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 September 30, 2002, or
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
COMMISSION FILE NUMBER 1-13374
REALTY INCOME CORPORATION
-------------------------
(Exact name of registrant as specified in its charter)
Maryland
--------
(State or other jurisdiction of incorporation or organization)
33-0580106
----------
(I.R.S. Employer Identification No.)
220 West Crest Street, Escondido, California 92025
--------------------------------------------------
(Address of principal executive offices)
(760) 741-2111
--------------
(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 34,871,217 shares of common stock outstanding as of November 7, 2002.
REALTY INCOME CORPORATION
Form 10-Q
September 30, 2002
TABLE OF CONTENTS
-------------------------
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
Forward-looking statements..................................................... 13
The company.................................................................... 14
Recent developments............................................................ 15
Liquidity and capital resources ............................................... 17
Funds from operations ......................................................... 20
Adjusted funds from operations................................................. 21
Results of operations ......................................................... 22
Properties .................................................................... 29
Impact of inflation and accounting pronouncements.............................. 34
Item 3: Quantitative and Qualitative Disclosures about Market Risk.......................... 35
Item 4: Controls and Procedures............................................................. 35
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K.................................................... 36
SIGNATURE .................................................................................... 37
OFFICER CERTIFICATIONS.................................................................................... 38
EXHIBIT INDEX .................................................................................... 39
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
--------------------
REALTY INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
----------------------------------------
September 30, 2002 and December 31, 2001
(dollars in thousands, except per share data)
2002 2001
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
ASSETS Real estate, at cost:
Land $ 460,050 $ 412,455
Buildings and improvements 811,235 765,707
- -------------------------------------------------------------------------------------------------------------------
1,271,285 1,178,162
Less accumulated depreciation and amortization (247,234) (233,848)
- -------------------------------------------------------------------------------------------------------------------
Net real estate held for investment 1,024,051 944,314
Real estate held for sale, net 13,156 23,356
- -------------------------------------------------------------------------------------------------------------------
Net real estate
1,037,207 967,670
Cash and cash equivalents 8,391 2,467
Accounts receivable 3,116 4,857
Goodwill, net 17,206 17,206
Other assets 9,734 11,508
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 1,075,654 $ 1,003,708
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Distributions payable $ $
6,756 6,238
Accounts payable and accrued expenses 6,903 5,834
Other liabilities 4,888 4,543
Lines of credit payable 102,200 85,300
Notes payable 230,000 230,000
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 350,747 331,915
- -------------------------------------------------------------------------------------------------------------------
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, 34,871,217 and 32,829,111 shares issued and
outstanding in 2002 and 2001, respectively 855,635 795,505
Distributions in excess of net income (230,096) (223,080)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 724,907 671,793
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,075,654 $ 1,003,708
===================================================================================================================
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 and nine months ended September 30,
2002 and 2001 (dollars in thousands, except
per share data)
(unaudited)
Three Three Nine Nine
months months months months
ended ended ended ended
9/30/02 9/30/01 9/30/02 9/30/01
- -----------------------------------------------------------------------------------------------------------------------
REVENUE
Rental $ 34,863 $ 29,747 $ 101,062 $ 87,734
Gain on sales of real estate acquired for
resale 969 284 2,460 2,373
Interest and other 223 409 306 715
- -----------------------------------------------------------------------------------------------------------------------
36,055 30,440 103,828 90,822
- -----------------------------------------------------------------------------------------------------------------------
EXPENSES
Interest 5,919 6,080 17,327 20,726
Depreciation and amortization 7,920 7,087 22,808 21,159
General and administrative 2,313 1,913 7,050 5,820
Property 754 559 1,991 1,722
Other 503 294 1,389 1,313
Provision for impairment loss -- 520 -- 1,050
- -----------------------------------------------------------------------------------------------------------------------
17,409 16,453 50,565 51,790
- -----------------------------------------------------------------------------------------------------------------------
Income from operations 18,646 13,987 53,263 39,032
Gain on sales of investment properties -- 2,806 340 8,921
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 18,646 16,793 53,603 47,953
Income from discontinued operations 3,174 393 4,956 1,182
- -----------------------------------------------------------------------------------------------------------------------
Net income 21,820 17,186 58,559 49,135
Preferred stock dividends (2,428) (2,428) (7,284) (7,284)
- -----------------------------------------------------------------------------------------------------------------------
Net income available to
common stockholders $ 19,392 $ 14,758 $ 51,275 $ 41,851
=======================================================================================================================
Income from continuing operations per common share:
Basic and diluted $ 0.47 $ 0.48 $ 1.38 $ 1.44
Net income available to common stockholders per common share:
Basic $ 0.56 $ 0.50 $ 1.53 $ 1.48
Diluted $ 0.56 $ 0.50 $ 1.52 $ 1.48
The accompanying notes to consolidated financial statements are an
integral part of these statements.
4
REALTY INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------
For the nine months ended September 30, 2002 and 2001
(dollars in thousands)
(unaudited)
2002 2001
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 58,559 $ 49,135
Adjustments to net income:
Depreciation and amortization 22,808 21,159
Provision for impairment losses -- 1,050
Income from discontinued operations (4,956) (1,182)
Cash from discontinued operations 1,090 1,625
Investment in real estate acquired for resale (5,829) (19,113)
Proceeds from sales of real estate acquired for resale 20,161 18,792
Gain on sales of real estate acquired for resale (2,460) (2,373)
Gain on sales of investment properties (340) (8,921)
Amortization of deferred stock compensation 439 228
Change in assets and liabilities:
Accounts receivable and other assets 3,332 2,403
Accounts payable, accrued expenses and other liabilities 2,477 823
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 95,281 63,626
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of investment
properties:
From continuing operations 1,198 29,650
From discontinued operations 14,294 --
Acquisition of and additions to investment properties (116,369) (41,681)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (100,877) (12,031)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from lines of credit 196,800 98,900
Payments under lines of credit (179,900) (175,400)
Distributions to common stockholders (57,773) (46,905)
Distributions to preferred stockholders (7,284) (5,402)
Proceeds from stock offerings, net of offering costs of
$2,914 in 2002 and $4,526 in 2001 57,122 77,485
Proceeds from other common stock issuances 2,555 7,705
Repurchase of stock -- (169)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 11,520 (43,786)
- --------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 5,924 7,809
Cash and cash equivalents, beginning of period 2,467 3,815
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 8,391 $ 11,624
====================================================================================================================
For supplemental disclosures, see note 10.
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
-----------------------------------------------------------------
September 30, 2002
(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 2001 balances have been reclassified to
conform to the 2002 presentation. Readers of this quarterly report should refer
to our audited financial statements for the year ended December 31, 2001, which
are included in our 2001 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. ACCOUNTING PRONOUNCEMENTS
A. In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 142
changed the accounting for goodwill from an amortization method to an
impairment-only approach. Under Statement No. 142, goodwill will be tested for
impairment annually and also whenever events or circumstances occur that
indicate that our goodwill might be impaired.
We adopted the provisions of Statement No. 142 on January 1, 2002 and ceased
amortizing our goodwill, which totaled $17.2 million. During the second quarter
of 2002, we completed the transitional impairment testing of our goodwill and
found that our goodwill was not impaired. We did not have any new goodwill or
record an impairment loss on our existing goodwill during 2002.
Amortization expense related to goodwill was $231,000 and $693,000 for the three
and nine months ended September 30, 2001, respectively. We do not have any
intangible assets as contemplated under Statement No. 142 or unamortized
negative goodwill.
The following table reconciles reported net income available to common
stockholders to adjusted net income available to common stockholders. It
excludes the effect of goodwill amortization expense that is no longer amortized
under Statement No. 142 (in thousands, except per share data):
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/02 9/30/01 9/30/02 9/30/01
- ---------------------------------------------------------------------------------------------------------------------------
Reported net income available to common stockholders $19,392 $14,758 $51,275 $41,851
Goodwill amortization -- 231 -- 693
- ---------------------------------------------------------------------------------------------------------------------------
Adjusted net income available to common stockholders $19,392 $14,989 $51,275 $42,544
===========================================================================================================================
Basic earnings per common share
- -------------------------------
Reported net income available to common stockholders $ 0.56 $ 0.50 $ 1.53 $ 1.48
Goodwill amortization -- -- -- 0.03
- ---------------------------------------------------------------------------------------------------------------------------
Adjusted net income available to common stockholders $ 0.56 $ 0.50 $ 1.53 $ 1.51
===========================================================================================================================
6
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/02 9/30/01 9/30/02 9/30/01
- ---------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share
Reported net income available to common stockholders $ 0.56 $ 0.50 $ 1.52 $ 1.48
Goodwill amortization -- -- -- 0.02
- ---------------------------------------------------------------------------------------------------------------------------
Adjusted net income available to common stockholders $ 0.56 $ 0.50 $ 1.52 $ 1.50
===========================================================================================================================
B. In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Effective January 1, 2002,
Statement No. 144 superseded Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Statement No. 144
requires long-lived assets to be disposed of to be measured at the lower of
carrying amount or fair value less costs to sell on our balance sheet. It also
broadened the reporting requirements of discontinued operations to include a
component of an entity rather than a segment of a business. Statement No. 144
states that a component of an entity comprises operations and cash flows that
can be clearly distinguished, operationally and for financial reporting
purposes, from the rest of the entity. In accordance with Statement No. 144, we
report each individual property as a reporting component for determining
discontinued operations. The operations of nine properties listed as held for
sale at September 30, 2002, plus 13 properties sold during the first six months
of 2002 and nine properties sold during the third quarter of 2002 were reported
as income from discontinued operations in 2002, and their respective 2001
results of operations were reclassified to income from discontinued operations.
As required by Statement No. 144, three other properties reported as held for
sale at December 31, 2001 that were sold during 2002 were not reported as
discontinued operations. The following is a summary of our income from
discontinued operations for the three and nine months ended September 30, 2002
and 2001 (dollars in thousands):
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/02 9/30/01 9/30/02 9/30/01
------------------------------------------------------------------------------------------------------------------
Rental revenue $ 316 $ 566 $ 1,200 $ 1,662
Interest and other revenue 2 -- 2 14
Gain on sales of investment properties 3,066 -- 5,144 --
Depreciation and amortization (44) (147) (299) (443)
Property expenses (16) (26) (111) (51)
Provision for impairment loss (150) -- (980) --
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Income from discontinued operations $ 3,174 $ 393 $ 4,956 $ 1,182
==================================================================================================================
Basic and diluted income from discontinued
operations per common share $ 0.09 $ 0.01 $ 0.15 $ 0.04
C. In July 2002, we changed our method of accounting for stock-based
compensation to the fair value based method which is the preferred method of
accounting as provided for under FASB Statement No. 123, Accounting for
Stock-Based Compensation. The effect of the change in accounting for stock-based
compensation will be to recognize stock compensation expense over the vesting
period for those stock options granted on or after January 1, 2002. For stock
options granted prior to January 1, 2002, we will continue to apply the
provisions under Accounting Principles Board Opinion No. 25 unless the stock
options are modified or settled for cash. The impact of adopting Statement No.
123 is not expected to have a material effect on our financial position or
results of operations. We anticipate that during 2002, our stock option expense
will be approximately $12,000.
7
3. RETAIL PROPERTIES ACQUIRED BY REALTY INCOme
During the first nine months of 2002, we invested $115.5 million in 100 new
retail properties and properties under development with an initial weighted
average contractual lease rate of 10.4%. These 100 properties are located in 24
states, will contain approximately 553,300 leasable square feet and are 100%
leased, with an average initial lease term of 20.1 years.
During the first nine months of 2001, we invested $41.1 million in 37 new retail
properties and properties under development with an initial weighted average
contractual lease rate of 11.1%. These 37 properties are located in 13 states,
contain approximately 227,800 leasable square feet and are 100% leased, with an
average initial lease term of 20.3 years.
4. GAIN ON SALES OF INVESTMENT PROPERTIES
During the third quarter of 2002, we sold nine investment properties for
$8.7 million and recognized a gain of $3.1 million. This gain is included in
income from discontinued operations. Included in the nine properties was one
property leased by one of our tenants that we exchanged for another property
owned by that same tenant. The exchange value assigned to the property we
exchanged was $431,000. During the third quarter of 2001, we sold ten investment
properties for $10.0 million and recognized a gain of $2.8 million.
During the first nine months of 2002, we sold 25 investment properties for
$15.9 million and recognized a gain of $5.5 million. Of this gain, $5.1 million
is included in income from discontinued operations. During the first nine months
of 2001, we sold 23 investment properties for $29.7 million and recognized a
gain of $8.9 million.
5. RETAIL PROPERTIES ACQUIRED BY CREST NET LEASE, INC. ("CREST NET")
A. During the first nine months of 2002, Crest Net invested $5.3 million in
three new retail properties and properties under development. These three
properties are located in three states, will contain approximately 13,200
leasable square feet and are 100% leased, with an average initial lease term of
18.4 years.
During the first nine months of 2001, Crest Net invested $18.7 million in 19 new
retail properties and properties under development.
B. At September 30, 2002 and December 31, 2001, investments in properties owned
by Crest Net totaled $9.9 million and $22.3 million, respectively, and are
included in real estate held for sale, net on our consolidated balance sheets.
6. GAIN ON SALES OF REAL ESTATE ACQUIRED FOR RESALE
During the third quarter of 2002, Crest Net sold six properties for $8.4 million
and Realty Income recognized a gain of $1.0 million on the sales. During the
third quarter of 2001, Crest Net sold one property for $3.3 million and Realty
Income recognized a gain of $284,000 on the sale.
During the first nine months of 2002, Crest Net sold 17 properties for
$20.2 million and Realty Income recognized a gain of $2.5 million on the sales.
During the first nine months of 2001, Crest Net sold six properties for
$18.8 million and Realty Income recognized a gain of $2.4 million on the sales.
8
7. DISTRIBUTIONS PAID AND PAYABLE
A. We pay monthly distributions to our common stockholders. The following is a
summary of the monthly cash distributions per common share during the nine
months ended September 30, 2002 and 2001. As of September 30, 2002, a
distribution of $0.19375 per common share was declared (and was paid on
October 15, 2002).
Month 2002 2001
-----------------------------------------------------------------------------
January $ 0.19000 $ 0.18500
February 0.19000 0.18500
March 0.19000 0.18500
April 0.19125 0.18625
May 0.19125 0.18625
June 0.19125 0.18625
July 0.19250 0.18750
August 0.19250 0.18750
September 0.19250 0.18750
-----------------------------------------------------------------------------
Total $ 1.72125 $ 1.67625
=============================================================================
B. In May 1999, we issued 2,760,000 shares of 9 3/8% Class B cumulative
redeemable preferred stock (the "Class B Preferred"), of which 2,745,700 shares
were outstanding during the first nine months of 2002 and 2001. Beginning
May 25, 2004, the Class B Preferred shares are redeemable at our option for
$25.00 per share. Dividends on the Class B Preferred are paid quarterly in
arrears. During each of the first three quarters of 2002 and 2001, we paid a
quarterly dividend to holders of our Class B Preferred of $0.5859 per share,
totaling $4.8 million for the first nine months of 2002 and 2001.
C. In July 1999, we issued 1,380,000 shares of 9 1/2% Class C cumulative
redeemable preferred stock (the "Class C Preferred"), all of which were
outstanding during the first nine months of 2002 and 2001. Beginning July 30,
2004, the Class C Preferred shares are redeemable at our option for $25.00 per
share. Dividends on the Class C Preferred are paid monthly in arrears. During
each of the first nine months of 2002 and 2001, we paid nine monthly dividends
to holders of our Class C Preferred of $0.1979 per share totaling, $2.5 million
for the first nine months of 2002 and 2001.
8. 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 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.
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 and nine months ended September 30, 2002 and
2001:
9
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/02 9/30/01 9/30/02 9/30/01
- --------------------------------------------------------------------------------------------------------------------------
Weighted average shares used
for the basic net income per
share computation 34,482,522 29,752,807 33,617,736 28,264,186
Incremental shares from the
assumed exercise of stock options 55,485 51,501 53,599 39,442
- --------------------------------------------------------------------------------------------------------------------------
Adjusted weighted average shares
used for diluted net income
per share computation 34,538,007 29,804,308 33,671,335 28,303,628
==========================================================================================================================
For the three and nine months ended September 30, 2002 and 2001, no stock
options were anti-dilutive.
9. STOCK OFFERINGS
A. In February 2002, we issued 273,150 shares of common stock to a unit
investment trust at a net price to us of $30.26 per share, based on a 5%
discount to the market price at the time of issuance of $31.85 per share. The
net proceeds of $8.2 million were used to repay a portion of our $200 million
acquisition credit facility.
B. In July 2002, we issued 1,550,000 shares of common stock at a price of $33.40
per share. The net proceeds of $48.9 million were used to repay a portion of our
$200 million acquisition credit facility.
10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid during the first nine months of 2002 and 2001 was $14.4 million
and $18.2 million, respectively. During the first nine months of 2002 and 2001,
interest of $388,000 and $276,000, respectively, was capitalized related to
properties under development.
The following non-cash investing and financing activities are included in the
accompanying consolidated financial statements (dollars in thousands):
Restricted stock grants resulted in the following:
2002 2001
---- ----
Other assets $ -- $ 1,561
Common stock and paid in capital 3,291 1,561
Common stock and paid in capital,
Deferred stock compensation (3,291) --
The exchange of one property valued at $431,000 for another property resulted in
the following:
2002
----
Land $ (23)
Building and improvements 23
11. SEGMENT INFORMATION
We evaluate performance and make resource allocation decisions on an industry by
industry basis. For financial reporting purposes, we have grouped our tenants
into 12 reportable industry segments, except for properties owned by Crest Net
that are grouped together and included in "other non-reportable segments." All
of the properties are incorporated into one of the applicable segments. Because
almost all of our leases require the tenant to pay operating expenses, revenue
is the only component of segment profit and loss we measure.
10
The following tables set forth certain information regarding the properties
owned by us, classified according to the business of the respective tenants as
of September 30, 2002 (dollars in thousands):
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Revenue for the: 9/30/02 9/30/01 9/30/02 9/30/01
- --------------------------------------------------------------------------------------------------------------------------
Segment rental revenue:
Automotive parts $ 2,449 $ 2,418 $ 7,683 $ 7,312
Automotive service 2,775 1,720 6,730 5,208
Child care 7,044 7,046 20,857 20,623
Consumer electronics 1,146 1,125 3,426 3,594
Convenience stores 3,576 2,537 8,747 7,581
Entertainment 979 592 2,229 1,565
Health and fitness 1,327 1,128 3,890 3,130
Home furnishings 1,818 1,721 5,303 5,108
Restaurants 4,139 3,297 13,017 9,542
Sporting goods 1,396 -- 4,188 --
Theaters 1,302 1,302 3,907 3,907
Video rental 1,159 1,115 3,411 3,359
Other non-reportable segments(1) 5,753 5,746 17,674 16,805
Reconciling items:
Gain on sales of real estate acquired for resale 969 284 2,460 2,373
Interest and other 223 409 306 715
- --------------------------------------------------------------------------------------------------------------------------
Total revenue $ 36,055 $30,440 $ 103,828 $90,822
==========================================================================================================================
(1) Consolidates 12 retail industry segments and properties owned by Crest Net.
Assets
----------------------------------------------------
As of: September 30, 2002 December 31, 2001
- ----------------------------------------------------------------------------------------------------------------------------
Segment real estate, net of depreciation and amortization:
Automotive parts $ 73,715 $ 73,240
Automotive service 88,676 44,438
Child care 135,757 142,163
Consumer electronics 35,200 35,950
Convenience stores 125,023 81,701
Entertainment 38,844 27,043
Health and fitness 44,620 43,549
Home furnishings 64,931 69,008
Restaurants 124,592 129,768
Sporting goods 49,500 50,506
Theaters 46,705 47,273
Video rental 36,859 37,719
Other non-reportable segments(1) 172,785 185,312
- ----------------------------------------------------------------------------------------------------------------------------
Total net real estate 1,037,207 967,670
Non-real estate assets 38,447 36,038
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,075,654 $ 1,003,708
============================================================================================================================
<FN>
(1) Consolidates 12 retail industry segments and properties owned by Crest Net.
</FN>
11
As required by Statement No. 142, we assigned our goodwill to the relevant
"reporting units" which were determined to be the seven industry segments we had
investments in at the time the goodwill originated. The following table sets
forth the seven industries our goodwill was assigned to as of January 1, 2002
(dollars in thousands):
Automotive parts $ 1,935
Automotive service 1,338
Child care 5,353
Convenience stores 2,073
Home furnishings 1,557
Restaurants 3,779
Other 1,171
- --------------------------------------------------------------------------------
Goodwill, net $ 17,206
================================================================================
12. SUBSEQUENT EVENT
In October 2002, we entered into a $250 million, three-year, revolving,
unsecured credit facility, which expires in October 2005. The $250 million
credit facility is with Wells Fargo Bank, N.A, as administrative agent, and
eight other banks. Our $200 million acquisition credit facility and $25 million
credit facility were cancelled simultaneously with the execution of the
$250 million credit facility.
The $250 million credit facility currently bears interest at 1.0% over the
London Interbank Offered Rate ("LIBOR") and offers us other interest rate
options. A facility fee of 0.20%, per annum, accrues on the total commitment of
the credit facility, for an all-in drawn pricing of 120 basis points over LIBOR.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
------------------------------------------------------------------------
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, among other things:
o Our anticipated growth strategies;
o Our intention to acquire additional properties;
o Our intention to sell properties;
o Our intention to re-lease vacant 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, Inc.
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; and
o Acts of terrorism and war.
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, 2001.
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.
13
THE COMPANY
Realty Income Corporation, The Monthly Dividend Company (R) a Maryland
corporation ("Realty Income," the "Company," "our" or "we") was organized to
operate as an equity real estate investment trust ("REIT"). Over the past 33
years Realty Income has been acquiring and owning freestanding retail properties
that generate rental revenue under long-term (primarily 15 to 20 years) lease
agreements. Our monthly distributions are supported by the cash flow from 1,199
retail properties leased to regional and national retail chains.
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.
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 stockholders and FFO
per share through both active portfolio management and the acquisition of
additional properties.
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 re-leasing of
vacant properties and selective sales of properties.
Our acquisition of additional properties adheres to a focused strategy of
primarily acquiring properties that are:
o Freestanding, single-tenant, retail locations;
o Leased to regional and national retail chains; and
o Under long-term, net-lease agreements.
As of September 30, 2002, we owned a diversified portfolio:
o Of 1,199 retail properties;
o With an occupancy rate of 98.2%, or 1,178 of the 1,199 properties being
leased;
o Leased to 80 different retail chains;
o Doing business in 24 separate retail industries; o Located in 48 states;
o With approximately 9.9 million square feet of leasable space; and
o With an average leasable retail space of 8,200 square feet.
Of the 1,199 properties in the portfolio, 1,194, or 99.6%, are single-tenant
retail properties with the remaining five being multi-tenant properties. As of
September 30, 2002, 1,173, or 98.2%, of the 1,194 single-tenant properties were
leased with a weighted average remaining lease term (excluding extension
options) of approximately 10.2 years.
In addition to our real estate portfolio, at September 30, 2002 our subsidiary,
Crest Net Lease, Inc. ("Crest Net") had invested $9.9 million in a portfolio of
ten retail properties located in six states. These properties are held for sale.
We typically acquire retail store locations leased under long-term leases from
retail chain store operators. This provides capital to the operators for
continued expansion and other corporate purposes. Our acquisition and investment
activities are concentrated in well-defined target markets and generally focus
on middle-market retailers providing goods and services that satisfy basic
consumer needs.
14
Our net-lease agreements generally:
o Are for initial terms of 15 to 20 years;
o Require the tenant to pay minimum monthly rents 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 tenants' gross sales above a specified
level.
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 also believe that a portfolio of properties
leased under long-term leases requiring tenants to be responsible for property
expenses, generally produces a more predictable income stream than many other
types of real estate portfolios, while continuing to offer the potential for
growth in rental income.
Our net-leased retail properties are primarily leased to regional and national
retail chain store operators. Generally, our properties contain single-story
buildings and adequate parking on site to accommodate peak retail traffic
periods. The properties tend to be on major thoroughfares with relatively high
traffic counts and adequate access, egress and proximity to a sufficient
population base to constitute a suitable market or trade area for the retailer's
business.
We provide sale-leaseback financing primarily to less than investment grade
retail chains. From 1970 through December 31, 2001, we acquired and leased back
to regional and national retail chains 1,158 properties (including 83 properties
that have been sold) and collected approximately 98% of the original contractual
rent obligations on those properties (this information is updated annually at
the end of each year.) We believe that within this market we can achieve an
attractive risk-adjusted return on the financing we provide to retailers.
RECENT DEVELOPMENTS
ISSUANCE OF COMMON STOCK. In February 2002, we issued 273,150 shares of common
stock to a unit investment trust at a net price to us of $30.26 per share, based
on a 5% discount to the market price at the time of issuance of $31.85 per
share. The net proceeds of $8.2 million were used to repay a portion of our
$200 million acquisition credit facility.
In July 2002, we issued 1,550,000 shares of common stock at a price of $33.40
per share. The net proceeds of $48.9 million were used to repay a portion of our
$200 million acquisition credit facility.
FUNDS FROM OPERATIONS (FFO). For the third quarter of 2002, FFO increased by
$4.7 million, or 23.9%, to $24.4 million compared to $19.7 million for the same
quarter in 2001. In the first nine months of 2002, FFO increased by
$14.3 million, or 25.8%, to $69.8 million compared to $55.5 million for the
first nine months of 2001. See our discussion of FFO in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In the third quarter of 2002, Crest Net generated $677,000 in FFO for Realty
Income compared to $303,000 in the same quarter of 2001. In the first nine
months of 2002, Crest Net generated $1.9 million in FFO for Realty Income
compared to $1.6 million in the first nine months of 2001. The future
contribution, if any, to our FFO by Crest Net will depend on the timing and the
number of property sales it achieves, if any, in a given period.
15
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS was $19.4 million in the third
quarter of 2002 versus $14.8 million in the third quarter of 2001, an increase
of $4.6 million. Net income available to common stockholders was $51.3 million
in the first nine months of 2002 versus $41.9 million in the first nine months
of 2001, an increase of $9.4 million.
ACQUISITION OF PROPERTIES DURING 2002. During the third quarter of 2002, we
invested $28.7 million in nine new retail properties and properties under
development with an initial weighted average contractual capitalization rate of
10.3%. These nine new properties are located in eight different states and are
100% leased with an initial average lease length of 22.2 years. During the first
nine months of 2002, we invested $115.5 million in 100 new retail properties and
properties under development with an initial weighted average contractual
capitalization rate of 10.4%. The 100 new properties are located in 24 different
states, are 100% leased with an initial average lease length of 20.1 years and
will contain approximately 553,300 leasable square feet.
SALES OF INVESTMENT PROPERTIES. During the third quarter of 2002, we sold nine
properties for $8.7 million and recognized a gain of $3.1 million. During the
first nine months of 2002, we sold 25 properties for $15.9 million and
recognized a gain of $5.5 million. Of this gain, $5.1 million is included in
income from discontinued operations. The 25 properties consisted of one
automotive parts store, one automotive service location, ten child care
locations, one health and fitness facility, one home furnishing store, one home
improvement store and ten restaurants. The proceeds from the sale of these
properties were, or will be, used to repay outstanding indebtedness on our
credit facilities and to invest in new properties. At September 30, 2002,
$5.4 million of the sale proceeds were held in like-kind exchange escrow
accounts.
CREST NET. During the third quarter of 2002, Crest Net sold six properties from
its inventory for $8.4 million and Realty Income recognized a gain on the sales
of $1.0 million. During the first nine months of 2002, Crest Net sold 17
properties from its inventory for $20.2 million and Realty Income recognized a
gain on the sales of $2.5 million. During the first nine months of 2002, Crest
Net invested $5.3 million in three new retail properties and properties under
development. At the end of the third quarter, Crest Net carried an inventory of
$9.9 million, which is included on Realty Income's consolidated balance sheet in
real estate held for sale, net.
The financial statements of Crest Net are consolidated into Realty Income's
financial statements. All material intercompany transactions have been
eliminated in consolidation.
INCREASE IN MONTHLY DISTRIBUTIONS TO COMMON STOCKHOLDERS. We continue our
33-year policy of paying distributions monthly. The amount of our monthly
distributions per share was increased $0.00125 in January 2002 to $0.19, in
April 2002 to $0.19125, in July 2002 to $0.1925 and in October 2002 to $0.19375.
The increase in October was our 20th consecutive quarterly increase and 22nd
increase since 1995. During the first nine months of 2002, we paid three monthly
distributions of $0.19 per share, three monthly distributions of $0.19125 per
share and three monthly distributions of $0.1925 per share, totaling $1.72125
per share. In September and October 2002, we declared distributions of $0.19375
per share, one of which was paid on October 15, 2002 and one of which is payable
on November 15, 2002, respectively.
The monthly distribution of $0.19375 per share represents a current annualized
distribution of $2.325 per share, and an annualized distribution yield of
approximately 6.9% based on the last reported sale price of the Company's Common
Stock on the NYSE of $33.83 on November 5, 2002. Although we expect to continue
our policy of paying monthly distributions, we cannot guarantee that we will
maintain the current level of distributions, that we will continue our pattern
of increasing distributions per share, or what the actual distribution yield
will be for any future period.
NEW BANK CREDIT FACILITY. In October 2002, we entered into a new credit facility
to replace our existing $200 million acquisition credit facility and our
$25 million credit facility, each of which was scheduled to expire in 2003.
Under the terms of the new credit facility, total funds available were increased
by $25 million, to $250 million. Concurrent with the closing of the new
facility, our previous $225 million credit facilities were canceled.
16
The borrowing rate on the new $250 million credit facility was reduced compared
to the previous credit facilities. Realty Income's current investment grade
credit ratings provide for financing at LIBOR (London Interbank Offered Rate)
plus 100 basis points with a facility fee of 20 basis points, for all-in drawn
pricing of 120 basis points over LIBOR as compared to an all-in pricing of 145
basis points on our previous credit facilities. The term of the new facility
extends through October 2005.
The co-lead Arranger and sole Administrative Agent for the credit facility is
Wells Fargo Bank, N.A., with The Bank of New York acting as co-lead Arranger and
sole Documentation Agent. They are joined by the Bank of America, N.A. and
Wachovia Bank, National Association as co-Syndication Agents. Five other banks
are also participants in providing the credit line: AmSouth Bank, Bank of
Montreal, U.S. Bank National Association, BANK ONE, NA and Chevy Chase Bank,
FSB.
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 and Crest Net together had 56 employees as of November 7, 2002.
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 September 30, 2002, we had
cash and cash equivalents totaling $8.4 million, including $5.4 million held in
like-kind exchange escrow accounts.
We believe that our cash and cash equivalents on hand, cash provided from
operating activities and borrowing capacity is 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. In October 2002, we entered into a new $250 million credit
facility to replace our existing $200 million acquisition credit facility and
our $25 million credit facility, each of which was scheduled to expire in 2003.
Under the terms of the new $250 million credit facility, total borrowing
capacity was increased by $25 million. Concurrent with the closing of the new
credit facility, our previous $225 million credit facilities were canceled.
17
The borrowing rate under the new $250 million credit facility was reduced
compared to the previous credit facilities. Realty Income's current investment
grade credit ratings provide for financing under the new $250 million credit
facility at LIBOR plus 100 basis points with a facility fee of 20 basis points,
for all-in drawn pricing of 120 basis points over LIBOR. The all-in drawn
pricing on the previous credit facilities was 145 basis points over LIBOR. The
term of the new credit facility extends through October 2005. At November 5,
2002, we had borrowing capacity of $151.6 million available on our credit
facility and an outstanding balance of $98.4 million with an effective interest
rate of 2.8%.
Our $250 million credit facility has been and is 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. We have no mortgage debt on any of our properties.
In May 1997, we issued $110 million of 7.75% senior notes due 2007. In October
1998, we issued $100 million of 8.25% Monthly Income Senior Notes due 2008. In
January 1999, we issued $20 million of 8.0% senior notes due 2009.
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 November 7, 2002, we
issued $261.1 million of common stock, preferred stock and debt securities under
the universal shelf registration statement. At November 7, 2002, a balance of
$148.1 million was available under our universal shelf registration statement.
In February 2002, we issued 273,150 shares of common stock to a unit investment
trust at a net price to us of $30.26 per share, based on a 5% discount to the
market price at the time of issuance of $31.85 per share. The net proceeds of
$8.2 million were used to repay bank borrowings under our $200 million
acquisition credit facility.
In July 2002, we issued 1,550,000 shares of common stock at a price of $33.40
per share. The net proceeds of $48.8 million were used to repay borrowings under
our $200 million acquisition credit facility.
We believe that our stockholders are best served by a conservative capital
structure. Therefore, we seek to maintain a conservative debt level on our
balance sheet and solid interest and fixed charge coverage ratios. At
November 5, 2002, our total outstanding credit facility borrowings and
outstanding notes were $328.4 million or approximately 20.4% of our total market
capitalization of $1.61 billion. We define our total market capitalization as
the sum of the:
o Shares of our common stock outstanding multiplied by the last reported
sales price of the common stock on the NYSE on November 5, 2002 of $33.83
per share;
o Liquidation value of the Class B Preferred Stock of $68.6 million;
o Liquidation value of the Class C Preferred Stock of $34.5 million; and
o Outstanding borrowings on the credit facilities and outstanding notes at
November 5, 2002.
Historically, we have met our long-term capital needs through the issuance of
common stock, preferred stock and long-term unsecured notes. Over the long term,
we believe that the majority of our future issuances of securities should be in
the form of common stock. However, we may issue additional preferred stock or
debt securities from time to time. We may issue common stock when we believe
that our share price is at a level that allows for the proceeds of any offering
to be invested on an accretive basis into additional properties. In addition, we
may issue common stock to permanently finance properties that were financed by
our credit facilities or debt securities. However, we cannot assure you that we
will have access to the capital markets at terms that are acceptable to us.
We currently are assigned investment grade corporate credit ratings on our
senior unsecured notes from Fitch Ratings, Moody's Investors Service and
Standard & Poor's Ratings Group. Currently, Fitch 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 notes. These ratings could change based upon, among
other things, our results of operations and financial condition.
18
We also have received credit ratings from the same rating agencies on our
preferred stock. Fitch Ratings has assigned a rating of BBB-, Moody's Investors
Service has assigned a rating of Ba1 and Standard & Poor's Ratings Group has
assigned a rating of BB+. These ratings could change based upon, among other
things, our results of operations and financial condition.
Realty Income and its subsidiaries have no unconsolidated investments in
"special purpose entities" or off balance sheet financing, nor do we engage in
trading activities involving energy or commodity contracts or other derivative
instruments.
PROPERTY ACQUISITIONS. In the third quarter 2002, we acquired nine properties
located in eight states and invested $28.7 million. In the first nine months of
2002, we acquired 100 properties (the "New Properties") located in 24 states and
invested $115.5 million in the New Properties and properties under development,
which includes investments of $3.1 million for properties acquired before 2002
that were under development. We have committed to pay estimated unfunded
development costs of $3.8 million on properties under construction at
September 30, 2002. In the first nine months of 2002, we capitalized $275,000
for re-leasing costs and $505,000 for building improvements on existing
properties in our portfolio.
The initial weighted average annual unleveraged return on the $115.5 million
invested in 2002 is estimated to be 10.4%, computed as estimated contractual net
operating income (which in the case of a net-leased property is equal to the
base rent or, in the case of properties under construction, the estimated base
rent under the lease) for the first year of each lease, divided by the estimated
total costs. Since it is possible that a tenant could default on the payment of
contractual rent, we cannot assure you that the actual return on the funds
invested will remain at the percentage listed above.
The New Properties will contain approximately 553,300 leasable square feet and
are 100% leased under net leases, with an average initial lease term of 20.1
years. At September 30, 2002, four of the New Properties were leased and under
construction, pursuant to contracts under which the tenants agreed to develop
the properties (with development costs funded by Realty Income) with rent
scheduled to begin in the next six months.
DISTRIBUTIONS. We pay monthly distributions to our common stockholders and Class
C preferred stockholders and quarterly distributions to our Class B preferred
stockholders 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 $2.34375 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 $2.375 per annum per share).
The November 2002 monthly distribution of $0.19375 per common share represents a
current annualized distribution of $2.325 per share, and an annualized
distribution yield of approximately 6.9% based on the last reported sale price
of $33.83 of our common stock, on the NYSE on November 5, 2002.
In order to maintain our tax status as a REIT for federal income tax purposes,
we generally are required to distribute dividends to our stockholders
aggregating annually at least 90% of our REIT taxable income (determined without
regard to the dividends paid deduction and by excluding net capital gains) and
we are subject to income tax to the extent we distribute less than 100% of our
REIT taxable income (including net capital gains). In 2001, our distributions
totaled approximately 114.5% of our estimated REIT taxable income. Our estimated
REIT taxable income reflects non-cash deductions for depreciation and
amortization. We intend to continue to make distributions to our stockholders
that are sufficient to meet this distribution requirement and that will reduce
our exposure to income taxes. Our 2001 distributions to common stockholders were
83.4% of our 2001 funds from operations.
19
Our future distributions will be at the discretion of our Board of Directors and
will depend on, among other things, our results of operations, our funds from
operations, cash flow from operations, financial condition and capital
requirements, the annual distribution requirements under the REIT provisions of
the Internal Revenue Code of 1986, as amended, our debt service requirements and
any other factors 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 our results of
operations or financial condition, 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.
FUNDS FROM OPERATIONS ("FFO")
FFO for the third quarter of 2002 increased by $4.7 million, or 23.9%, to
$24.4 million versus $19.7 million in the third quarter of 2001. FFO for the
first nine months of 2002 increased by $14.3 million, or 25.8%, to $69.8 million
versus $55.5 million in the first nine months of 2001.
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 three and nine months ended
September 30, 2002 and 2001 (dollars in thousands):
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/02 9/30/01 9/30/02 9/30/01
- -------------------------------------------------------------------------------------------------------------------------------
Net income available to
common stockholders $ 19,392 $ 14,758 $ 51,275 $ 41,851
Depreciation and amortization:
Continuing operations 7,920 7,087 22,808 21,159
Discontinued operations 44 147 299 443
Depreciation of furniture, fixtures
and equipment (37) (29) (104) (85)
Provision for impairment losses:
Continuing operations -- 520 -- 1,050
Discontinued operations 150 -- 980 --
Gain on sales of investment properties:
Continuing operations -- (2,806) (340) (8,921)
Discontinued operations (3,066) -- (5,144) --
- -------------------------------------------------------------------------------------------------------------------------------
Total funds from operations $ 24,403 $ 19,677 $ 69,774 $ 55,497
===============================================================================================================================
Distributions paid to common stockholders $ 19,839 $ 16,716 $ 57,773 $ 46,905
FFO in excess of distributions paid
to common stockholders $ 4,564 $ 2,961 $ 12,001 $ 8,592
Diluted weighted average number of
common shares outstanding 34,538,007 29,804,308 33,671,335 28,303,628
20
We define FFO, consistent with the National Association of Real Estate
Investment Trust's definition, 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 items.
ADJUSTED FUNDS FROM OPERATIONS ("AFFO")
We utilize AFFO as a measure of our cash available for distributions to our
common stockholders. Most companies in our industry use a similar measurement,
but they may use the term "CAD" (for Cash Available for Distribution) or "FAD"
(for Funds Available for Distribution). We define AFFO as funds from operations:
(i) plus certain non-cash items ( including amortization of note financing costs
& stock compensation ), (ii) minus capitalized expenditures on existing
properties in our portfolio ( such as capitalized leasing costs and commissions
and capitalized building improvements), and (iii) plus or minus straight-line
rent (which is non-cash rental revenue).
AFFO for the third quarter of 2002 increased by $5.2 million, or 26.1%, to
$25.1 million versus $19.9 million in the third quarter of 2001. AFFO for the
first nine months of 2002 increased by $14.4 million, or 25.8%, to $70.3 million
versus $55.9 million in the first nine months of 2001.
The following is a reconciliation of FFO to AFFO for the three and nine months
ended September 30, 2002 and 2001. The adjustments are for non-cash items and
capitalized expenditures on existing properties in our portfolio (dollars in
thousands):
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/02 9/30/01 9/30/02 9/30/01
- -------------------------------------------------------------------------------------------------------------------------------
Funds from operations $ 24,403 $ 19,677 $ 69,774 $ 55,497
Amortization of settlements on
treasury lock agreements 189 189 567 567
Amort. of deferred note financing costs (1) 145 145 434 434
Amortization of stock compensation 155 83 439 228
Capitalized leasing costs and commissions (45) (48) (275) (273)
Capitalized building improvements (78) (146) (505) (392)
Straight-line rent 287 7 (131) (116)
- -------------------------------------------------------------------------------------------------------------------------------
Total adjusted funds from operations $ 25,056 $ 19,907 $ 70,303 $ 55,945
===============================================================================================================================
Distributions paid to common stockholders $ 19,839 $ 16,716 $ 57,773 $ 46,905
AFFO in excess of distributions paid
to common stockholders $ 5,213 $ 3,191 $ 12,526 $ 9,040
Diluted weighted average number of 34,538,007 29,804,308 33,671,335 28,303,628
common shares outstanding
<FN>
(1) Amortization of deferred note financing costs includes the amortization of
costs incurred and capitalized when our notes were issued in May 1997, October
1998 and January 1999. These costs are being amortized over the lives of these
notes. No costs associated with our credit facility agreements or annual fees
paid to credit rating agencies have been included.
</FN>
21
We consider FFO and AFFO to be appropriate measures of the performance of equity
REITs. Financial analysts use FFO and AFFO in evaluating REITs. FFO and AFFO can
be a way to measure a REIT's ability to make cash distribution payments.
Presentation of this information is intended to assist the reader in comparing
the performance of different REITs, although it should be noted that not all
REITs calculate FFO and AFFO the same way; therefore, comparisons with other
REITs may not be meaningful.
FFO and AFFO are 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 AFFO should not
be considered as an alternative to reviewing our cash flows from operating,
investing and financing activities as a measure of our liquidity, our ability to
make cash distributions or our ability to pay interest payments.
FFO GENERATED BY CREST NET LEASE
Crest Net generated $677,000 in FFO for Realty Income during the third quarter
of 2002 and $303,000 during the third quarter of 2001. Crest Net generated
$1.9 million in FFO for Realty Income during the first nine months of 2002 and
$1.6 million during the first nine months of 2001.
The following is a calculation of the FFO generated by Crest Net in the third
quarter and first nine months of 2002 and 2001 (dollars in thousands):
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/02 9/30/01 9/30/02 9/30/01
- -------------------------------------------------------------------------------------------------------------------------------
Gains from the sales of real estate
acquired for resale $ 969 $ 284 $2,460 $2,373
Rent and other revenue 305 506 1,261 1,292
Interest expense (99) (219) (319) (673)
General and administrative expenses (56) (83) (340) (361)
Property expenses (63) -- (104) --
Income taxes (379) (185) (1,017) (969)
Minority interest -- -- -- (56)
- -------------------------------------------------------------------------------------------------------------------------------
Total adjusted funds from operations $ 677 $ 303 $1,941 $1,606
===============================================================================================================================
Diluted weighted average number of
common shares outstanding 34,538,007 29,804,308 33,671,335 28,303,628
RESULTS OF OPERATIONS
THE FOLLOWING IS A COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 2002 TO THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2001.
RENTAL REVENUE was $34.9 million for the third quarter of 2002 versus
$29.8 million for the third quarter of 2001, an increase of $5.1 million, or
17.1%. The increase in rental revenue is attributable to:
o The properties acquired in the first nine months of 2002, which generated
revenue of $2.6 million in the third quarter of 2002;
o The properties acquired in 2001, which generated revenue of $3.5 million in
the third quarter of 2002 compared to $509,000 in the third quarter of
2001, an increase of $3.0 million;
22
o Same store rents generated on 963 leased properties owned in all of both
the third quarters of 2002 and 2001 increased by $143,000, or 0.5%, to
$27.77 million from $27.62 million;
o Properties owned by Crest Net, which generated revenue of $305,000 in the
third quarter of 2002 compared to $506,000 in the third quarter of 2001, an
decrease of $201,000;
o Properties sold during 2001 generated revenue of $409,000 in the third
quarter of 2001;
o Development properties acquired before 2001 that started paying rent in
2001, properties that were vacant during part of 2001 or 2002 and lease
termination settlements, which generated revenue of $938,000 in the third
quarter of 2002 compared to $710,000 in the same quarter of 2001, an
increase of $228,000; and
o A decrease in straight-line rent of $280,000 in the third quarter of 2002
as compared the third quarter of 2001.
RENTAL REVENUE was $101.0 million for the first nine months of 2002 versus
$87.7 million for the first nine months of 2001, an increase of $13.3 million,
or 15.2%. The increase in rental revenue is attributable to:
o The properties acquired in the first nine months of 2002, which generated
revenue of $3.4 million in the first nine months of 2002;
o The properties acquired in 2001, which generated revenue of $10.4 million
in the first nine months of 2002 compared to $650,000 in the first nine
months of 2001, an increase of $9.75 million;
o Same store rents generated on 963 leased properties owned in all of both
2002 and 2001 increased by $1.1 million, or 1.4%, to $82.98 million from
$81.84 million;
o Properties owned by Crest Net, which generated revenue of $1.26 million in
the first nine months of 2002 compared to $1.28 million in the first nine
months of 2001, an decrease of $20,000;
o Properties sold during 2001 and 2002, which generated revenue of $44,000 in
the first nine months of 2002 as compared to $1.68 million in the first
nine months of 2001, a decrease of $1.64 million;
o Development properties acquired before 2001 that started paying rent in
2001, properties that were vacant during part of 2001 or 2002 and lease
termination settlements, which generated revenue of $2.82 million in the
first nine months of 2002 compared to $2.17 million in the same period of
2001, an increase of $653,000; and
o Straight-line rent of $131,000 in the first nine months of 2002 as compared
to $116,000 in the first nine months of 2001, an increase of $15,000.
Of the 1,199 properties in the portfolio as of September 30, 2002, 1,194 are
single-tenant properties with the remaining properties being multi-tenant
properties. Of the 1,194 single-tenant properties, 1,173, or 98.2%, were net
leased with a weighted average remaining lease term (excluding extension
options) of approximately 10.2 years at September 30, 2002. Of our 1,173 leased
single-tenant properties, 1,159 or 98.8% 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;
o Fixed increases; or
o A combination of two or more of the above rent provisions.
Percentage rent, which is included in rental revenue during the third quarter of
2002 and 2001, was $286,000 and $335,000, respectively. Percentage rent, which
is included in rental revenue during the first nine months of 2002 and 2001, was
$495,000 and $541,000, respectively.
Our portfolio of retail real estate owned under net leases continues to perform
well and provides dependable lease revenue supporting the payment of our monthly
dividends. As of September 30, 2002, our portfolio of 1,199 retail properties
was 98.2% leased with 21 properties available for lease.
23
Transactions to lease or sell eight of the 21 properties not leased at
September 30, 2002 were underway or completed as of November 1, 2002. We
anticipate these transactions to be completed during the next six months;
although we cannot guarantee that all of these properties can be sold or leased
within this period. It has been our experience that approximately 1% to 3% of
our property portfolio will be un-leased at any given time; however, we cannot
assure you that the number of un-leased properties will not exceed these levels.
GAIN ON SALES OF REAL ESTATE ACQUIRED FOR RESALE. During the third quarter of
2002, Crest Net sold six properties for $8.4 million and Realty Income
recognized a gain on the sales of $1.0 million, before income taxes. During the
third quarter of 2001, Crest Net sold one property for $3.3 million and Realty
Income recognized a gain on the sale of $284,000, before income taxes.
During the first nine months of 2002, Crest Net sold 17 properties for
$20.2 million and Realty Income recognized a gain on the sales of $2.5 million,
before income taxes. During the first nine months of 2001, Crest Net sold six
properties for $18.8 million and Realty Income recognized a gain on the sales of
$2.4 million, before income taxes.
At September 30, 2002, Crest Net had $9.9 million invested in 10 properties,
which are held for sale. It is anticipated that Crest Net will carry an average
inventory of $20 to $25 million in real estate. 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, and it has been our
experience to date, that at this level of inventory, these earnings will more
than cover the ongoing operating expenses of Crest Net.
INTEREST EXPENSE. The following is a summary of the five components of interest
expense for the three months ended September 30, 2002 and 2001 (dollars in
thousands):
Three months ended September 30, 2002 2001 Net Change
- ----------------------------------------------------------------------------------------------------------------------
Interest on outstanding credit facilities and notes $ 5,454 $ 5,578 $ (124)
Amortization of settlements on treasury lock agreements 189 189 --
Credit facility commitment fees 128 128 --
Amortization of credit facility origination costs and deferred
bond financing costs 280 273 7
Interest capitalized (132) (88) (44)
- ----------------------------------------------------------------------------------------------------------------------
Interest expense $ 5,919 $ 6,080 $ (161)
======================================================================================================================
Credit facilities and notes outstanding 2002 2001 Net Change
Three months ended September 30,
- ----------------------------------------------------------------------------------------------------------------------
$ 343,967 $ 309,793 $ (34,174)
Average outstanding balances (in thousands)
Average interest rates 6.29% 7.14% (0.85)%
Interest on outstanding credit facilities and notes decreased by $124,000 in the
third quarter of 2002 as compared to the third quarter of 2001 primarily due to
a decrease of 85 basis points in our average interest rates. In 2001, the
Federal Reserve decreased the federal funds rate 11 times by an aggregate total
of 475 basis points. Correspondingly, the average borrowing rate on our credit
facilities has declined during the same period. The average interest rate on our
credit facilities decreased to 2.99% in the third quarter of 2002 from 4.90% in
the third quarter of 2001
24
The following is a summary of the five components of interest expense for the
nine months ended September 30, 2002 and 2001 (dollars in thousands):
Nine months ended September 30, 2002 2001 Net Change
- ----------------------------------------------------------------------------------------------------------------------
Interest on outstanding credit facilities and notes $ 15,928 $ 19,220 $ (3,292)
Amortization of settlements on treasury lock agreements 567 567 --
Credit facility commitment fees 385 385 --
Amortization of credit facility origination costs and deferred
bond financing costs 835 830 5
Interest capitalized (388) (276) (112)
- ----------------------------------------------------------------------------------------------------------------------
Interest expense $ 17,327 $ 20,726 $ (3,399)
======================================================================================================================
Credit facilities and notes outstanding 2002 2001 Net Change
Nine months ended September 30,
- ----------------------------------------------------------------------------------------------------------------------
$ 324,630 $ 338,899 $ (14,269)
Average outstanding balances (in thousands)
Average interest rates 6.56% 7.58% (1.02)%
Interest on outstanding credit facilities and notes decreased by $3.3 million in
the first nine months of 2002 as compared to the first nine months of 2001 due
to a decrease of $14.3 million in the average outstanding balances and a
decrease of 102 basis points in our average interest rates. The average interest
rate on our credit facilities decreased to 3.03% in the first nine months of
2002 from 6.68% in the first nine months of 2001.
At November 5, 2002, the weighted average interest rate on our:
o Credit facility borrowings of $98.4 million was 2.81%;
o Notes payable of $230 million was 7.99%; and
o Combined outstanding notes and credit facility borrowings totaling
$328.4 million was 6.44%.
Our interest coverage ratio for the nine months ended September 30, 2002 and
2001 was 5.5 times and 4.1 times, respectively. Interest coverage ratio is
calculated as follows: EBITDA divided by interest expense. EBITDA is calculated
as follows: net income plus interest expense, income taxes, depreciation,
amortization and impairment losses less gain on sales of investment properties.
Our EBITDA for the nine months ended September 30, 2002 and 2001 was
$95.9 million and $84.9 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.
Our fixed coverage ratio for the nine months ended September 30, 2002 and 2001
was 3.9 times and 3.0 times, respectively. Fixed coverage ratio is calculated as
follows: EBITDA divided by the sum of interest expense and preferred stock
dividends. This information should not be considered as an alternative to any
measure of performance as promulgated under GAAP.
DEPRECIATION AND AMORTIZATION was $7.9 million in the third quarter of 2002
versus $7.1 million in the third quarter of 2001. Depreciation and amortization
was $22.8 million in the first nine months of 2002 versus $21.2 million in the
first nine months of 2001. The increase in 2002 was primarily due to the
acquisition of properties during 2001 and 2002. Depreciation of buildings and
improvements is computed using the straight-line method over an estimated useful
life of 25 years. If we used a shorter or longer estimated useful life it could
have a material impact on our results of operations and financial position. We
believe that 25 years is an appropriate estimate of useful life. No depreciation
has been recorded on Crest Net's properties because they are held for sale.
25
Amortization expense related to goodwill for the third quarter and first nine
months of 2001 was $231,000 and $693,000, respectively. In accordance with
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," effective January 2002, our goodwill is no longer amortized,
but instead will be tested for impairment at least annually. If goodwill is
determined to be impaired, a provision for impairment will be recorded to reduce
the carrying value to its fair value. During the second quarter of 2002, we
completed the transitional impairment testing of our goodwill and found that our
goodwill was not impaired.
GENERAL AND ADMINISTRATIVE EXPENSES increased by $400,000 to $2.3 million in the
third quarter of 2002 versus $1.9 million in the same quarter of 2001. General
and administrative expenses as a percentage of revenue increased to 6.4% in the
third quarter of 2002 as compared to 6.3% in the same quarter of 2001. General
and administrative expenses increased primarily due to an increase in employees
and employee related costs. Realty Income and Crest Net had 56 employees at
November 7, 2002 as compared to 48 employees at the beginning of 2001. This
increase in staffing was largely due to an increase in our legal and portfolio
management departments due to the increase in the size and maturity of our
portfolio. We feel our current staffing levels are sufficient to meet the needs
of the company. We do not anticipate the number of employees to increase over
the next several quarters. To a lesser extent, general and administrative
expenses also increased due to increases in insurance costs and property
acquisition costs.
General and administrative expenses increased by $1.3 million to $7.1 million in
the first nine months of 2002 versus $5.8 million in the first nine months of
2001. General and administrative expenses as a percentage of revenue increased
to 6.8% in 2002 as compared to 6.4% in 2001. General and administrative expenses
increased due to reasons stated above.
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 September 30, 2002, 21 properties
were available for lease, as compared to 20 at December 31, 2001 and 22 at
September 30, 2001.
Property expenses were $754,000 in the third quarter of 2002 and $559,000 in the
third quarter of 2001. The $195,000 increase in property expenses is primarily
attributable to an increase in portfolio property insurance and costs associated
with the properties available for lease. Property expenses were $2.0 million in
the first nine months of 2002 as compared to $1.7 in the first nine months of
2001.
OTHER EXPENSES increased $209,000 to $503,000 in the third quarter of 2002
versus $294,000 in the third quarter of 2001. The increase in 2002 is primarily
due to an increase in Crest Net income taxes of $194,000. Crest Net taxes were
higher because its net income was higher.
The following is a summary of our other expenses for the three months ended
September 30, 2002 and 2001 (dollars in thousands):
Three months ended September 30, 2002 2001 Net Change
- ----------------------------------------------------------------------------------------------------------------------
Realty Income's state and local income taxes $ 124 $ 109 $ 15
Crest Net's income taxes 379 185 194
- ----------------------------------------------------------------------------------------------------------------------
Other expenses $ 503 $ 294 $ 209
======================================================================================================================
Other expenses increased $76,000 to $1.4 million in the first nine months of
2002 versus $1.3 million in the first nine months of 2001. The increase in 2002
is primarily due to an increase in Crest Net income taxes of $48,000. Crest Net
taxes were higher because its net income was higher.
26
The following is a summary of our other expenses for the nine months ended
September 30, 2002 and 2001 (dollars in thousands):
Nine months ended September 30, 2002 2001 Net Change
- ----------------------------------------------------------------------------------------------------------------------
Realty Income's state and local income taxes $ 372 $ 344 $ 28
Crest Net's income taxes 1,017 969 48
- ----------------------------------------------------------------------------------------------------------------------
Other expenses $ 1,389 $ 1,313 $ 76
======================================================================================================================
A PROVISION FOR IMPAIRMENT LOSS of $520,000 and $1.1 million was recorded in the
third quarter and first nine months of 2001, respectively. A provision for
impairment loss of $150,000 and $980,000 was recorded in the third quarter and
first nine months of 2002, respectively, and is included in discontinued
operations. 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. Generally, a provision is made for impairment loss if estimated
future operating cash flows (undiscounted and without interest charges) plus
estimated disposition proceeds (undiscounted) are less than the current book
value. Impairment losses are measured as the amount by which the current book
value of the asset exceeds the fair value of the asset. The carrying value of
our real estate is the largest component of our consolidated balance sheet. If
events should occur that required us to reduce the carrying value of our real
estate by recording provisions for impairment losses, it could have a material
impact on our results of operations or financial position.
INCOME FROM DISCONTINUED OPERATIONS. In August 2001, the Financial Accounting
Standards Board issued Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Effective January 1, 2002, Statement No. 144
superseded Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of. Statement No. 144 requires
long-lived assets to be disposed of to be measured at the lower of carrying
amount or fair value less cost to sell on our balance sheet. It also broadened
the reporting requirements of discontinued operations to include a component of
an entity rather than a segment of a business. Statement No. 144 states that a
component of an entity comprises operations and cash flows that clearly can be
distinguished, operationally and for financial reporting purposes, from the rest
of the entity. In accordance with Statement No. 144, we report each individual
property as a reporting component for determining discontinued operations. Nine
properties listed as held for sale at September 30, 2002, plus 13 properties
sold during the first six months of 2002 and nine properties sold during the
third quarter 2002 were reported as discontinued operations. As required by
Statement No. 144, three other properties reported as held for sale at
December 31, 2001, that were sold during 2002, were not reported as discontinued
operations.
The following is a summary of our income from discontinued operations for the
three and nine months ended September 30, 2002 and 2001 (dollars in thousands):
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/02 9/30/01 9/30/02 9/30/01
- ------------------------------------------------------------------------------------------------------------------
Rental revenue $ 316 $ 566 $ 1,200 $ 1,662
Interest and other revenue 2 -- 2 14
Gain on sales of investment properties 3,066 -- 5,144 --
Depreciation and amortization (44) (147) (299) (443)
Property expenses (16) (26) (111) (51)
Provision for impairment loss (150) -- (980) --
- ------------------------------------------------------------------------------------------------------------------
Income from discontinued operations $ 3,174 $ 393 $ 4,956 $ 1,182
==================================================================================================================
27
GAIN ON SALES OF INVESTMENT PROPERTIES. During the third quarter of 2002, we
sold nine investment properties for $8.7 million and recognized a gain of
$3.1 million, which is included in income from discontinued operations. During
the third quarter of 2001, we sold ten investment properties for $10.0 million
and recognized a gain of $2.8 million.
During the first nine months of 2002, we sold 25 investment properties for
$15.9 million and recognized a gain of $5.5 million. Of this gain, $5.1 million
is included in income from discontinued operations. During the first nine months
of 2001, we sold 23 investment properties for $29.7 million and recognized a
gain of $8.9 million.
We have an active portfolio management program that incorporates the sale of
assets when we believe the reinvestment of the sale proceeds will generate
higher returns, enhance the credit quality of our real estate portfolio or
extend our average remaining lease term. At September 30, 2002, we classified
real estate with a carrying amount of $13.2 million as held for sale, which
includes $9.9 million in properties owned by Crest Net. Additionally, we
anticipate selling properties from our portfolio that 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 property acquisitions.
PREFERRED STOCK DIVIDENDS. We declared preferred stock dividends of $2.4 million
in the third quarters of both 2002 and 2001 and $7.3 million in the first nine
months of both 2002 and 2001.
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS was $19.4 million in the third
quarter of 2002 and $14.8 million in the third quarter of 2001, an increase of
$4.6 million. Net income available to common stockholders was $51.3 million in
the first nine months of 2002 and $41.9 million in the first nine months of
2001, an increase of $9.4 million.
The calculation to determine net income available to common stockholders
includes gains and losses from the sale of investment properties, some of which
is included in income from discontinued operations. The amount of gains and
losses vary from period to period based on the timing of property sales and can
significantly impact net income available to common stockholders.
The gain recognized from the sales of investment properties during the third
quarter of 2002 was $3.1 million. This was $300,000 more than the gain
recognized from investment property sales during the third quarter of 2001.
Excluding the gain on sales of investment properties, net income available to
common stockholders increased by $4.4 million, or 36.6%.
The gain recognized from the sales of investment properties during the first
nine months of 2002 was $5.5 million. This was $3.4 million less than the gain
recognized from investment property sales during the first nine months of 2001.
Excluding the gain on sales of investment properties, net income available to
common stockholders increased by $12.9 million, or 39.1%.
28
PROPERTIES
As of September 30, 2002, we owned a diversified portfolio:
o Of 1,199 properties;
o With an occupancy rate of 98.2%, or 1,178 of the 1,199 properties being
leases;
o Leased to 80 different retail chains;
o Doing business in 24 separate retail industries;
o Located in 48 states;
o With approximately 9.9 million square feet of leasable space; and
o With an average leasable retail space of 8,200 square feet.
In addition to our real estate portfolio, at September 30, 2002 our subsidiary,
Crest Net, owned a portfolio of 10 properties and had invested $9.9 million.
At September 30, 2002, 1,173 or 97.8% of the 1,199 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. In addition, tenants are typically responsible
for 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 tenants' gross sales above a specified level.
Our net-leased retail properties are primarily leased to regional and national
retail chain store operators. 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
and adequate access, egress and proximity to a sufficient population base to
constitute a suitable market or trade area for the retailer's business.
29
The following table sets forth certain information regarding our properties
classified according to the business of the respective tenants, expressed as a
percentage of our total rental revenue.
Percentage of Rental Revenue (1)
----------------------------------------------------------------------------------------
Annualized Rent
as of For the Years Ended December 31,
---------------------------------------------------------------------
September 30,
Industry 2002(2) 2001 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Apparel stores 2.2% 2.4% 2.4% 3.8% 4.1% 0.7% --%
Automotive parts 7.3 8.3 8.3 8.6 7.8 9.1 10.5
Automotive service 8.5 5.7 5.8 6.6 7.5 6.4 4.8
Book stores 0.4 0.4 0.5 0.5 0.6 0.5 --
Business services 0.1 0.1 0.1 0.1 * -- --
Child care 20.0 23.9 24.7 25.3 29.2 35.9 42.0
Consumer electronics 3.3 4.0 4.9 4.4 5.4 6.5 0.9
Convenience stores 10.4 8.4 8.4 7.2 6.1 5.5 4.6
Crafts and novelties 0.4 0.4 0.4 0.4 * -- --
Drug stores 0.2 0.2 0.2 0.2 0.1 -- --
Entertainment 2.7 1.8 2.0 1.2 -- -- --
General merchandise 0.5 0.6 0.6 0.6 * -- --
Grocery stores 0.5 0.6 0.6 0.5 * -- --
Health and fitness 3.7 3.6 2.4 0.6 0.1 -- --
Home furnishings 5.2 6.0 5.8 6.5 7.8 5.6 4.4
Home improvement 1.1 1.3 2.0 3.6 * -- --
Office supplies 2.0 2.2 2.3 2.6 3.0 1.7 --
Pet supplies and services 1.6 1.6 1.5 1.1 0.6 0.2 --
Private education 1.2 1.5 1.4 1.2 0.9 -- --
Restaurants 12.9 12.2 12.3 13.3 16.2 19.8 24.4
Shoe stores 0.9 0.7 0.8 1.1 0.8 0.2 --
Sporting goods 3.9 0.9 -- -- -- -- --
Theaters 3.6 4.3 2.7 0.6 -- -- --
Video rental 3.2 3.7 3.9 4.3 3.8 0.6 --
Other 4.2 5.2 6.0 5.7 6.0 7.3 8.4
- -------------------------------------------------------------------------------------------------------------------------
Totals 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
=========================================================================================================================
* Less than 0.1%
<FN>
(1) Does not include properties owned by our subsidiary, Crest Net.
(2) Annualized rent is calculated by multiplying the monthly contractual base
rent as of September 30, 2002 for each of the properties by 12 and adding the
previous 12 month's historic percentage rent on properties owned at September
30, 2002, which totaled $1.7 million (i.e., additional rent calculated as a
percentage of the tenants' 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 at September 30, 2002, classified according to the retail
business types and the level of services they provide (dollars in thousands):
30
Number of Annualized Percentage of
Industry Properties(1) Rent(1)(2) Annualized Rent
- ----------------------------------------------------------------------------------------------------------------------
Tenants Providing Services
- --------------------------
Automotive service 179 $ 12,181 8.5%
Child care 317 28,624 20.0
Entertainment 10 3,862 2.7
Health and fitness 8 5,335 3.8
Private education 5 1,738 1.2
Theaters 10 5,209 3.7
Other 8 6,030 4.2
--------------------------------------------------------------------------------
537 62,979 44.1
--------------------------------------------------------------------------------
Tenants Selling Goods and Services
- ----------------------------------
Automotive parts (with installation) 65 6,066 4.3
Business services 1 124 0.1
Convenience stores 117 14,888 10.4
Home improvement 2 187 0.1
Pet supplies and services 6 1,561 1.1
Restaurants 221 18,393 12.9
Video rental 34 4,625 3.2
--------------------------------------------------------------------------------
446 45,844 32.1
--------------------------------------------------------------------------------
Tenants Selling Goods
- ---------------------
Apparel stores 5 3,103 2.2
Automotive parts 74 4,302 3.0
Book stores 2 606 0.4
Consumer electronics 36 4,660 3.3
Crafts and novelties 2 517 0.3
Drug stores 1 235 0.2
General merchandise 11 687 0.5
Grocery stores 2 727 0.5
Home furnishings 38 7,372 5.1
Home improvement 16 1,377 1.0
Office supplies 9 2,846 2.0
Pet supplies 4 761 0.5
Shoe stores 5 1,254 0.9
Sporting goods 11 5,584 3.9
- ----------------------------------------------------------------------------------------------------------------------
216 34,031 23.8
- ----------------------------------------------------------------------------------------------------------------------
TOTALS 1,199 $ 142,854 100.0%
======================================================================================================================
<FN>
(1) This table does not include properties owned by our subsidiary, Crest Net.
(2) Annualized rent is calculated by multiplying the monthly contractual base
rent as of September 30, 2002 for each of the properties by 12 and adding the
previous 12 month's historic percentage rent on properties owned at September
30, 2002, which totaled $1.7 million (i.e., additional rent calculated as a
percentage of the tenants' 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>
31
Of the 1,199 properties in the portfolio at September 30, 2002, 1,194 were
single-tenant properties with the remaining properties being multi-tenant
properties. At September 30, 2002, 1,173 of the 1,194 single-tenant properties,
or 98.2%, were net leased with a weighted average remaining lease term
(excluding extension options) of approximately 10.2 years.
The following table sets forth certain information regarding the timing of the
initial lease term expirations (excluding extension options) on our 1,173
net-leased, single-tenant retail properties at September 30, 2002 (dollars in
thousands):
Number of Annualized Percentage of
Year Leases Expiring(1) Rent(1)(2) Annualized Rent
- ----------------------------------------------------------------------------------------------------------------
2002 28 $ 3,316 2.4%
2003 81 6,909 5.0
2004 122 10,422 7.6
2005 87 6,802 4.9
2006 75 6,696 4.9
2007 115 8,364 6.1
2008 64 5,793 4.2
2009 28 2,555 1.9
2010 42 3,742 2.7
2011 35 5,324 3.9
2012 52 6,237 4.5
2013 70 12,348 9.0
2014 36 6,546 4.8
2015 32 3,417 2.5
2016 14 1,498 1.1
2017 17 5,297 3.9
2018 16 1,988 1.4
2019 49 8,246 6.0
2020 11 4,166 3.0
2021 95 14,367 10.5
2022 92 9,098 6.6
2023 2 341 0.2
2024 1 216 0.2
2026 2 372 0.3
2033 2 1,118 0.8
2034 2 834 0.6
2037 3 1,343 1.0
- ----------------------------------------------------------------------------------------------------------------
Totals 1,173 $ 137,355 100.0%
================================================================================================================
<FN>
(1) This table does not include five multi-tenant properties and 21 vacant,
unleased single-tenant properties owned by the Company and properties owned by
our subsidiary, Crest Net. 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 September 30, 2002 for each of the properties by 12 and adding the
previous 12 month's historic percentage rent on properties owned at
September 30, 2002, which totaled $1.7 million (i.e., additional rent calculated
as a percentage of the tenants' 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>
32
The following table sets forth certain state-by-state information regarding
Realty Income's property portfolio as of September 30, 2002 (dollars in
thousands):
Approximate
Number of Percent Leasable Annualized Percentage of
State Properties(1) Leased Square Feet Rent(1)(2) Annualized Rent
- ------------------------------------------------------------------------------------------------------------------
Alabama 15 93% 142,600 $ 1,393 1.0%
Alaska 2 100 128,500 1,003 0.7
Arizona 35 97 248,800 3,980 2.8
Arkansas 8 100 48,800 916 0.6
California 61 98 1,015,000 14,768 10.3
Colorado 43 100 266,300 4,195 2.9
Connecticut 16 100 245,600 3,709 2.6
Delaware 1 100 5,400 72 *
Florida 90 97 1,148,400 15,140 10.6
Georgia 68 100 504,100 7,100 5.0
Idaho 11 100 52,000 775 0.5
Illinois 41 100 322,200 4,558 3.2
Indiana 29 97 165,500 2,139 1.5
Iowa 10 100 67,600 702 0.5
Kansas 21 100 190,000 2,215 1.6
Kentucky 13 100 43,600 1,134 0.8
Louisiana 7 100 47,100 723 0.5
Maryland 15 100 118,500 2,792 2.0
Massachusetts 30 100 138,300 2,902 2.0
Michigan 14 100 87,300 1,243 0.9
Minnesota 22 95 237,300 2,250 1.6
Mississippi 21 100 174,000 1,720 1.2
Missouri 35 100 230,400 3,010 2.1
Montana 2 100 30,000 305 0.2
Nebraska 10 100 91,200 1,211 0.8
Nevada 10 100 100,700 1,593 1.1
New Hampshire 6 100 23,900 594 0.4
New Jersey 23 100 110,800 3,892 2.7
New Mexico 5 100 46,000 362 0.3
New York 24 100 265,600 5,656 4.0
North Carolina 37 100 199,300 4,101 2.9
North Dakota 1 100 22,000 65 *
Ohio 66 95 370,600 5,550 3.9
Oklahoma 19 100 107,600 1,544 1.1
Oregon 18 100 206,000 1,960 1.4
Pennsylvania 32 100 251,200 3,577 2.5
Rhode Island 1 100 3,500 116 0.1
South Carolina 47 98 142,000 4,008 2.8
South Dakota 2 100 12,600 176 0.1
Tennessee 33 100 248,800 3,382 2.4
Texas 152 95 1,201,200 14,069 9.8
Utah 7 86 43,300 427 0.3
Vermont 1 100 2,500 87 0.1
Virginia 33 100 320,200 6,202 4.3
Washington 39 97 256,900 3,113 2.2
West Virginia 2 100 16,800 161 0.1
Wisconsin 17 100 168,400 1,984 1.4
Wyoming 4 100 20,100 280 0.2
- ------------------------------------------------------------------------------------------------------------------
Totals/Average 1,199 98% 9,888,500 $ 142,854 100.0%
==================================================================================================================
* Less than 0.1%
<FN>
(1) Does not include properties owned by our subsidiary, Crest Net.
(2) Annualized rent is calculated by multiplying the monthly contractual base
rent as of September 30, 2002 for each of the properties by 12 and adding the
previous 12 month's historic percentage rent on properties owned at
September 30, 2002, which totaled $1.7 million (i.e., additional rent calculated
as a percentage of the tenants' 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>
33
IMPACT OF INFLATION
Tenant leases generally provide for limited increases in rent as a result of
increases in the tenants' sales volumes, increases in the consumer price index,
and/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 97.8% or 1,173 of the 1,199 properties in the portfolio are leased
to tenants under net leases where the tenant is responsible for property costs
and expenses. These lease features reduce our exposure to rising property
expenses due to inflation. Inflation and increased costs may have an adverse
impact on our tenants if increases in their operating expenses exceed increases
in revenue.
IMPACT OF ACCOUNTING PRONOUNCEMENTS
A. In September 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement No. 142. Statement No. 142 also
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with FASB Statement No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of.
The Company adopted Statement No. 142 effective January 1, 2002. At the date of
adoption, the Company had unamortized goodwill in the amount of $17.2 million.
Amortization expense related to goodwill was $231,000 and $693,000 during third
quarter and first nine months of 2001, respectively. The Company does not have
any intangible assets or unamortized negative goodwill. As required by Statement
No. 142, we applied our goodwill to the relevant "reporting units" which were
determined to be the seven industry segments we had investments in at the time
the goodwill originated. During the second quarter of 2002, we completed the
transitional impairment testing of our goodwill and found that our goodwill was
not impaired.
B. In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Statement No. 144 will supersede
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. Statement No. 144 requires long-lived
assets to be disposed of to be measured at the lower of carrying amount or fair
value less cost to sell on our balance sheet. The Company adopted the provisions
of Statement No. 144 on January 1, 2002. The adoption of Statement No. 144 has
not had a material effect on our financial position, results of operations or
liquidity.
C. In July 2002, we changed our method of accounting for stock-based
compensation to the fair value based method which is the preferred method of
accounting as provided for under FASB Statement No. 123, Accounting for
Stock-Based Compensation. The effect of the change in accounting for stock-based
compensation will be to recognize stock compensation expense over the vesting
period for those stock options granted on or after January 1, 2002. For stock
options granted prior to January 1, 2002, we will continue to apply the
provisions under Accounting Principles Board Opinion No. 25 unless the stock
options are modified or settled for cash. The impact of adopting Statement No.
123 is not expected to have a material effect on our financial position and
results of operations.
34
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 notes 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
flow and to lower our overall borrowing costs. To achieve these objectives we
issue long-term notes, 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
as of September 30, 2002. 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
---------------------------------------
2003 Thereafter Total Fair Value(2)
---- ---------- ----- -------------
Fixed rate debt -- $ 230.0(1) $ 230.0 $ 233.2
Average interest rate -- 7.99% 7.99%
Variable rate debt $102.2 -- $ 102.2 $ 102.2
Average interest rate 2.99% -- 2.99%
<FN>
(1) $110 million matures in 2007, $100 million matures in 2008 and $20 million
matures in 2009.
(2) We base the fair value of the fixed rate debt at September 30, 2002 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 September 30, 2002,
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.
Item 4. CONTROLS AND PROCEDURES
-----------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURE. We maintain disclosure controls
and procedures (as defined in Securities Exchange Act 1934 Rules 13a-14(c) and
15d-14(c)) that are designed to ensure that information required to be disclosed
in our Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, and that such information is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
Within 90 days prior to the date of this quarterly report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective.
35
CHANGES IN INTERNAL CONTROLS. There have not been any significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation. There were no significant
deficiencies or material weaknesses, and therefore no corrective actions were
taken.
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).
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).
36
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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 $250 million Credit Facility Agreement dated October 28, 2002
(filed herein).
B. Two reports on Form 8-K were filed by the registrant during the quarter
for which this report is filed.
On July 24, 2002, we filed a Form 8-K in connection with the issuance of
1,550,000 shares of the Company's common stock pursuant to the Company's
shelf registration statement on Form S-3 filed on June 16, 1999, as
amended on July 13, 1999.
On August 9, 2002, we filed a Form 8-K containing the certification of
Thomas A. Lewis, the Registrant's Chief Executive Officer, and Paul M.
Meurer, the Registrant's Chief Financial Officer, pursuant to 18 U.S.C.
ss. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.
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/ GREGORY J. FAHEY
--------------------------------------------
Date: November 7, 2002 Gregory J. Fahey
Vice President, Controller
(Principal Accounting Officer)
37
OFFICER CERTIFICATIONS
I, Thomas A. Lewis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Realty Income
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 6, 2002 /s/ THOMAS A. LEWIS
--------------------------------------------
Thomas A. Lewis
Chief Executive Officer and
Vice Chairman of the Board
38
I, Paul M. Meurer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Realty Income
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 6, 2002 /s/ PAUL M. MEURER
--------------------------------------------
Paul M. Meurer
Executive Vice President,
Chief Financial Officer and Treasurer
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
10.1 $250 million Credit Facility Agreement dated October 28, 2002
39