY INCOME CORPORATION
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(Exact name of registrant as specified in its charter)
Maryland
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(State or other jurisdiction of incorporation or organization)
33-0580106
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(I.R.S. Employer Identification No.)
220 West Crest Street, Escondido, California 92025
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(Address of principal executive offices)
(760) 741-2111
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(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
There were 29,469,745 shares of common stock outstanding as of May 10, 2001.
REALTY INCOME CORPORATION
Form 10-Q
March 31, 2001
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION Page
----
Item 1: Financial Statements
Consolidated Balance Sheets.................................................... 3
Consolidated Statements of Income.............................................. 4
Consolidated Statements of Cash Flows.......................................... 5
Notes to Consolidated Financial Statements..................................... 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................... 11
Item 3: Quantitative and Qualitative Disclosures about Market Risk.......................... 28
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K.................................................... 29
SIGNATURE .................................................................................... 31
EXHIBIT INDEX .................................................................................... 31
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
---------------------
REALTY INCOME CORPORATION AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
March 31, 2001 and December 31, 2000
(dollars in thousands, except per share data)
2001 2000
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------
ASSETS Real estate, at cost:
Land $ 370,462 $ 368,057
Buildings and improvements 705,989 705,470
- ------------------------------------------------------------------------------------------------------------------
1,076,451 1,073,527
Less accumulated depreciation and amortization (218,246) (212,379)
- ------------------------------------------------------------------------------------------------------------------
Net real estate held for investment 858,205 861,148
Real estate held for sale, net 16,954 33,130
- ------------------------------------------------------------------------------------------------------------------
Net real estate 875,159 894,278
Cash and cash equivalents 1,992 3,815
Accounts receivable 3,696 5,053
Goodwill, net 17,899 18,130
Other assets 14,082 13,490
- ------------------------------------------------------------------------------------------------------------------
Total assets $ 912,828 $ 934,766
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Distributions payable $ 6,837 $ 4,914
Accounts payable and accrued expenses 7,544 5,969
Other liabilities 4,254 4,314
Lines of credit payable 146,300 174,000
Notes payable 230,000 230,000
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 394,935 419,197
- ------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock and paid in capital, par value $1.00 per share, 20,000,000
shares authorized, 4,125,700 shares issued and outstanding 99,368 99,368
Common stock and paid in capital, par value $1.00 per share, 100,000,000
shares authorized, 26,607,645 and 26,563,519 shares issued and
outstanding in 2001 and 2000, respectively 632,023 630,932
Distributions in excess of net income (213,498) (214,731)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 517,893 515,569
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 912,828 $ 934,766
==================================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
REALTY INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
------------------------------------------
For the three months ended March 31, 2001 and 2000
(dollars in thousands, except per share data)
(unaudited)
2001 2000
- ------------------------------------------------------------------------------------------------------------
REVENUE
Rental 29,496 28,330
Gain on sales of real estate acquired for resale 1,928 --
Interest and other 141 25
- ------------------------------------------------------------------------------------------------------------
31,565 28,355
- ------------------------------------------------------------------------------------------------------------
EXPENSES
Interest 8,059 7,158
Depreciation and amortization 7,210 6,748
General and administrative 2,040 1,574
Property 624 515
Other 1,110 110
- ------------------------------------------------------------------------------------------------------------
19,043 16,105
- ------------------------------------------------------------------------------------------------------------
Income from operations 12,522 12,250
Gain on sales of investment properties 5,951 662
- ------------------------------------------------------------------------------------------------------------
Net income 18,473 12,912
Preferred stock dividend (2,428) (2,428)
- ------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $ 16,045 $ 10,484
============================================================================================================
Basic and diluted net income per common share 0.60 0.39
The accompanying notes to consolidated financial statements are an
integral part of these statements.
4
REALTY INCOME CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the three months ended March 31, 2001 and 2000
(dollars in thousands)
(unaudited)
2001 2000
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 18,473 $ 12,912
Adjustments to net income:
Depreciation and amortization 7,210 6,748
Provision for impairment loss on a property held for sale 330 --
Acquisition of real estate acquired for resale (3,802) (3,095)
Proceeds from sales of real estate acquired for resale 14,033 --
Gain on sales of real estate acquired for resale (1,928) --
Gain on sales of investment properties (5,951) (662)
Change in assets and liabilities:
Accounts receivable and other assets 1,936 516
Accounts payable, accrued expenses and other liabilities 1,515 1,754
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 31,816 18,173
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment properties 17,054 1,424
Acquisition of and additions to real estate (7,542) (14,854)
Increase in other assets -- (3,250)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 9,512 (16,680)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from lines of credit 28,600 31,800
Payments under lines of credit (56,300) (14,100)
Distributions to common stockholders (14,770) (14,484)
Distributions to preferred stockholders (546) (2,428)
Repurchase of stock (169) (951)
Proceeds from other common stock issuances 34 --
- --------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (43,151) (163)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,823) 1,330
Cash and cash equivalents, beginning of period 3,815 773
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,992 $ 2,103
====================================================================================================================
For supplemental disclosures, see note 9.
The accompanying notes to consolidated financial statements are an
integral part of these statements.
5
REALTY INCOME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
March 31, 2001
(Unaudited)
1. Management Statement
The consolidated financial statements of Realty Income Corporation ("Realty
Income", the "Company", "we" or "our") were prepared from our books and records
without audit and include all adjustments (consisting of only normal recurring
accruals) necessary to present a fair statement of results for the interim
periods presented. Certain of the 2000 balances have been reclassified to
conform to the 2001 presentation. Readers of this quarterly report should refer
to our audited financial statements for the year ended December 31, 2000, which
are included in our 2000 Annual Report on Form 10-K, as certain disclosures
which would substantially duplicate those contained in such audited financial
statements have been omitted from this report.
2. Investment in Subsidiary
In January 2000, we acquired 95% of the common stock of Crest Net Leases, all of
which is non-voting. Certain members of our management and Crest Net Lease
management own 5% of the common stock, all of which is voting stock. Crest Net
Lease was created to buy, own and sell properties, primarily to buyers using
tax-deferred exchanges, under Section 1031 of the Internal Revenue Code of 1986,
as amended (the "Code").
The financial statements of Crest Net Lease have been consolidated. All
intercompany transactions have been eliminated in consolidation.
3. Property Acquisitions
A. During the first three months of 2001, we invested $7.2 million in three new
retail properties and properties under development with an initial weighted
average contractual lease rate of 11.5%. These three properties are located in
two states, will contain approximately 49,500 leasable square feet and are 100%
leased, with an average initial lease term of 20 years.
During the first three months of 2000, we invested $8.7 million in two new
retail properties and properties under development with an initial aggregate
contractual lease rate of 10.7% and an average initial lease term of 15 years.
B. During the first three months of 2001, Crest Net Lease invested $3.8 million
in four new retail properties and properties under development.
During the first three months of 2000, Crest Net Lease invested $3.1 million in
one new retail property.
6
4. Distributions Paid and Payable
A. Realty Income pays distributions monthly to our common stockholders. The
following is a summary of the monthly cash distributions per common share for
the three months ended March 31, 2001 and 2000. As of March 31, 2001, a
distribution of $0.18625 per common share was declared (and was paid on
April 16, 2001).
Month 2001 2000
----------------------------------------------------------------------
January $0.185 $0.180
February 0.185 0.180
March 0.185 0.180
----------------------------------------------------------------------
Total $0.555 $0.540
======================================================================
B. In May 1999, we issued 9 3/8% Class B cumulative redeemable preferred stock.
Dividends on the Class B preferred stock are paid quarterly in arrears. During
each of the first three months of 2001 and 2000, we declared one quarterly
distribution of $0.5859 per share, to our Class B preferred stockholders. The
2001 first quarter dividend was paid on April 2, 2001.
C. In July 1999, we issued 9 1/2% Class C cumulative redeemable preferred stock.
Dividends on the Class C preferred stock are paid monthly in arrears. During
each of the first three months of 2001 and 2000, we declared three monthly
distributions of $0.1979 per share to our Class C preferred stockholders. The
March 2001 dividend was paid on April 2, 2001.
5. Gain on Sales of Real Estate Acquired for Resale
During the three months ended March 31, 2001, Crest Net Lease sold four
properties for $14.0 million. We recognized a gain of $1.9 million on the sale
of these properties.
6. Gain on Sales of Investment Properties
During the three months ended March 31, 2001, we sold 10 properties for $17.1
million and recognized a gain of $6.0 million. During the three months ended
March 31, 2000, we sold one property for $1.4 million and recognized a gain of
$662,000.
7. Net Income per Common Share
Basic net income per common share is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during each period. Diluted net income per common share is computed
by dividing the amount of net income available to common stockholders for the
period by the number of common shares that would have been outstanding assuming
the issuance of common shares for all potentially dilutive common shares
outstanding during the reporting period.
7
7. Net Income per Common Share (continued)
The following is a reconciliation of the denominator of the basic net income per
common share computation to the denominator of the diluted net income per common
share computation, for the three months ended March 31, 2001 and 2000:
2001 2000
----------------------------------------------------------------------------------------------------------
Weighted average shares used for the basic net 26,612,009 26,815,391
income per share computation
Incremental shares from the assumed exercise of
stock options 43,667 1,537
----------------------------------------------------------------------------------------------------------
Adjusted weighted average shares used for diluted
net income per share computation 26,655,676 26,816,928
==========================================================================================================
For the three months ended March 31, 2001 and 2000, 50,000 and 275,805 stock
options, respectively, that were anti-dilutive have been excluded from the
incremental shares from the assumed exercise of stock options.
8. Purchases of Realty Income Securities
In January 2000, our Board of Directors authorized the purchase of up to $10
million of our outstanding common stock, preferred shares and senior debt
securities. During the first three months of 2001, we purchased 6,800 shares of
our common stock at an average price of $24.82, for a total investment of
$169,000.
During the first three months of 2000, we purchased 32,300 shares of our common
stock at an average price of $20.90 and 14,300 shares of our Class B preferred
stock at an average price of $19.27, for a total investment of $951,000.
9. Supplemental Disclosure of Cash Flow Information
Interest paid during the first three months of 2001 and 2000 was $6.1 million
and $5.0 million, respectively.
During the first three months of 2001 and 2000, interest of $76,000 and
$357,000, respectively, was capitalized with respect to properties under
development.
The following non-cash operating activity is included in the accompanying
consolidated financial statements:
In January 2001, we issued 49,000 shares of common stock to officers of the
Company resulting in the following non-cash charges (in thousands):
Other assets $ 1,219
Common stock and paid in capital $(1,219)
8
10. Segment Information
We evaluate performance and make resource allocation decisions on a property by
property basis. For financial reporting purposes, we have grouped our tenants
into 11 reportable segments based upon the business the tenants are in, except
for properties owned by Crest Net Lease that are grouped in a separate segment.
The Crest Net Lease segment is included in "other non-reportable segments". All
of the properties have been acquired separately and are incorporated into one of
the applicable segments. Revenue is the only component of segment profit and
loss we measure.
The following tables set forth certain information regarding the properties
owned by us, classified according to the business of the respective tenants as
of March 31, 2001 (dollars in thousands):
REVENUE
---------------------------------------------
For the quarter ended March 31, 2001 2000
---------------------------------------------
Segment rental revenue:
Apparel $ 700 $ 700
Automotive parts 2,481 2,410
Automotive service 1,732 1,702
Child care 6,855 6,929
Consumer electronics 1,237 1,452
Convenience stores 2,515 2,459
Health and fitness 987 392
Home furnishings 1,787 1,615
Restaurants 3,449 3,535
Theaters 1,302 601
Video rental 1,133 1,130
Other non-reportable segments 5,318 5,405
Reconciling items:
Gain on sales of real estate acquired for resale 1,928 --
Interest and other 141 25
-------------------------------------------------------------------------------------------------------
Total revenue $ 31,565 $ 28,355
=======================================================================================================
9
10. Segment Information (continued)
ASSETS
----------------------------------------------
As of : March 31, 2001 December 31, 2000
----------------------------------------------
Segment net real estate:
Apparel $ 24,025 $ 24,217
Automotive parts 74,121 74,487
Automotive service 47,240 47,603
Child care 148,072 149,838
Consumer electronics 40,553 40,820
Convenience stores 83,232 81,639
Health and fitness 38,610 34,918
Home furnishings 69,809 70,140
Restaurants 78,128 82,402
Theaters 47,835 48,003
Video rental 39,306 39,598
Other non-reportable segments 184,228 200,613
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875,159 894,278
Total segment net real estate
Non-real estate assets 37,669 40,488
--------------------------------------------------------------------------------------------------------
Total assets $912,828 $934,766
========================================================================================================
11. Subsequent Events
A. In April 2001, the expiration date of $180 million of our $200 million
acquisition credit facility was extended one year to December 30, 2003.
B. On May 7, 2001, we issued 2,850,000 shares of common stock at a price of
$27.80 per share. The net proceeds of $74.9 million were used to repay
borrowings under our $200 million acquisition credit facility and for other
general corporate purposes.
C. On May 9, 2001, we acquired the 5% of common stock of Crest Net Lease owned
by certain members of our management and management of Crest Net Lease for
$507,000. After this transaction, Realty Income owned 100% of the stock of Crest
Net Lease.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. When used in this quarterly report, the words estimated, anticipated and
similar expressions are intended to identify forward-looking statements.
Forward-looking statements are subject to risks, uncertainties, and assumptions
about Realty Income Corporation, including, but not limited to:
o Our anticipated growth strategies;
o Our intention to acquire additional properties;
o Our intention to sell properties;
o Anticipated trends in our business, including trends in the market for
long-term net leases of freestanding, single-tenant retail properties;
o Future expenditures for development projects; and
o Profitability of our subsidiary, Crest Net Lease.
Future events and actual results, financial and otherwise, may differ materially
from the results discussed in the forward-looking statements. In particular,
some of the factors that could cause actual results to differ materially are:
o Our continued qualification as a real estate investment trust;
o General business and economic conditions;
o Competition;
o Interest rates;
o Accessibility of debt and equity capital markets;
o Other risks inherent in the real estate business including tenant defaults,
potential liability relating to environmental matters and illiquidity of
real estate investments.
Additional factors that may cause risks and uncertainties include those
discussed in the sections entitled "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
Readers are cautioned not to place undue reliance on forward-looking statements,
which speak only as of the date that this quarterly report was filed with the
Securities and Exchange Commission. We undertake no obligation to publicly
release the results of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date of this quarterly
report or to reflect the occurrence of unanticipated events. In light of these
risks and uncertainties, the forward-looking events discussed in this quarterly
report might not occur.
11
THE COMPANY
Realty Income Corporation, a Maryland corporation ("Realty Income", the
"Company", "our" or "we") was organized to operate as an equity real estate
investment trust ("REIT"). Our primary business objective is to generate
dependable monthly distributions from a consistent and predictable level of
funds from operations ("FFO") per share. Additionally, we seek to increase
distributions to common stockholders and FFO per share through both active
portfolio management and the acquisition of additional properties.
We are a fully integrated, self-administered real estate company with in-house
acquisition, leasing, legal, retail and real estate research, portfolio
management and capital markets expertise. As of March 31, 2001, we owned a
diversified portfolio of 1,061 retail properties located in 46 states with
approximately 8.9 million square feet of leasable space leased to 69 different
retail chains doing business in 23 separate retail industries. Of the 1,061
properties in the portfolio, 1,056 are single-tenant retail properties with the
remainder being multi-tenant properties. In addition, as of March 31, 2001, our
subsidiary, Crest Net Lease, owned seven retail properties located in five
states that will contain approximately 117,100 square feet of leaseable space.
These seven properties, which are held for sale, are 100% leased.
Our portfolio management focus includes:
o Contractual rent increases on existing leases;
o Rental increases at the termination of existing leases when market
conditions permit; and
o The active management of our property portfolio, including selective sales
of properties.
Our acquisition of additional properties adheres to a focused strategy of
acquiring primarily:
o Freestanding, single-tenant, retail properties;
o Properties leased to regional and national retail chains; and
o Properties under long-term, net lease agreements.
We typically acquire, then lease back, retail store locations from chain store
operators, providing capital to the operators for continued expansion and other
corporate purposes. Our acquisitions and investment activities are concentrated
in well-defined target markets and focus generally on middle-market retailers
providing goods and services that satisfy basic consumer needs.
Our net-lease agreements generally:
o Are for initial terms of 10 to 20 years;
o Require the tenant to pay a minimum monthly rent and property operating
expenses (taxes, insurance and maintenance); and
o Provide for future rent increases (typically subject to ceilings) based on
increases in the consumer price index, fixed increases or additional rent
calculated as a percentage of the tenant's gross sales above a specified
level.
12
We believe that the long-term ownership of an actively managed, diversified
portfolio of retail properties under long-term, net-lease agreements produces
consistent, predictable income. We believe that long-term leases, coupled with
the tenant's responsibility for property expenses, generally produce a more
predictable income stream than many other types of real estate portfolios, while
continuing to offer the potential for growth in rental income.
From 1970 and through December 31, 2000, we have acquired and leased back to
regional and national retail chains 1,067 properties (including 51 properties
that have been sold) and have collected approximately of 98% of the original
contractual rent obligations on those properties. We principally provide
sale-leaseback financing primarily to less than investment grade retail chains.
We believe that within this market we can achieve an attractive risk-adjusted
return on the financing that we provide to retailers.
RECENT DEVELOPMENTS
ISSUANCE OF COMMON STOCK. On May 7, 2001, we issued 2,850,000 shares of common
stock at a price of $27.80 per share. The net proceeds of $74.9 million were
used to repay borrowings under our $200 million acquisition credit facility and
for other general corporate purposes.
PROPERTY DISPOSITIONS. During the first quarter of 2001, we sold 10 properties
for $17.1 million and recognized a gain on sales of $6.0 million. The 10
properties consisted of seven restaurants, one home improvement store, one home
furnishing store, and one child day care property. The properties were sold at
an average capitalization rate of 9.3%. We calculate capitalization rate by
dividing the amount of annual rent for the next 12 months by the purchase price.
The proceeds from the sale of these properties were i) used to repay outstanding
indebtedness on our $200 million credit facility and ii) invested in new
properties and properties under development. The objective of our disposition
program is to sell properties when we believe the reinvestment of the net sales
proceeds can generate higher returns, enhance the credit quality of our real
estate portfolio and/or increase the average lease term.
ACQUISITION OF PROPERTIES DURING THE FIRST THREE MONTHS OF 2001. During the
first three months of 2001, we invested $7.2 million in three new properties and
properties under development with an initial weighted average contractual
capitalization rate of 11.5%. The new properties are 100% leased with an initial
average lease length of 20 years and will contain approximately 49,500 leasable
square feet.
During the first three months of 2001, we capitalized $160,000 for re-leasing
costs and $144,000 for building improvements on existing properties in our
portfolio.
CREDIT FACILITY EXTENSION. In April 2001, the expiration date of $180 million of
our $200 million acquisition credit facility was extended one year to December
2003.
13
INCREASE IN MONTHLY DISTRIBUTIONS TO COMMON SHAREHOLDERS. Monthly distributions
per share were increased $0.00125 in January 2001 to $0.185 and in April 2001 to
$0.18625. The increase in April was our 14th consecutive quarterly increase. We
continue our 31-year policy of paying distributions monthly. During the first
three months of 2001, we paid three distributions of $0.185 per share, totaling
$0.555 per share. In March, April and May 2001, we declared distributions of
$0.18625 per share, which were paid on April 16, 2001 and payable on May 15,
2001 and June 15, 2001, respectively. The monthly distribution of $0.18625 per
share represents a current annualized distribution of $2.235 per share, and an
annualized distribution yield of approximately 8.1% based on the last reported
sale price of the Company's Common Stock on the NYSE of $27.66 on May 9, 2001.
Although we expect to continue our policy of paying monthly distributions, we
cannot guarantee that the current level of distributions will be maintained by
the Company, that will we continue our pattern of increasing distributions per
share, or as to the actual distribution yield for any future period.
CREST NET LEASE. During the first quarter of 2001, Crest Net Lease sold four
properties from its inventory for $14.0 million and we recorded a gain on sales
of $1.9 million. Crest Net Lease also invested $3.8 million in four new
properties and properties under development. At the end of the first quarter,
Crest Net Lease carried an inventory of $14.8 million, which is included in real
estate held for sale. The contribution, if any, to our FFO by Crest Net Lease
will depend on the timing and the number of property sales achieved, if any, in
any given quarter. During the first quarter of 2001, Crest Net Lease generated
$1.15 million in funds from operations for us.
In order to comply with the Internal Revenue Code (the "Code") in force at the
inception of Crest Net Lease, 5% of the common stock of Crest Net Lease, which
represented 100% of the voting stock, was not owned by the Company. Effective
for 2001, the Code was modified to allow a REIT to own 100% of the voting stock
of a corporation that elects and qualifies with the REIT to be treated as a
taxable REIT subsidiary. As a result of the change in the Code, in May 2001 we
acquired the 5% of Crest Net Lease's common stock owned by certain members of
our management and the management of Crest Net Lease for $507,000. The
disinterested members of our board of directors approved this transaction. Crest
Net Lease originally issued this stock for $450,000. Realty Income also received
rights to the undistributed earnings on the stock, which totaled $79,000 as of
March 31, 2001. After this transaction, Realty Income owns 100% of Crest Net
Lease's stock.
The following is a summary of Crest Net Lease's balance sheet (prior to the
effect of eliminating entries) as of March 31, 2001 (unaudited, dollars in
thousands):
Real estate held for sale $ 14,763
Other assets 563
------------------------------------------------------------------------------
Total assets $ 15,326
==============================================================================
Liabilities $ 4,756
Stockholders' equity 10,570
------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 15,326
==============================================================================
14
The following is a summary of Crest Net Lease's statement of income (prior to
the effect of eliminating entries) for the quarter ended March 31, 2001
(unaudited, dollars in thousands):
Three
months
ended
3/31/01
----------------------
Rent & other revenue $ 2,075
Expenses 1,017
------------------------------------------------------------
Net income $ 1,058
============================================================
SHARE REPURCHASE ACTIVITY. We regularly review our investment options to
determine the best use of our capital. From time to time during the first
quarter of 2001, we concluded our share price justified repurchasing shares
since this provided the highest return on our investment capital. During the
three months ended March 31, 2001, we invested $169,000 to repurchase 6,800
shares of our common stock at an average price of $24.82 per share.
OTHER INFORMATION
Realty Income's common stock is listed on the New York Stock Exchange ("NYSE")
under the ticker symbol "O", our central index key ("CIK") number is 726728 and
cusip number is 756109-104.
Realty Income's 9 3/8% Class B cumulative redeemable preferred stock is listed
on the NYSE under the ticker symbol "OprB" and its cusip number is 756109-302.
Realty Income's 9 1/2% Class C cumulative redeemable preferred stock is listed
on the NYSE under the ticker symbol "OprC" and its cusip number is 756109-500.
Realty Income's 8.25% Monthly Income Senior Notes, due 2008, are listed on the
NYSE under the ticker symbol "OUI". The cusip number of these notes is
756109-203.
Realty Income has 49 employees as of May 9, 2001.
LIQUIDITY AND CAPITAL RESOURCES
CASH RESERVES. Realty Income is organized for the purpose of operating as an
equity REIT that acquires and leases properties and distributes to stockholders,
in the form of monthly cash distributions, a substantial portion of its net cash
flow generated from leases on its retail properties. We intend to retain an
appropriate amount of cash as working capital. At March 31, 2001, we had cash
and cash equivalents totaling $2.0 million.
15
We believe that our cash and cash equivalents on hand, cash provided from
operating activities and borrowing capacity are sufficient to meet our liquidity
needs for the foreseeable future. We intend, however, to use additional sources
of capital to fund property acquisitions and to repay our credit facilities
CAPITAL FUNDING. We have a $200 million, three-year revolving, unsecured
acquisition credit facility, of which $180 million expires in December 2003 and
$20 million expires in December 2002. We also have a $25 million, three-year
revolving, unsecured credit facility that expires in February 2003. The credit
facilities currently bear interest at 1.225% over the London Interbank Offered
Rate, or LIBOR, and offer us other interest rate options. As of May 9, 2001,
borrowing capacity of $154.1 million was available on our credit facilities. At
that time, the outstanding balance on the credit facilities was $70.9 million
with an effective interest rate of 6.2%.
These credit facilities have been and are expected to be used to acquire
additional retail properties leased to national and regional retail chains under
long-term lease agreements. Any additional borrowings will increase our exposure
to interest rate risk.
On May 7, 2001, we issued 2,850,000 shares of common stock at a price of $27.80
per share. The net proceeds of $74.9 million were used to repay borrowings under
our $200 million acquisition credit facility and for other general corporate
purposes.
In June 1999, we filed a universal shelf registration statement with the
Securities and Exchange Commission covering up to $409.2 million in value of
common stock, preferred stock and debt securities. Through May 9, 2001, we have
issued $113.7 million of common stock, preferred stock and debt securities under
the universal shelf registration statement.
We believe that our stockholders are best served by a conservative capital
structure. As of May 9, 2001, our total outstanding credit facility borrowings
and outstanding notes were $300.9 million or approximately 24.7% of our total
capitalization of $1.2 billion (defined as shares of our common stock
outstanding multiplied by the last reported sales price of the common stock on
the NYSE on May 9, 2001 of $27.66 per share plus the liquidation value of the
Class B Preferred Stock, the Class C Preferred Stock, the outstanding borrowings
on the credit facilities and outstanding notes at May 9, 2001).
Historically, we have met our long-term capital needs through the issuance of
common stock, preferred stock and investment grade long-term unsecured debt. We
believe that the Company should have the majority of its future issuances of
securities be in the form of common stock. We will issue common stock when we
believe that the share price of our common stock is at a level that allows for
the proceeds of any offering to be invested on an accretive basis into
additional properties or to pay down any short-term borrowings on our credit
facilities. In addition, we seek to maintain a conservative debt level on our
balance sheet, which should result in solid interest and fixed charge coverage
ratios.
16
We received investment grade corporate credit ratings on our senior unsecured
debt from Fitch IBCA Duff & Phelps; Moody's Investor Service, Inc.; and Standard
& Poor's Rating Group in December 1996. Currently, Fitch IBCA Duff & Phelps has
assigned a rating of BBB, Moody's has assigned a rating of Baa3, and Standard &
Poor's has assigned a rating of BBB- to our senior debt. These ratings could
change based upon, among other things, our results of operations and financial
condition.
We have also received credit ratings from the same rating agencies on our
preferred stock. Fitch IBCA Duff & Phelps has assigned a rating of BBB-, Moody's
Investor Service, Inc. has assigned a rating of "ba1", and Standard & Poor's
Rating Group has assigned a rating of BB+. These ratings could change based
upon, among other things, our results of operations and financial condition.
DISTRIBUTIONS. Distributions are paid to our common stockholders and Class C
Preferred stockholders on a monthly basis and paid to our Class B Preferred
stockholders on a quarterly basis if, as and when declared by our Board of
Directors. The Class B Preferred stockholders receive cumulative distributions
at a rate of 9.375% per annum on the $25 per share liquidation preference
(equivalent to $2.3436 per annum per share). The Class C Preferred stockholders
receive cumulative distributions at a rate of 9.5% per annum on the $25 per
share liquidation preference (equivalent to $2.3748 per annum per share).
The May 2001 distribution of $0.18625 per common share represents a current
annualized distribution of $2.235 per share, and an annualized distribution
yield of approximately 8.1% based on the last reported sale price of $27.66 of
our common stock, on the NYSE on May 9, 2001. In order to maintain our tax
status as a REIT for federal income tax purposes, we are generally required to
distribute dividends to our stockholders aggregating annually at least 90% (95%
prior to 2001) of our REIT taxable income (determined without regard to the
dividends paid deduction and by excluding net capital gains). In 2000, our
distributions totaled approximately 119.0% of our REIT taxable income. We intend
to continue to make distributions to our stockholders that are sufficient to
meet this requirement.
Future distributions by us will be at the discretion of our Board of Directors
and will depend on, among other things, our results of operations, financial
condition and capital requirements, the annual distribution requirements under
the REIT provisions of the Code, our debt service requirements and other factors
as the Board of Directors may deem relevant. In addition, our credit facilities
contain financial covenants which could limit the amount of distributions
payable by us in the event of a deterioration in the results of operations or
financial condition of the Company, and which prohibit the payment of
distributions on the common or preferred stock in the event that we fail to pay
when due (subject to any applicable grace period) any principal or interest on
borrowings under our credit facilities.
17
FUNDS FROM OPERATIONS ("FFO")
For the first quarter of 2001, FFO increased by $1.1 million or 6.7% to $17.6
million versus $16.5 million during the first quarter of 2000. The following is
a reconciliation of net income available to common stockholders to FFO, and
information regarding distributions paid and diluted weighted average number of
common shares outstanding for the first quarter of 2001 and 2000 (dollars in
thousands):
Three months ended March 31, 2001 2000
---------------------------------------------------------------------------------------------------------
Net income available to common stockholders $ 16,045 $ 10,484
Plus:
Depreciation and amortization 7,210 6,748
Provision for impairment loss on a property held for sale 330 --
Less:
Depreciation of furniture, fixtures and equipment (28) (33)
Gain on sales of investment properties (5,951) (662)
---------------------------------------------------------------------------------------------------------
Total funds from operations $ 17,606 $ 16,537
=========================================================================================================
Distributions paid to common stockholders $ 14,770 $ 14,484
FFO in excess of distributions to common stockholders $ 2,836 $ 2,053
Diluted weighted average number of common shares outstanding 26,655,676 26,816,928
We define FFO as net income available to common stockholders, plus depreciation
and amortization of assets uniquely significant to the real estate industry,
reduced by gains and increased by losses on (i) sales of investment property and
provisions for impairment and (ii) extraordinary and "unusual" items.
The following is a reconciliation of FFO to adjusted FFO. The adjustments are
for non-cash items and capitalized expenditures on existing properties in our
portfolio.
Three months ended March 31, 2001 2000
---------------------------------------------------------------------------------------------------------
Funds from operations $ 17,606 $ 16,537
Plus:
Amortization of settlements on treasury lock agreements 189 189
Amortization of stock compensation 67 40
Less:
Capitalized leasing costs and commissions (160) (28)
Capitalized building improvements (144) (44)
Straight line rent (26) (66)
---------------------------------------------------------------------------------------------------------
Total adjusted funds from operations $ 17,532 $ 16,628
=========================================================================================================
18
We consider FFO and adjusted FFO to be appropriate measures of the performance
of equity REITs. Financial analysts use FFO and adjusted FFO in evaluating REITs
and FFO and adjusted FFO can be a way to measure a REIT's ability to make cash
distribution payments. Presentation of this information provides the reader with
an additional information to compare the performance of different REITs,
although it should be noted that not all REITs calculate FFO and adjusted FFO
the same way so comparisons with other REITs may not be meaningful.
FFO and adjusted FFO is not necessarily indicative of cash flow available to
fund cash needs and should not be considered as an alternative to net income as
an indication of Realty Income's performance. In addition, FFO and adjusted FFO
should not be considered as an alternative to reviewing our cash flows from
operating, investing, and financing activities as a measure of liquidity, of our
ability to make cash distributions or our ability to pay interest payments.
RESULTS OF OPERATIONS
The following is a comparison of our results of operations for the three months
ended March 31, 2001 to the three months ended March 31, 2000.
REVENUE
Rental revenue was $29.5 million for the first quarter of 2001 versus $28.3
million for the comparable quarter of 2000, an increase of 4.2% or $1.2 million.
The increase in rental revenue was primarily due to the acquisition of
properties during 2000. Included in rental revenue for the first quarter of 2001
and 2000 is $428,000 and zero, respectively, from properties owned by Crest Net
Lease. Properties owned by Crest Net Lease are held for sale.
Of the 1,061 properties in the portfolio as of March 31, 2001, 1,056 are
single-tenant properties with the remaining properties being multi-tenant
properties. Of the 1,056 single-tenant properties, 1,032, or 97.7%, were net
leased with an average remaining lease term (excluding extension options) of
approximately 7.6 years. Of our 1,032 leased single-tenant properties, 1,023 or
99.1% were under leases that provide for increases in rents through:
o Base rent increases tied to a consumer price index with adjustment ceilings;
o Overage rent based on a percentage of the tenants' gross sales; or
o Fixed increases.
Some leases contain more than one of these clauses. Percentage rent, which is
included in rental revenue, was $119,000 and $306,000 during the first quarter
of 2001 and 2000, respectively. Same store rents generated on 999 leased
properties owned during all of both the first quarter of 2001 and 2000 increased
by 1.3%, to $26.30 million from $25.97 million.
Many of our leases call for rent increases every five years. Over the past four
years we have acquired approximately $545 million in new properties that now
represent approximately 50% of our total portfolio, excluding properties owned
by Crest Net Lease. Many of these properties are due to generate their initial
rent increases from 2002 to 2004. As such, we believe our same store rent growth
is likely to accelerate with the onset of rent increases from the newer
properties over the next few years.
19
Our portfolio of quality retail real estate owned under 10-20 year net leases
continues to perform well and provide dependable lease revenue supporting the
payment of monthly dividends. As of March 31, 2001, our property portfolio of
1,061 properties was 97.7% leased with only 24 properties available for lease.
Of the 24 properties not leased at March 31, 2001, transactions to lease or sell
11 properties were underway or completed as of May 9, 2001. We anticipate these
transactions to be completed during the second and third quarters of 2001;
although we cannot assure you that all of these properties can be sold or leased
within this period.
During the last six months, we made progress in the re-lease of the 21
properties formerly occupied by Flooring America that became vacant during the
third quarter of 2000. As of May 9, 2001, transactions were underway or
completed on 16 of the 21 properties. The Flooring America stores are generally
in retail locations that lend themselves to a wide variety of retail uses. In
addition, the rents previously received on these properties were mainly at
prevailing market rents. We believe we will complete the re-leasing of the
remaining five properties and the transactions underway during 2001; however, we
cannot assure you that this will occur.
During the first quarter of 2001, Crest Net Lease sold four properties for $14.0
million and we recognized a gain on the sales of $1.9 million, before income
taxes. As of March 31, 2001, Crest Net Lease has $14.8 million invested in seven
properties held for sale. It is Crest Net Lease's intent to carry an average
inventory of between $20.0 to $25.0 million in real estate on an ongoing basis.
Crest Net generates an earnings spread on the differential between the lease
payments it receives and the cost of capital used to acquire the properties. It
is our belief that at this level of inventory, these earnings will more than
cover the ongoing operating expenses of Crest Net.
EXPENSES
The following is a summary of the five components of interest expense for the
first quarter of 2001 and 2000 (dollars in thousands):
Three months ended March 31, 2001 2000 Net Change
----------------------------------------------------------------------------------------------------------------------
Interest on outstanding loans and notes $ 7,534 $ 6,939 $ 595
Amortization of settlements on treasury lock agreements 189 189 --
Credit facility commitment fees 128 123 5
Amortization of credit facility origination costs and deferred
bond financing costs 284 264 20
Interest capitalized (76) (357) 281
----------------------------------------------------------------------------------------------------------------------
Interest expense $ 8,059 $ 7,158 $ 901
======================================================================================================================
20
Credit facility and notes outstanding
(dollars in thousands)
Three months ended March 31, 2001 2000 Net Change
----------------------------------------------------------------------------------------------------------------------
Average outstanding balances $389,838 $358,559 $ 31,279
Average interest rates 7.84% 7.78% 0.06%
Interest on outstanding loans and notes was $595,000 higher in the first quarter
of 2001 than in 2000. The increase was primarily due to an increase of $31.3
million in the average outstanding balances. During the first four months of
2001, the Federal Reserve decreased the federal funds rate four times by a total
of 200 basis points. Correspondingly, the average borrowing rate on our credit
facilities has declined during the same period.
Our debt service coverage ratio for the three months ended March 31, 2001 and
2000 was 3.6 times and 3.7 times, respectively. Debt service coverage ratio is
calculated as follows: earnings (income from operations) before interest, taxes,
impairment losses on depreciable real estate, and depreciation and amortization
(EBITDA) divided by interest expense. Our EBITDA for the three months ended
March 31, 2001 and 2000 was $28.9 million and 26.3 million, respectively. This
information should not be considered as an alternative to any measure of
performance as promulgated under GAAP. Our calculation of EBITDA may be
different from the calculation used by other companies and, therefore,
comparability may be limited.
Depreciation and amortization was $7.2 million in the first quarter of 2001
versus $6.7 million in the first quarter of 2000. The increase in 2001 was
primarily due to the acquisition of properties during 2000.
General and administrative expenses increased by $466,000 to $2.0 million in the
first quarter of 2001 versus $1.6 million in the first quarter of 2000. Included
in general and administrative expenses for 2001 and 2000 are $258,000 and zero,
respectively, of expenses attributable to Crest Net Lease. Excluding the Crest
Net expenses, general and administrative expenses as a percentage of revenue
were 5.6% in the first quarter of 2001 as compared to 5.5% in 2000. General and
administrative expenses, excluding expenses attributable to Crest Net, increased
primarily due to increases in the costs of living, which includes increases in
payroll costs.
Property expenses are broken down into costs associated with non-net leased
multi-tenant properties, unleased single-tenant properties and general portfolio
expenses. Expenses related to the multi-tenant and unleased single-tenant
properties include, but are not limited to, property taxes, maintenance,
insurance, utilities, property inspections, bad debt expense and legal fees.
General portfolio costs include, but are not limited to, insurance, legal,
property inspections and title search fees. At March 31, 2001, 24 properties
were available for lease, as compared to 25 at December 31, 2000 and 18 at
March 31, 2000.
Property expenses were $624,000 in the first quarter of 2001 and $515,000 in
first quarter of 2000. The $109,000 increase in property expenses is primarily
attributable to an increase in property insurance and costs associated with
properties available for lease.
21
During the first quarter of 2001, we sold ten investment properties for a total
of $17.1 million and recognized a gain of $6.0 million. During the first quarter
of 2000, we sold one investment property for $1.4 million and recognized a gain
of $662,000.
We have an active portfolio management program that incorporates the sale of
properties when we believe the reinvestment of the net sales proceeds can
generate higher returns, enhance the credit quality of our real estate portfolio
or increase the average lease term. As of March 31, 2001, we classified real
estate with a carrying amount of $17.0 million as held for sale. Additionally,
we anticipate selling properties from our investment portfolio, which have not
yet been specifically identified. We anticipate we will receive up to $50
million in proceeds from the sale of properties during the next 12 months. We
intend to invest these proceeds into new properties.
Other expenses increased $1.0 million to $1.1 million in the first quarter of
2001 versus $110,000 in the first quarter of 2000. The increase in 2001 is
primarily attributable to Crest Net Lease income taxes of $656,000 and a
$330,000 provision for impairment on depreciable real estate. We review
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.. The
following is a summary of our other expenses for the first quarter of 2001 and
2000 (dollars in thousands):
Three months ended March 31, 2001 2000 Net Change
----------------------------------------------------------------------------------------------------------------------
Realty Income's state and local income taxes $ 124 $ 110 $ 14
Crest Net Lease's income taxes 656 -- 656
Provision for impairment on depreciable real estate 330 -- 330
----------------------------------------------------------------------------------------------------------------------
Other expense $ 1,110 $ 110 $ 1,000
======================================================================================================================
We declared preferred stock dividends of $2.4 million during both the first
quarters of 2001 and 2000.
NET INCOME
In the first quarter of 2001 and 2000, our net income available to common
stockholders was $16.0 million and $10.5 million, an increase of $5.5 million or
52.4%.
The calculation to determine net income available to common stockholders
includes gains and losses from the sale of investment properties. The amount of
gain and losses varies from year to year based on the timing of property sales
and can significantly impact net income available to common stockholders. The
gain recognized from property sales during the first quarter of 2001 was $5.3
million greater than the gain recognized from property sales during the first
quarter of 2000.
22
PROPERTIES
As of March 31, 2001, we owned a diversified portfolio of 1,061 properties
located in 46 states with approximately 8.9 million square feet of leasable
space. In addition to our real estate portfolio, our subsidiary Crest Net Lease
owned seven properties. Our portfolio of retail properties is leased to 69
retail chains doing business in 23 retail industries. At March 31, 2001, 1,032
or 97.3% of the 1,061 properties were leased under net lease agreements. Net
leases typically require the tenant to be responsible for minimum monthly rent
and property operating expenses including property taxes, insurance and
maintenance plus, typically, future rent increases (generally subject to
ceilings) based on increases in the consumer price index, fixed increases or
additional rent calculated as a percentage of the tenant's gross sales above a
specified level.
Our net-leased retail properties are primarily leased to regional and national
retail chain store operators. The average leasable retail space of the 1,061
properties is approximately 8,400 square feet on approximately 60,200 square
feet of land. Generally, buildings are single-story properties with adequate
parking on site to accommodate peak retail traffic periods. The properties tend
to be on major thoroughfares with relatively high traffic counts, adequate
access and proximity to a sufficient population base to constitute a suitable
market or trade area for the retailer's business.
23
The following table sets forth rental revenue from our properties classified
according to the business of the respective tenants, expressed as a percentage
of our total rental revenue.
Percentage of Historical Rental Revenue (1)
-------------------------------------------------------------------------------------------
For the
Three
Months
Ended For the Years Ended December 31,
---------------------------------------------------------------------------
Mar 31,
Industry 2001 2000 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Apparel Stores 2.4% 2.4% 3.8% 4.1% 0.7% --% --%
Automotive Parts 8.5 8.3 8.6 7.8 9.1 10.5 11.4
Automotive Service 6.0 5.8 6.6 7.5 6.4 4.8 3.7
Book Stores 0.5 0.5 0.5 0.6 0.5 -- --
Business Services 0.1 0.1 0.1 * -- -- --
Child Care 23.6 24.7 25.3 29.2 35.9 42.0 45.6
Consumer Electronics 4.3 4.9 4.4 5.4 6.5 0.9 --
Convenience Stores 8.7 8.4 7.2 6.1 5.5 4.6 2.4
Craft and Novelty 0.4 0.4 0.4 * -- -- --
Drug Stores 0.2 0.2 0.2 0.1 -- -- --
Entertainment 1.5 2.0 1.2 -- -- -- --
General Merchandise 0.6 0.6 0.6 * -- -- --
Grocery Stores 0.6 0.6 0.5 * -- -- --
Health and Fitness 3.4 2.4 0.6 0.1 -- -- --
Home Furnishings 6.2 5.8 6.5 7.8 5.6 4.4 2.9
Home Improvement 1.3 2.0 3.6 * -- -- --
Office Supplies 2.2 2.3 2.6 3.0 1.7 -- --
Pet Supplies and Services 1.5 1.5 1.1 0.6 0.2 -- --
Private Education 1.5 1.4 1.2 0.9 -- -- --
Restaurants 11.9 12.3 13.3 16.2 19.8 24.4 24.7
Shoe Stores 0.8 0.8 1.1 0.8 0.2 -- --
Theaters 4.5 2.7 0.6 -- -- -- --
Video Rental 3.9 3.9 4.3 3.8 0.6 -- --
Other 5.4 6.0 5.7 6.0 7.3 8.4 9.3
- ----------------------------------------------------------------------------------------------------------------------------
Totals 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
============================================================================================================================
* Less than 0.1%
<FN>
(1) This table does not include properties owned by Crest Net Lease which are
held for sale.
</FN>
24
Of the 1,061 properties in the portfolio at March 31, 2001, 1,056 were
single-tenant properties with the remaining properties being multi-tenant
properties. As of March 31, 2001, 1,032 of the 1,056 single-tenant properties,
or 97.7%, were net leased with an average remaining lease term (excluding
extension options) of approximately 7.6 years.
The following table sets forth certain information regarding the timing of the
lease term expirations (excluding extension options) on our 1,032 net leased,
single-tenant retail properties as of March 31, 2001 (dollars in thousands):
Number of Annualized Percent of
Year Leases Expiring(1) Rent(1)(2) Annualized Rent
- ----------------------------------------------------------------------------------------------------------------
2001 72 5,420 4.8
2002 81 6,618 5.9
2003 73 6,154 5.5
2004 117 9,987 8.9
2005 84 6,484 5.8
2006 28 2,562 2.3
2007 94 6,437 5.8
2008 66 5,838 5.2
2009 29 2,523 2.3
2010 45 3,880 3.5
2011 38 5,693 5.1
2012 48 5,588 5.0
2013 74 12,671 11.3
2014 39 6,659 5.9
2015 37 4,305 3.8
2016 13 1,382 1.2
2017 11 4,130 3.7
2018 16 1,616 1.4
2019 50 8,706 7.8
2020 9 2,920 2.6
2021 4 826 0.7
2033 2 1,118 1.0
2034 2 570 0.5
- ----------------------------------------------------------------------------------------------------------------
Totals 1,032 $ 112,087 100.0%
================================================================================================================
<FN>
(1) This table does not include five multi-tenant properties and 24 vacant,
unleased single-tenant properties owned by the Company and seven properties
owned by Crest Net Lease. The lease expirations for properties under
construction are based on the estimated date of completion of such properties.
(2) Annualized rent is calculated by multiplying the monthly contractual base
rent as of March 31, 2001 for each of the properties by 12 and adding the
previous 12 month's historic percentage rent, which totaled $1.8 million (i.e.,
additional rent calculated as a percentage of the tenant's gross sales above a
specified level). For the properties under construction, an estimated
contractual base rent is used based upon the estimated total costs of each
property.
</FN>
25
The following table sets forth certain state-by-state information regarding
Realty Income's property portfolio as of March 31, 2001 (dollars in thousands).
Approximate
Number of Percent Leasable Annualized Percent of
State Properties(1) Leased Square Feet Rent(1)(2) Annualized Rent
- ------------------------------------------------------------------------------------------------------------------
Alabama 9 100% 120,100 $ 882 0.8%
Alaska 1 100 70,600 285 0.2
Arizona 29 97 182,500 2,769 2.4
Arkansas 5 100 36,700 614 0.5
California 53 100 950,400 13,201 11.2
Colorado 44 100 267,600 3,973 3.4
Connecticut 10 100 223,800 2,983 2.5
Delaware 1 100 5,400 72 0.1
Florida 87 91 1,003,100 12,478 10.6
Georgia 60 97 428,400 5,674 4.8
Idaho 11 100 52,000 755 0.6
Illinois 35 100 259,100 3,745 3.2
Indiana 29 97 170,400 2,184 1.9
Iowa 10 100 67,900 701 0.6
Kansas 22 100 235,600 2,601 2.2
Kentucky 13 100 43,500 1,114 1.0
Louisiana 5 100 39,600 506 0.4
Maryland 8 100 48,300 750 0.6
Massachusetts 8 100 53,900 1,106 0.9
Michigan 10 100 68,100 986 0.8
Minnesota 25 96 261,500 2,565 2.2
Mississippi 16 100 152,100 1,291 1.1
Missouri 33 100 204,700 2,586 2.2
Montana 2 100 30,000 287 0.2
Nebraska 9 100 87,100 1,081 0.9
Nevada 6 100 81,300 1,257 1.1
New Hampshire 1 100 6,400 133 0.1
New Jersey 4 100 45,400 786 0.7
New Mexico 5 80 46,000 183 0.2
New York 20 100 253,300 4,850 4.1
North Carolina 33 97 172,800 3,038 2.6
North Dakota 1 100 22,000 65 0.1
Ohio 66 100 377,000 5,511 4.7
Oklahoma 17 94 102,200 1,243 1.1
Oregon 19 100 210,800 2,066 1.8
Pennsylvania 23 100 168,300 2,300 2.0
South Carolina 48 100 147,000 3,991 3.4
South Dakota 2 100 12,600 172 0.2
Tennessee 25 96 221,300 2,676 2.3
Texas 153 96 1,172,700 12,966 11.0
Utah 8 88 51,700 636 0.5
Virginia 29 100 261,900 4,606 3.9
Washington 42 100 274,500 3,332 2.8
West Virginia 2 100 16,800 158 0.1
Wisconsin 18 100 167,700 2,057 1.8
Wyoming 4 100 20,100 264 0.2
- ------------------------------------------------------------------------------------------------------------------
Totals/Average 1,061 98% 8,894,200 $ 117,479 100.0%
==================================================================================================================
<FN>
(1) This table does not include seven properties owned by Crest Net Lease which
are held for sale.
26
(2) Annualized rent is calculated by multiplying the monthly contractual base
rent as of March 31, 2001 for each of the properties by 12 and adding the
previous 12 month's historic percentage rent, which totaled $1.8 million (i.e.,
additional rent calculated as a percentage of the tenant's gross sales above a
specified level). For the properties under construction, an estimated
contractual base rent is used based upon the estimated total costs of each
property.
</FN>
The following table sets forth certain information regarding the properties
owned by Realty Income as of March 31, 2001, classified according to the retail
business types and the level of services they provide (dollars in thousands):
Number of Annualized Percent of
Industry Properties(1) Rent(1)(2) Annualized Rent
- ----------------------------------------------------------------------------------------------------------------------
TENANTS PROVIDING SERVICES
Automotive Service 101 $ 7,018 6.0%
Child Care 332 28,541 24.3
Entertainment 6 1,928 1.6
Health and Fitness 8 4,602 3.9
Private Education 6 1,817 1.6
Theaters 10 5,209 4.4
Other 8 5,972 5.1
--------------------------------------------------------------------------------
471 55,087 46.9
--------------------------------------------------------------------------------
TENANTS SELLING GOODS AND SERVICES
Automotive Parts (with installation) 62 5,432 4.6
Business Services 1 124 0.1
Convenience Stores 105 10,111 8.6
Home Improvement 2 187 0.2
Pet Supplies and Services 6 1,231 1.1
Restaurants 165 13,568 11.5
Video Rental 35 4,443 3.8
--------------------------------------------------------------------------------
376 35,096 29.9
--------------------------------------------------------------------------------
TENANTS SELLING GOODS
Apparel Stores 4 2,799 2.4
Automotive Parts 78 4,509 3.8
Book Stores 2 572 0.5
Consumer Electronics 37 4,982 4.2
Craft and Novelty 2 502 0.4
Drug Stores 1 235 0.2
General Merchandise 11 687 0.6
Grocery Stores 2 726 0.6
Home Furnishings 38 7,074 6.0
Home Improvement 25 1,377 1.2
Office Supplies 8 2,476 2.1
Pet Supplies 2 467 0.4
Shoe Stores 4 890 0.8
--------------------------------------------------------------------------------
214 27,296 23.2
- ----------------------------------------------------------------------------------------------------------------------
TOTALS 1,061 $ 117,479 100.0%
===================================== ============================== ======================= =========================
27
<FN>
(1) This table does not include seven properties owned by Crest Net Lease which
are held for sale.
(2) Annualized rent is calculated by multiplying the monthly contractual base
rent as of March 31, 2001 for each of the properties by 12 and adding the
previous 12 month's historic percentage rent, which totaled $1.8 million (i.e.,
additional rent calculated as a percentage of the tenant's gross sales above a
specified level). For the properties under construction, an estimated
contractual base rent is used based upon the estimated total costs of each
property.
</FN>
IMPACT OF INFLATION
Tenant leases generally provide for limited increases in rent as a result of
increases in the tenant's sales volumes, increases in the consumer price index
or fixed increases. We expect that inflation will cause these lease provisions
to result in increases in rent over time. During times when inflation is greater
than increases in rent as provided for in the leases, rent increases may not
keep up with the rate of inflation.
Approximately 97.3%, or 1,032, of the properties in the portfolio are leased to
tenants under net leases in which the tenant is responsible for property costs
and expenses. These features in the leases reduce our exposure to rising
property expenses due to inflation. Inflation and increased costs may have an
adverse impact on the tenants if increases in the tenant's operating expenses
exceed increases in revenue.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
We are exposed to interest rate changes primarily as a result of our credit
facilities and long-term debt used to maintain liquidity and expand our real
estate investment portfolio and operations. Our interest rate risk management
objective is to limit the impact of interest rate changes on earnings and cash
flows and to lower our overall borrowing costs. To achieve our objectives we
borrow our long term debt primarily at fixed rates and may selectively enter
into derivative financial instruments such as interest rate lock agreements,
interest rate swaps and caps in order to mitigate our interest rate risk on a
related financial instrument. We are not a party to any derivative financial
instruments at March 31, 2001. We do not enter into any transactions for
speculative or trading purposes.
Our interest rate risk is monitored using a variety of techniques. The table
below presents the principal amounts, weighted average interest rates, fair
values and other terms required by year of expected maturity to evaluate the
expected cash flows and sensitivity to interest rate changes (dollars in table
in millions).
Expected Maturity Data
-----------------------------------------------------
2002 2003 Thereafter Total Fair Value(2)
---- ---- ---------- ----- -------------
Fixed rate debt -- -- $230.0(1) $230.0 $223.0
Average interest rate -- -- 7.99% 7.99%
Variable rate debt -- $146.3 -- $146.3 $146.3
Average interest rate -- 6.73% -- 6.73%
<FN>
(1) $110 million matures in 2007, $100 million matures in 2008 and $20 million
matures in 2009.
28
(2) We base the fair value of the fixed rate debt at March 31, 2001 on the
closing market price or indicative price per each note. The fair value of the
variable rate debt approximates its carrying value because its terms are similar
to those available in the market place.
</FN>
The table incorporates only those exposures that exist as of March 31, 2001, it
does not consider those exposures or positions that could arise after that date.
As a result, our ultimate realized gain or loss with respect to interest rate
fluctuations would depend on the exposures that arise during the period, our
hedging strategies at the time, and interest rates.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
A. EXHIBITS:
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation of the Company (filed as Appendix B
to the Company's Proxy Statement dated March 28, 1997 ("1997
Proxy Statement") and incorporated herein by reference).
3.2 Bylaws of the Company (filed as Appendix C to the Company's
1997 Proxy Statement and incorporated herein by reference).
3.3 Articles Supplementary of the Class A Junior Participating
Preferred Stock of Realty Income Corporation (filed as exhibit
A of exhibit 1 to Realty Income's registration statement on
Form 8-A, dated June 26, 1998, and incorporated herein by
reference).
3.4 Articles Supplementary to the Articles of Incorporation of
Realty Income Corporation classifying and designating the
Class B Preferred Stock (filed as exhibit 4.1 to the Company's
Form 8-K dated May 24, 1999 and incorporated herein by
reference).
3.5 Articles Supplementary to the Articles of Incorporation of
Realty Income Corporation classifying and designating the
Class C Preferred Stock (filed as exhibit 4.1 to the Company's
Form 8-K dated July 29, 1999 and incorporated herein by
reference).
4.1 Pricing Committee Resolutions and Form of 7.75% Notes due 2007
(filed as Exhibit 4.2 to the Company's Form 8-K dated May 5,
1997 and incorporated herein by reference).
29
EXHIBIT NO. DESCRIPTION
4.2 Indenture dated as of May 6, 1997 between the Company and The
Bank of New York (filed as Exhibit 4.1 to the Company's Form
8-K dated May 5, 1997 and incorporated herein by reference).
4.3 First Supplemental Indenture dated as of May 28, 1997, between
the Company and The Bank of New York (filed as Exhibit 4.3 to
the Company's Form 8-B and incorporated herein by reference).
4.4 Rights Agreement, dated as of June 25, 1998, between Realty
Income Corporation and The Bank of New York (filed as an
exhibit 1 to the Company's registration statement on Form 8-A,
dated June 26, 1998, and incorporated herein by reference).
4.5 Pricing Committee Resolutions (filed as an exhibit 4.2 to
Realty Income's Form 8-K, dated October 27, 1998 and
incorporated herein by reference).
4.6 Form of 8.25% Notes due 2008 (filed as exhibit 4.3 to Realty
Income's Form 8-K, dated October 27, 1998 and incorporated
herein by reference).
4.7 Indenture dated as of October 28, 1998 between Realty Income
and The Bank of New York (filed as exhibit 4.1 to Realty
Income's Form 8-K, dated October 27, 1998 and incorporated
herein by reference).
4.8 Pricing Committee Resolutions and Form of 8% Notes due 2009
(filed as exhibit 4.2 to Realty Income's Form 8-K, dated
January 21, 1999 and incorporated herein by reference).
10.1 Form of extension agreement dated April 25, 2001 to the $200
million credit facility, extending for one year $180 million
of the $200 million commitment to December 2003, filed
herewith.
B. No reports on Form 8-K were filed by registrant during the quarter for which
this report is filed.
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REALTY INCOME CORPORATION
(Signature and Title) /s/ GARY M. MALINO
----------------------------------------------------
Date: March 11, 2001 Gary M. Malino, Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
EXHIBIT INDEX
Exhibit
No. Description
- --------- -----------
10.1 Form of extension agreement dated April 25, 2001 to the $200
million credit facility, extending for one year $180 million
of the $200 million commitment to December 2003.
31