UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
Commission File Number 1-13374
REALTY INCOME CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 33-0580106
- ----------------------------------------- -------------------------------------
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
220 West Crest Street, Escondido, California 92025
(Address of principal executive offices)
Registrant's telephone number, including area code: (760)741-2111
Securities registered pursuant to Section 12 (b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
- -------------------------------------------- ------------------------------
Common Stock, $1.00 Par Value New York Stock Exchange
Preferred Stock Purchase Rights
Class B Preferred Stock, $1.00 Par Value New York Stock Exchange
Class C Preferred Stock, $1.00 Par Value New York Stock Exchange
8.25% Monthly Income Senior Notes, due 2008 New York Stock Exchange
- -------------------------------------------- ------------------------------
Securities registered pursuant to Section 12 (g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
1
At March 1, 2002, the aggregate market value of the Registrant's shares of
common stock, $1.00 par value, held by non-affiliates of the Registrant was
$1,016,101,000, at the New York Stock Exchange closing price of $31.40.
At March 1, 2002, the number of common shares outstanding was 33,222,867, the
number of Class B preferred shares outstanding was 2,745,700, the number of
Class C preferred shares outstanding was 1,380,000 and the number of Monthly
Income Senior Notes, due 2008 outstanding was 4,000,000.
Documents incorporated by reference: Part III, Item 10, 11 and 12 incorporate by
reference certain specific portions of the definitive proxy statement for Realty
Income Corporation's Annual Meeting to be held on May 7, 2002, to be filed
pursuant to Regulation 14A. Only those portions of the proxy statement which are
specifically incorporated by reference herein shall constitute a part of this
Annual Report.
The following items are amended:
o Item 6. Selected Financial Data
o Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
o Item 8. Financial Statements and Supplementary Data
REALTY INCOME CORPORATION
Index to Form 10-K / A
------------------------------
Page
PART II
Item 6: Selected Financial Data ................................................................................ 3
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations .................. 4
Item 8: Financial Statements and Supplementary Data ............................................................ 18
Signatures .......................................................................................................... 39
Officer Certifications .............................................................................................. 41
Exhibit Index ....................................................................................................... 43
2
PART II
Item 6: Selected Financial Data
(not covered by Independent Auditors' Report)
As of or for the years ended December 31, 2001 2000 1999 1998 1997
(dollars in thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------------------
Total assets (book value) $1,003,708 $934,766 $905,404 $759,234 $577,021
Cash and cash equivalents 2,467 3,815 773 2,533 2,123
Lines of credit and notes payable 315,300 404,000 349,200 294,800 132,600
Total liabilities 331,915 419,197 370,573 309,025 143,706
Total stockholders' equity 671,793 515,569 534,831 450,209 433,315
Net cash provided by operating
activities 90,035 56,590 72,154 64,645 52,692
Net change in cash and cash
equivalents (1,348) 3,042 (1,760) 410 564
Total revenue (2) 124,084 116,053 102,071 82,957 65,719
Income from operations (2) 55,653 46,433 43,429 39,418 32,166
Gain on sales of properties 10,478 6,712 1,301 526 1,082
Income from discontinued operations (2) 1,427 1,643 1,866 1,586 1,522
Extraordinary item -- -- (355) -- --
Cumulative effect of change in
accounting principle -- -- -- (226) --
Net income 67,558 54,788 46,241 41,304 34,770
Preferred stock dividends (9,712) (9,712) (5,229) -- --
Net income available to common
stockholders 57,846 45,076 41,012 41,304 34,770
Distributions paid to common
stockholders 64,871 58,262 55,925 52,301 44,367
Ratio of earnings to fixed
charges (1) 3.5x 2.6x 2.7x 3.8x 5.1x
Ratio of earnings to combined
fixed charges and preferred
stock dividends (1) 2.6x 2.0x 2.3x 3.8x 5.1x
Basic and diluted net income per
common share 1.98 1.69 1.53 1.55 1.48
Distributions paid per common
share 2.2425 2.1825 2.085 1.965 1.893
Distributions declared per common
share 2.2475 2.1875 2.095 1.975 1.895
Basic weighted average number of
common shares outstanding 29,225,359 26,684,598 26,822,285 26,629,936 23,568,831
Diluted weighted average number
of common shares outstanding 29,281,120 26,700,806 26,826,090 26,638,284 23,572,715
<FN>
(1) Ratio of Earnings to Fixed Charges is calculated by dividing earnings by
fixed charges. For this purpose, earnings consist of net income before interest
expense. Fixed charges are comprised of interest costs (including capitalized
interest) and the amortization of debt issuance costs.
3
(2) Our consolidated statements of income and consolidated statements of cash
flows have been revised from those originally reported for the years ended
December 31, 2001, 2000, 1999, 1998 and 1997 to separately reflect the results
of discontinued operations for 22 properties that were sold during the nine
months ended September 30, 2002 and nine properties held for sale at September
30, 2002. These results were previously included in income from operations. The
revisions had no impact on our consolidated balance sheets or statements of
stockholders' equity. The revision had no impact on net income or net income per
share of common stock for the years ended December 31, 2001, 2000, 1999, 1998
and 1997. These revisions are being made in conjunction with the expected filing
by the Company of a shelf registration statement, as a result of which the
Company is required to revise its historical consolidated financial statements
in accordance with Financial Accounting Statement No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets ("Statement No. 144".) Statement No.
144 became effective January 1, 2002 and 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.
</FN>
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
REVISION OF CONSOLIDATED STATEMENTS OF INCOME AND
CONSOLIDATED STATEMENTS OF CASH FLOWS
Our consolidated statements of income and consolidated statements of cash flows
have been revised from those originally reported for the years ended December
31, 2001, 2000 and 1999 to separately reflect the results of discontinued
operations for 22 properties that were sold during the nine months ended
September 30, 2002 and nine properties held for sale at September 30, 2002.
These results were previously included in income from operations. These
revisions had no impact on our consolidated balance sheets or statements of
stockholders' equity. These revisions had no impact on net income or net income
per share of common stock for the years ended December 31, 2001, 2000 and 1999.
These revisions are being made in conjunction with the expected filing by the
Company of a shelf registration statement, as a result of which the Company is
required to revise its historical consolidated financial statements in
accordance with Financial Accounting Statement No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets ("Statement No. 144".) Statement No.
144 became effective January 1, 2002 and 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. See the discussions
of discontinued operations in the "Results of Operations" section below.
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 1,124
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.
4
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.
At December 31, 2001, we owned a diversified portfolio:
o Of 1,124 properties;
o With an occupancy rate of 98.2%, or 1,104 of the 1,124 properties;
o Leased to 78 retail chains doing business in 24 retail industries;
o Located in 48 states;
o With over 9.6 million square feet of leasable space; and
o With an average leasable retail space of approximately 8,600 square feet
on approximately 62,300 square feet of land.
In addition to our real estate portfolio, at December 31, 2001, our subsidiary
Crest Net Lease, Inc. ("Crest Net") owned a portfolio:
o Of 24 retail properties;
o Located in 14 states;
o That will contain approximately 92,300 square feet of leasable space;
o That are 100% leased and are held for sale; and
o For a total investment of $22.3 million.
LIQUIDITY AND CAPITAL RESOURCES
CASH RESERVES. Realty Income is organized to operate 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 December 31, 2001, we had cash and cash
equivalents totaling $2.5 million.
We believe that our cash and cash equivalents on hand, cash provided from
operating activities and borrowing capacity are sufficient to meet our liquidity
needs for the foreseeable future. We intend, however, to use additional sources
of capital to fund property acquisitions and to repay our credit facilities.
CAPITAL FUNDING. We have a $200 million revolving, unsecured acquisition credit
facility that expires in December 2003. We also have a $25 million revolving,
unsecured credit facility that expires in February 2003. The credit facilities
currently bear interest at 1.225% over the London Interbank Offered Rate, or
LIBOR, and offer us other interest rate options. At March 1, 2002, we had
borrowing capacity of $151.5 million available on our credit facilities and an
outstanding balance of $73.5 million with an effective interest rate of 3.1%.
These credit facilities have been and are expected to be used to acquire
additional retail properties leased to national and regional retail chains under
long-term lease agreements. Any additional borrowings will increase our exposure
to interest rate risk. We have no mortgage debt on any of our properties.
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 March 1, 2002, we
have issued $209.3 million of common stock, preferred stock and debt securities
under the universal shelf registration statement. At March 1, 2002, a balance of
$199.9 million was available under our universal shelf registration statement.
5
In May 2001, we issued 2,850,000 shares of common stock at a price of $27.80 per
share. We issued an additional 100,000 shares in May 2001 when the underwriters
exercised their over-allotment option. The net proceeds of $77.5 million were
used to repay borrowings under our $200 million acquisition credit facility and
for other general corporate purposes.
In October 2001, we issued 2,600,000 shares of common stock at a price of $28.50
per share. We issued an additional 350,000 shares in November 2001 when the
underwriters exercised their over-allotment option. The net proceeds of $79.5
million were used to repay borrowings under our $200 million acquisition credit
facility and for other general corporate purposes.
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.
We believe that our stockholders are best served by a conservative capital
structure. At March 1, 2002, our total outstanding credit facility borrowings
and outstanding notes were $303.5 million or approximately 20.9% of our total
market capitalization of $1.45 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 March 1, 2002 of $31.40 per
share;
o Liquidation value of the Class B Preferred Stock;
o Liquidation value of the Class C Preferred Stock; and
o Outstanding borrowings on the credit facilities and outstanding notes at
March 1, 2002.
Historically, we have met our long-term capital needs through the issuance of
common stock, preferred stock and investment grade, long-term, unsecured notes.
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
seek to maintain a conservative debt level on our balance sheet and solid
interest and fixed charge coverage ratios.
We currently are assigned investment grade corporate credit ratings on our
senior unsecured notes from Fitch Ratings, Moody's Investor Service, Inc. and
Standard & Poor's Rating Group. Currently, Fitch Ratings 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.
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 Investor
Service, Inc. has assigned a rating of Ba1 and Standard & Poor's Rating Group
has assigned a rating of BB+. These ratings could change based upon, among other
things, our results of operations and financial condition.
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.
6
PROPERTY ACQUISITIONS. In 2001, we acquired 91 properties (the "New Properties")
located in 25 states. In 2001, we invested $131.8 million in the New Properties
and properties under development, which includes investments of $7.1 million for
properties acquired before 2001. Estimated unfunded development costs on
properties under construction at December 31, 2001 totaled $3.1 million. In
2001, we capitalized $401,000 for re-leasing costs and $547,000 for building
improvements on existing properties in our portfolio.
The initial weighted average annual unleveraged return on the $131.8 million
invested in 2001 is estimated to be 11.0%, 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 877,200 leasable square feet and
are 100% leased under net leases, with an average initial lease term of 20.1
years. At December 31, 2001, two 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 first half of 2002.
In 2000, we acquired 13 properties (the "2000 Properties") and invested
$70.0 million in the 2000 Properties and properties under development. In 2000,
we also paid $308,000 for re-leasing costs and $90,000 for building improvements
on existing properties in our portfolio. The initial weighted average annual
unleveraged return on the $70.0 million invested in 2000 is estimated to be
10.8%, computed in the same manner as 2001's estimated initial weighted average
annual unleveraged return and subject to the same uncertainty described above.
These 13 properties contain approximately 676,100 leasable square feet and are
100% leased under net leases, with an average initial lease term of 18.3 years.
DISTRIBUTIONS. We pay monthly distributions to our common stockholders. We
paid cash distributions to our common stockholders of $64.9 million in 2001,
$58.3 million in 2000 and $55.9 million in 1999.
We pay quarterly distributions to our Class B preferred stockholders. We paid
cash distributions to our Class B preferred stockholders of $6.4 million in both
2001 and 2000 and $3.9 million in 1999. Our Class B preferred stock was issued
in May 1999.
We pay monthly distributions to our Class C preferred stockholders. We paid cash
distributions to our Class C preferred stockholders of $3.3 million in both 2001
and 2000 and $1.4 million in 1999. Our Class C preferred stock was issued in
July 1999.
CREST NET LEASE. We created Crest Net in January 2000 to buy, own and sell
properties, primarily to buyers using tax-deferred exchanges under Section 1031
of the Internal Revenue Code of 1986, as amended. (the "Code"). In order to
comply with the REIT qualification requirements in force when we created Crest
Net, 5% of the common stock of Crest Net, which represented 100% of the voting
stock, was not owned by the Company. Effective for 2001, the Code was modified
to allow a REIT to own up to 100% of the voting stock and/or value of a
corporation that elects with the REIT and qualifies to be treated as a taxable
REIT subsidiary. Following the change in the Code, Realty Income and Crest Net
jointly elected to treat Crest Net as a taxable REIT subsidiary, effective
January 1, 2001, and in May 2001 we acquired the 5% of Crest Net's common stock
owned by certain members of our management and the management of Crest Net for
$507,000. The acquisition of the 5% of common stock was accounted for under the
purchase method of accounting. The disinterested members of our Board of
Directors unanimously approved this transaction. Crest Net originally issued
this stock for $450,000. Realty Income also received rights to the undistributed
earnings on the stock, which totaled $81,200. After this transaction, Realty
Income owns 100% of Crest Net's stock.
7
In 2000, we invested $8.6 million in Crest Net common stock. In February 2000,
we entered into a $25 million, revolving credit facility with Crest Net. The
financial statements of Crest Net are consolidated into Realty Income's
financial statements. All material intercompany transactions have been
eliminated in consolidation.
In 2001, Crest Net invested $24.7 million in 26 retail properties. Estimated
unfunded development costs on properties under construction at December 31, 2001
totaled $2.8 million. These 26 properties will contain approximately 102,300 of
leasable square feet, are 100% leased and have initial lease terms averaging
20.1 years. Three of these properties were sold in 2001.
In 2000, Crest Net invested $28.6 million in nine retail properties. These nine
properties contain approximately 398,100 leasable square feet, are 100% leased
and have initial lease terms averaging 19.0 years. Eight of these properties
were sold during 2000 and 2001.
In 2001, Crest Net sold nine properties from its inventory for $28.9 million and
we recorded a gain of $3.4 million, before income taxes. At the end of 2001,
Crest Net carried an inventory of $22.3 million, which is included in real
estate held for sale on our consolidated balance sheet.
In 2001, Crest Net generated $2.4 million in funds from operations for Realty
Income. The contribution, if any, to our FFO by Crest Net will depend on the
timing and the number of property sales achieved by Crest Net, if any, in any
given year.
In 2000, Crest Net sold two properties for $6.2 million and we recorded a gain
of $766,000, before income taxes. In 2000, Crest Net generated $422,000 in funds
from operations for Realty Income.
STOCK AND SENIOR DEBT PURCHASE PROGRAM. We regularly review our investment
options to determine the best use of our capital. In January 2000, our Board of
Directors authorized the purchase of up to $10 million of our outstanding common
stock, preferred stock and senior debt securities. From time to time since
January 2000, we concluded our share price justified purchasing shares since
this provided an attractive return on our investment capital. We purchased an
aggregate of $6.7 million of our securities from January 2000 through December
2001. In 2001, we invested $169,000 to purchase 6,800 shares of our common
stock.
8
FUNDS FROM OPERATIONS ("FFO")
Our FFO for 2001 increased by $10.6 million, or 15.8%, to $77.8 million versus
$67.2 million in 2000. FFO in 1999 was $65.9 million. The following is a
reconciliation of net income available to common stockholders to FFO and
information regarding distributions paid and the diluted weighted average number
of shares outstanding for 2001, 2000 and 1999 (dollars in thousands):
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $ 57,846 $ 45,076 $ 41,012
Depreciation and amortization:
Continuing operations 28,535 28,413 25,385
Discontinued operations 590 590 567
Extraordinary item -- -- 355
Depreciation of furniture, fixtures and equipment (115) (128) (101)
Provision for impairment losses:
Continuing operations 1,380 -- --
Discontinued operations 70 -- --
Gain on sales of investment properties:
Continuing operations (10,478) (6,712) (1,301)
- -----------------------------------------------------------------------------------------------------------------------
Total funds from operations $ 77,828 $ 67,239 $ 65,917
=======================================================================================================================
Distributions paid to common stockholders $ 64,871 $ 58,262 $ 55,925
FFO in excess of distributions paid to
common stockholders $ 12,957 $ 8,977 $ 9,992
Diluted weighted average number of shares
outstanding 29,281,120 26,700,806 26,826,090
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 2001 increased by $10.7 million, or 15.7%, to $78.9 million versus
$68.2 million in 2000. AFFO for 1999 was $66.5 million.
9
The following is a reconciliation of FFO to adjusted FFO for the years ended
December 31, 2001, 2000 and 1999. The adjustments are for non-cash items and
capitalized expenditures on existing properties in our portfolio (dollars in
thousands):
2001 2000 1999
------------------------------------------------------------------------------------------------------------------
Funds from operations $ 77,828 $ 67,239 $ 65,917
Plus:
Amortization of settlements on
treasury lock agreements 756 756 756
Amortization of deferred financing costs 958 990 774
Amortization of stock compensation 301 194 216
Less:
Capitalized leasing costs and commissions (401) (308) (242)
Capitalized building improvements (547) (90) (148)
Straight line rent (12) (534) (747)
------------------------------------------------------------------------------------------------------------------
Total adjusted funds from operations $ 78,883 $ 68,247 $ 66,526
==================================================================================================================
Distributions paid to common stockholders $ 64,871 $ 58,262 $ 55,925
AFFO in excess of distributions paid to
common stockholders $ 14,012 $ 9,985 $ 10,601
Diluted weighted average number of shares
outstanding 29,281,120 26,700,806 26,826,090
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 $2.4 million in FFO for Realty Income during the 2001 and
$422,000 during 2000. Crest Net Lease was formed in January 2000.
10
The following is a calculation of the FFO generated by Crest Net in 2001 and
2000 (dollars in thousands):
2001 2000
---------------------------------------------------------------------------------------------------
Gains from the sales of real estate acquired for
resale $ 3,374 $ 766
Rent and other revenue 1,816 1,234
Interest expense (869) (913)
General and administrative expenses (496) (333)
State and federal income taxes (1,400) (332)
---------------------------------------------------------------------------------------------------
Funds from operations contributed by Crest Net $ 2,425 $ 422
===================================================================================================
RESULTS OF OPERATIONS
Management is required to make a number of assumptions and estimates that
directly impact the consolidated financial statements and related disclosures.
Those assumptions and estimates are the basis for certain of our accounting
policies described in note 2 to the consolidated financial statements. The
accounting policies that are most important to the portrayal of the Company's
financial condition and results of operations, and require management's most
difficult, subjective or complex judgments, are considered to be critical
accounting policies. Because of the uncertainties inherent in making assumptions
and estimates regarding unknown future outcomes, events may result in
significant differences between our estimates and actual results. Management
believes that each of our assumptions and estimates are appropriate under the
circumstances, and represent the most likely outcome. We believe our critical
accounting policies relate to depreciable lives of our real estate assets and
recoverability (impairment) of our real estate assets.
THE FOLLOWING IS A COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 2001 TO THE YEAR ENDED DECEMBER 31, 2000.
Rental revenue was $119.9 million for 2001 versus $114.9 million for 2000, an
increase of $5.0 million, or 4.4%. The increase in rental revenue is
attributable to:
o The 91 properties acquired in 2001, which generated revenue of $2.9 million;
o The 13 properties acquired in 2000, which generated revenue of $6.0 million in
2001 compared to $1.7 million in 2000, an increase of $4.3 million;
o Properties owned by Crest Net, which generated revenue of $1.8 million in 2001
compared to $1.2 million in 2000, an increase of $588,000;
o Properties sold during 2000 and 2001, which generated revenue of $1.4 million
in 2001 as compared to $7.0 million in 2000, a decrease of $5.6 million;
o Net rental increase of $900,000 on development properties acquired before 2000
that started paying rent in 2000 and properties that were vacant during part
of 2000 or 2001; and
o Same store rents generated on 953 leased properties owned in all of both 2001
and 2000 increased by $1.7 million, or 1.7%, to $103.3 million from
$101.6 million.
Of the 1,124 properties in the portfolio at December 31, 2001, 1,119, or 99.6%,
are single-tenant properties with the remaining properties being multi-tenant
properties. Of the 1,119 single-tenant properties, 1,099, or 98.2%, were net
leased with a weighted average remaining lease term (excluding extension
options) of approximately 10.4 years. Of our 1,099 leased single-tenant
properties, 1,087, or 98.9%, were under leases that provide for increases in
rents through:
11
o Base rent increases tied to a consumer price index with adjustment ceilings;
o Percentage 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, was $1.7 million in 2001
and $2.0 million in 2000.
Our portfolio of quality retail real estate owned under net leases continues to
perform well and provide dependable lease revenue supporting the payment of
monthly dividends. At December 31, 2001, our property portfolio of 1,124 retail
properties was 98.2% leased with only 20 properties available for lease or sale.
Of the 20 properties not leased at December 31, 2001, transactions to lease or
sell eight properties were underway or completed as of March 1, 2002. We
anticipate these transactions to be completed during the first half of 2002;
although we cannot assure you that all of these properties will be sold or
leased within this period.
GAIN ON SALES OF REAL ESTATE ACQUIRED FOR RESALE. In 2001, Crest Net sold nine
properties for $28.9 million and we recognized a gain of $3.4 million, before
income taxes. In 2000, Crest Net sold two properties for $6.2 million and we
recognized a gain of $766,000, before income taxes.
At December 31, 2001, Crest Net had $22.3 million invested in 24 properties,
which are held for sale. It is Crest Net's intent to carry an average inventory
of between $20 to $25 million in real estate on an ongoing basis. Crest Net
generates an earnings spread on the difference between the lease payments it
receives and the cost of capital used to acquire the properties. It is our
belief that at this level of inventory, these earnings will cover the ongoing
operating expenses of Crest Net.
INTEREST EXPENSE. The following is a summary of the five components of interest
expense for 2001 and 2000 (dollars in thousands):
2001 2000 Net Change
- ----------------------------------------------------------------------------------------------------------------------
Interest on outstanding loans and notes $ 24,479 $ 30,259 $ (5,780)
Amortization of settlements on treasury lock
agreements 756 756 --
Credit facility commitment fees 513 508 5
Amortization of credit facility origination costs
and deferred bond financing costs 1,103 1,072 31
Interest capitalized (385) (1,048) 663
- ----------------------------------------------------------------------------------------------------------------------
Interest expense $ 26,466 $ 31,547 $ (5,081)
================================================================ ================= ================ ==================
Credit facilities and notes outstanding (dollars in thousands):
Years ended December 31, 2001 2000 Net Change
- ----------------------------------------------------------------------------------------------------------------------
Average outstanding balances $326,050 $384,921 $(58,871)
Average interest rates 7.51% 7.86% (0.35%)
Interest on outstanding loans and notes was $5.8 million lower in 2001 than in
2000 primarily due to a decrease of $58.9 million in the average outstanding
balances and a decrease of 35 basis points in our average interest rate. 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 6.36% in 2001 from 7.67% in
2000. The majority of our credit facilities interest rate reductions in 2001
occurred during the second half of the year.
12
At December 31, 2001, the weighted average interest rate on our:
o Credit facility borrowings of $85.3 million was 3.13%;
o Notes payable of $230 million was 7.99%; and
o Combined outstanding credit facilities and notes of $315.3 million was 6.68%.
Our debt service coverage ratio for 2001 was 4.4 times and for 2000 was 3.5
times. Debt service coverage ratio is calculated as follows: earnings (income
from operations) before interest, taxes, depreciation, amortization and
impairment losses ("EBITDA") divided by interest expense. Our EBITDA for the
year ended December 31, 2001 and 2000 was $115.9 million and $109.4 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 2001 was 3.2 times and for 2000 was 2.7 times.
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 $28.5 million in 2001 versus $28.4 million in
2000. The increase in depreciation and amortization was due to the acquisition
of properties in 2001, which was offset by property sales in 2001. The majority
of our 2001 acquisitions occurred during the fourth quarter. 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.
Amortization of goodwill for each of the years 2001, 2000 and 1999 was $924,000.
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," effective January 2002, our goodwill
will no longer be 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.
GENERAL AND ADMINISTRATIVE EXPENSES increased by $996,000 to $7.8 million in
2001 versus $6.8 million in 2000. General and administrative expenses as a
percentage of revenue increased to 6.3% in 2001 as compared to 5.9% in 2000.
Included in general and administrative expenses are $496,000 and $333,000 of
expenses attributable to Crest Net in 2001 and 2000, respectively. General and
administrative expenses, excluding expenses attributable to Crest Net, increased
primarily due to increases in the cost of living, which includes increases in
payroll costs.
We had 53 employees at March 1, 2002 compared to 49 employees at March 1, 2001.
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 December 31, 2001, 20 properties
were available for lease or sale, as compared to 25 at December 31, 2000.
PROPERTY EXPENSES were $2.4 million in 2001 and $2.0 million in 2000. The
$409,000 increase in property expenses is primarily attributable to an increase
in portfolio property insurance and costs associated with properties available
for lease.
13
OTHER EXPENSES were $1.8 million in 2001 and $807,000 in 2000. The increase in
2001 is primarily attributable to an increase in Crest Net income taxes. The
following is a summary of our other expenses in 2001 and 2000 (dollars in
thousands):
2001 2000 Net Change
- ----------------------------------------------------------------------------------------------------------------------
Realty Income state and local income taxes $ 392 $ 475 $ (83)
Crest Net income taxes 1,400 332 1,068
- ----------------------------------------------------------------------------------------------------------------------
Other expenses $ 1,792 $ 807 $ 985
======================================================================================================================
PROVISION FOR IMPAIRMENT LOSSES of $1.45 million was recorded in 2001, of which
$70,000 is included in income from discontinued operations. No provision for
impairment loss was recorded in 2000 or 1999. 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.
GAIN ON SALES OF INVESTMENT PROPERTIES. In 2001, we sold 35 properties for a
total of $39.5 million and recognized a gain of $10.5 million. In 2000, we sold
21 properties for a total of $45.2 million and recognized a gain of $6.7
million. Included in the 21 properties sold in 2000, are two properties leased
by one of our tenants that we exchanged, valued at $22.7 million, for two other
properties owned by that tenant. The gain recognized from property sales in 2001
was $10.5 million, or $3.8 million greater than the gain recognized from
property sales in 2000 of $6.7 million.
We have an active portfolio management program that incorporates the sale of
assets when we believe the reinvestment of the sales proceeds will generate
higher returns, enhance the credit quality of our real estate portfolio or
extend our average remaining lease terms. At December 31, 2001, we classified
real estate with a carrying amount of $23.4 million as held for sale, of which
$22.3 million is owned by Crest Net. Additionally, we anticipate selling
investment 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 investment properties during the next 12 months. We intend to invest
these proceeds into new retail property acquisitions.
14
INCOME FROM DISCONTINUED OPERATIONS. In accordance with Statement No. 144, the
operations of nine properties listed as held for sale at September 30, 2002,
plus 22 properties sold during the first nine months of 2002 were reported as
income from discontinued operations for the years 2001, 2000 and 1999. The
following is a summary of our income from discontinued operations for the years
ended December 31, 2001 and 2000 (dollars in thousands):
2001 2000
- ------------------------------------------------------------------ -------------
Rental revenue $ 2,173 $ 2,256
Other revenue 14 --
Depreciation and amortization (590) (590)
Property expenses (100) (23)
Provision for impairment loss (70) --
- --------------------------------------------------------------------------------
Income from discontinued operations $ 1,427 $ 1,643
================================================================================
PREFERRED STOCK DIVIDENDS. We paid preferred stock dividends of $9.7 million in
both 2001 and 2000.
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS in 2001 increased by $12.7 million
to $57.8 million versus $45.1 million in 2000.
The calculation to determine net income available to common stockholders
includes gains and losses from the sale of investment properties. The amount of
gains and losses varies from year to year based on the timing of property sales
and can significantly impact net income available to common stockholders.
THE FOLLOWING IS A COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 2000 TO THE YEAR ENDED DECEMBER 31, 1999.
RENTAL REVENUE was $114.9 million for 2000 versus $101.9 million for 1999, an
increase of $13.0 million, or 12.8%. The increase in rental revenue was
primarily due to the acquisition of 110 properties in 1999. These properties
generated revenue of $15.4 million in 2000 compared to $6.9 million in 1999, an
increase of $8.5 million. Included in rental revenue for 2000 is $1.2 million
from properties owned by Crest Net.
Percentage rent, which is included in rental revenue, was $2.0 million in 2000
and $1.7 million in 1999. Same store rents generated on 867 leased properties
owned during all of both 2000 and 1999 increased by $1.5 million or 1.7%, to
$88.9 million from $87.4 million.
GAIN ON SALES OF REAL ESTATE ACQUIRED FOR RESALE. In 2000, Crest Net sold two
properties for $6.2 million and we recognized a gain on the sales of $766,000,
before income taxes. Crest Net was formed in 2000.
15
INTEREST EXPENSE. The following is a summary of the five components of interest
expense for 2000 and 1999 (dollars in thousands):
2000 1999 Net Change
- ----------------------------------------------------------------------------------------------------------------------
Interest on outstanding loans and notes $ 30,259 $ 24,254 $6,005
Amortization of settlements on treasury lock
agreements 756 756 --
Credit facility commitment fees 508 268 240
Amortization of credit facility origination costs
and deferred bond financing costs 1,072 839 233
Interest capitalized (1,048) (1,644) 596
- ----------------------------------------------------------------------------------------------------------------------
Interest expense $ 31,547 $ 24,473 $7,074
======================================================================================================================
Credit facilities and notes outstanding (dollars in thousands):
Years ended December 31, 2000 1999 Net Change
- ----------------------------------------------------------------------------------------------------------------------
Average outstanding balances $384,921 $325,564 $59,357
Average interest rates 7.86% 7.45% 0.41%
Interest on outstanding loans and notes was $6.0 million higher in 2000 than in
1999 primarily due to an increase of $59.4 million in the average outstanding
balances and an increase of 41 basis points in our average interest rate. The
average borrowing rate on our credit facilities during 2000 was 7.67%, or 150
basis points higher than our average borrowing rate during 1999. During 2000,
LIBOR increased, which increased the average borrowing rate on our credit
facilities.
Our debt service coverage ratio for the years ended December 31, 2000 and 1999
was 3.5 times and 3.9 times, respectively. Our EBITDA (as defined above) for the
years ended December 31, 2000 and 1999 was $109.4 million and $96.2 million,
respectively. Our fixed coverage ratio for 2000 was 2.7 times and for 1999 was
3.2 times.
DEPRECIATION AND AMORTIZATION was $28.4 million in 2000 versus $25.4 million in
1999. The increase in 2000 was primarily due to the full-year effect of
depreciation on the properties acquired in 1999.
GENERAL AND ADMINISTRATIVE EXPENSES increased by $300,000 to $6.8 million in
2000 versus $6.5 million in 1999. General and administrative expenses as a
percentage of revenue decreased to 5.9% in 2000 as compared to 6.4% in 1999.
Included in general and administrative expenses for 2000 are $305,000 of
expenses attributable to Crest Net.
PROPERTY EXPENSES were $2.0 million in 2000 and $1.8 million in 1999. The
$193,000 increase in property expenses is primarily attributable to costs
associated with properties available for lease.
16
Other expenses were $807,000 in 2000 and $424,000 in 1999. The increase in 2000
is primarily attributable to Crest Net state and federal income taxes of
$332,000. The following is a summary of our other expenses for the years ended
December 31, 2000 and 1999 (dollars in thousands):
2000 1999 Net Change
- ----------------------------------------------------------------------------------------------------------------------
Realty Income state and local income taxes $ 475 $ 424 $ 51
Crest Net income taxes 332 -- 332
- ----------------------------------------------------------------------------------------------------------------------
Other expenses $ 807 $ 424 $ 383
======================================================================================================================
NO PROVISION FOR IMPAIRMENT LOSS was recorded in 2000 or 1999.
GAIN ON SALES OF INVESTMENT PROPERTIES. In 2000, we sold 21 properties for a
total of $45.2 million and recognized a gain of $6.7 million. Included in the 21
properties sold in 2000, are two properties leased by one of our tenants that we
exchanged, valued at $22.7 million, for two other properties owned by that
tenant. In 1999, we sold three properties for $9.4 million and recognized a gain
of $1.3 million.
INCOME FROM DISCONTINUED OPERATIONS. The following is a summary of our income
from discontinued operations for the years ended December 31, 2000 and 1999
(dollars in thousands):
2000 1999
- --------------------------------------------------------------------------------
Rental revenue $ 2,256 $ 2,408
Other revenue -- 32
Depreciation and amortization (590) (567)
Property expenses (23) (7)
Provision for impairment loss -- --
- --------------------------------------------------------------------------------
Income from discontinued operations $ 1,643 $ 1,866
================================================================================
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF CREDIT FACILITY. In December 1999,
our $170 million credit facility was canceled simultaneously with the execution
of our $200 million credit facility and unamortized fees of $355,000 relating to
the $170 million credit facility were recorded as an extraordinary loss on the
early extinguishment of the credit facility in 1999.
PREFERRED STOCK DIVIDENDS. We paid preferred stock dividends of $9.7 million in
2000 and $5.2 million in 1999. Our outstanding preferred stock was issued during
the second and third quarters of 1999.
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS in 2000 increased 10.0%, to $45.1
million versus $41.0 million in 1999.
17
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 1,099 of the 1,124 properties in the portfolio are leased
to tenants under net leases whereby 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.
Item 8: Financial Statements and Supplementary Data
-------------------------------------------
Table of Contents Page
A. Independent Auditors' Report......................................................... 19
B. Consolidated Balance Sheets,
December 31, 2001 and 2000........................................................... 20
C. Consolidated Statements of Income,
Years ended December 31, 2001, 2000 and 1999......................................... 21
D. Consolidated Statements of Stockholders' Equity,
Years ended December 31, 2001, 2000 and 1999......................................... 22
E. Consolidated Statements of Cash Flows,
Years ended December 31, 2001, 2000 and 1999......................................... 23
F. Notes to Consolidated Financial Statements........................................... 24
G. Consolidated Quarterly Financial Data
(unaudited) for 2001 and 2000........................................................ 38
H. Schedule III Real Estate and Accumulated Depreciation (incorporated by reference to the Schedule III Real Estate and
Accumulated Depreciation filed with Realty Income's Form 10-K for the fiscal year ended December 31, 2001)
Schedules not filed: All schedules, other than that indicated in the Table of
Contents, have been omitted as the required information is inapplicable or the
information is presented in the financial statements or related notes.
18
Independent Auditors' Report
The Board of Directors and Stockholders
Realty Income Corporation:
We have audited the consolidated financial statements of Realty Income
Corporation and subsidiaries as listed in the accompanying table of contents. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule III listed in the accompanying
table of contents. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Realty Income
Corporation and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule III, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/KPMG LLP
San Diego, California
January 18, 2002,
except as to Note 22, which is as of February 28, 2002; and as to the tenth
paragraph of Note 2, Notes 3, 12B and 20, which are as of December 9, 2002
19
REALTY INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-----------------------------------------
December 31, 2001 and 2000
(dollars in thousands, except per share data)
2001 2000
- ------------------------------------------------------------------------------------------------------------------
ASSETS Real estate, at cost:
Land $ 412,455 $ 368,057
Buildings and improvements 765,707 705,470
- ------------------------------------------------------------------------------------------------------------------
1,178,162 1,073,527
Less accumulated depreciation and amortization (233,848) (212,379)
- ------------------------------------------------------------------------------------------------------------------
Net real estate held for investment 944,314 861,148
Real estate held for sale, net 23,356 33,130
- ------------------------------------------------------------------------------------------------------------------
Net real estate 967,670 894,278
Cash and cash equivalents 2,467 3,815
Accounts receivable 4,857 5,053
Goodwill, net 17,206 18,130
Other assets 11,508 13,490
- ------------------------------------------------------------------------------------------------------------------
Total assets $ 1,003,708 $934,766
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Distributions payable $ 6,238 $ 4,914
Accounts payable and accrued expenses 5,834 5,969
Other liabilities 4,543 4,314
Lines of credit payable 85,300 174,000
Notes payable 230,000 230,000
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 331,915 419,197
- ------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity
Preferred stock and paid in capital, par value $1.00 per share,
20,000,000 shares authorized, 4,125,700 shares issued and outstanding 99,368 99,368
Common stock and paid in capital, par value $1.00 per share,
100,000,000 shares authorized, 32,829,111 and 26,563,519
shares issued and outstanding in 2001 and 2000, respectively 795,505 630,932
Distributions in excess of net income (223,080) (214,731)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 671,793 515,569
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,003,708 $ 934,766
==================================================================================================================
The accompanying notes to consolidated financial statements are
an integral part of these statements.
20
REALTY INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------
Years Ended December 31, 2001, 2000 and 1999
(dollars in thousands, except per share data)
2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
REVENUE
Rental $ 119,888 $ 114,934 $ 101,862
Gain on sales of real estate acquired for resale 3,374 766 --
Interest and other 822 353 209
- ---------------------------------------------------------------------------------------------------------------------
124,084 116,053 102,071
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES
Interest 26,466 31,547 24,473
Depreciation and amortization 28,535 28,413 25,385
General and administrative 7,840 6,844 6,544
Property 2,418 2,009 1,816
Other 1,792 807 424
Provision for impairment losses 1,380 -- --
- ---------------------------------------------------------------------------------------------------------------------
68,431 69,620 58,642
- ---------------------------------------------------------------------------------------------------------------------
Income from operations 55,653 46,433 43,429
Gain on sales of investment properties 10,478 6,712 1,301
- ---------------------------------------------------------------------------------------------------------------------
Income from continuing operations 66,131 53,145 44,730
Income from discontinued operations 1,427 1,643 1,866
Extraordinary loss on early extinguishment
of credit facility -- -- (355)
- ---------------------------------------------------------------------------------------------------------------------
Net income 67,558 54,788 46,241
Preferred stock dividends (9,712) (9,712) (5,229)
- ---------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $ 57,846 $ 45,076 $ 41,012
=====================================================================================================================
Income from continuing operations per common share:
Basic and diluted $ 1.93 $ 1.63 $ 1.47
Net income available to common stockholders
per common share:
Basic and diluted $ 1.98 $ 1.69 $ 1.53
The accompanying notes to consolidated financial statements are
an integral part of these statements.
21
REALTY INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------
Years Ended December 31, 2001, 2000 and 1999
(dollars in thousands)
Preferred Common
Shares of stock and stock and Distributions
------------------------------
Preferred Common paid in paid in in excess of
Stock Stock capital capital net income Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 -- 26,817,103 $ -- $ 636,486 $ (186,277) $ 450,209
Net income -- -- -- -- 46,241 46,241
Distributions paid and payable -- -- -- -- (61,423) (61,423)
Shares issued in stock offering, net
of offering costs of $3,821 4,140,000 -- 99,679 -- -- 99,679
Shares issued -- 5,600 -- 139 -- 139
Shares forfeited -- (539) -- (14) -- (14)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 4,140,000 26,822,164 99,679 636,611 (201,459) 534,831
Net income -- -- -- -- 54,788 54,788
Distributions paid and payable -- -- -- -- (68,060) (68,060)
Shares purchased (14,300) (284,500) (276) (6,223) -- (6,499)
Shares issued -- 27,800 -- 593 -- 593
Shares forfeited -- (1,945) -- (49) -- (49)
Stock offering costs -- -- (35) -- -- (35)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 4,125,700 26,563,519 99,368 630,932 (214,731) 515,569
Net income -- -- -- -- 67,558 67,558
Distributions paid and payable -- -- -- -- (75,907) (75,907)
Shares issued in stock offerings, net
of offering costs of $9,044 -- 5,900,000 -- 157,041 -- 157,041
Shares purchased -- (6,800) -- (169) -- (169)
Shares issued -- 380,527 -- 9,340 -- 9,340
Shares forfeited -- (8,135) -- (202) -- (202)
Deferred stock compensation, net of
forfeitures and amortization -- -- -- (1,437) -- (1,437)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 4,125,700 32,829,111 $ 99,368 $ 795,505 $ (223,080) $ 671,793
====================================================================================================================================
The accompanying notes to consolidated financial statements are
an integral part of these statements.
22
REALTY INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------
Years Ended December 31, 2001, 2000 and 1999
(dollars in thousands)
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 67,558 $ 54,788 $ 46,241
Adjustments to net income:
Depreciation and amortization 28,535 28,413 25,385
Provision for impairment losses 1,380 -- --
Income from discontinued operations (1,427) (1,643) (1,866)
Cash from discontinued operations 2,087 2,233 2,433
Investments in real estate acquired for resale (24,535) (28,577) --
Proceeds from sales of real estate acquired for resale 28,912 6,215 --
Gain on sales of real estate acquired for resale (3,374) (766) --
Gain on sales of investment properties (10,478) (6,712) (1,301)
Extraordinary item -- -- 355
Amortization of deferred stock compensation 301 -- --
Changes in assets and liabilities:
Accounts receivable and other assets 1,125 485 25
Accounts payable, accrued expenses and other liabilities (49) 2,154 882
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 90,035 56,590 72,154
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment properties 39,543 22,536 9,431
Acquisition of and additions to investment properties (132,291) (56,142) (174,056)
Increase in other assets -- (450) --
Payment of other liabilities -- -- (1,713)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (92,748) (34,056) (166,338)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from lines of credit 196,300 157,700 221,200
Payments under lines of credit (285,000) (102,900) (186,800)
Distributions to common stockholders (64,871) (58,262) (55,925)
Distributions to preferred stockholders (9,712) (9,712) (5,229)
Proceeds from common stock offerings,
net of offering costs 157,041 -- --
Proceeds from preferred stock offerings,
net of offering costs -- (35) 99,679
Proceeds from other stock issuances 7,776 216 --
Proceeds from notes issued, net of costs of $501 -- -- 19,499
Shares purchased (169) (6,499) --
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,365 (19,492) 92,424
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,348) 3,042 (1,760)
Cash and cash equivalents, beginning of year 3,815 773 2,533
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,467 $ 3,815 $ 773
============================================================================================================================
For supplemental disclosures, see note 16.
The accompanying notes to consolidated financial statements are
an integral part of these statements.
23
REALTY INCOME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------
December 31, 2001, 2000 and 1999
1. ORGANIZATION AND BASIS OF PRESENTATION
Realty Income Corporation ("Realty Income," the "Company," "we" or "our") is
organized as a Maryland corporation. We invest in commercial retail real estate
and have elected to be taxed as a real estate investment trust ("REIT"). At
December 31, 2001, we owned 1,124 properties in 48 states containing over 9.6
million leasable square feet, excluding 24 properties owned by our subsidiary,
Crest Net Lease, Inc. ("Crest Net").
Our consolidated statements of income and consolidated statements of cash flows
have been revised from those originally reported for the years ended December
31, 2001, 2000 and 1999 to separately reflect the results of discontinued
operations for 22 properties that were sold during the nine months ended
September 30, 2002 and nine properties listed as held for sale at September 30,
2002. These revisions had no impact on our consolidated balance sheets or
statements of stockholders' equity. These revisions had no impact on net income
or net income per share of common stock for the years ended December 31, 2001,
2000 and 1999.
These revisions are being made in conjunction with the expected filing by the
Company of a shelf registration statement, as a result of which the Company is
required to revise its historical consolidated financial statements in
accordance with Financial Accounting Statement No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets ("Statement No. 144".) Statement No.
144 became effective January 1, 2002 and 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 tenth paragraph
of Note 2, Note 3, 12B and 20 to the consolidated financial statements show the
effects of the revisions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of Realty Income, Crest Net and other entities for which we
make operational and financial decisions (control), after elimination of all
material intercompany balances and transactions.
Cash Equivalents - We consider all short-term, highly liquid investments that
are readily convertible to cash and have an original maturity of three months or
less at the time of purchase to be cash equivalents.
Depreciation and Amortization - Depreciation of buildings and improvements and
amortization of goodwill are computed using the straight-line method over an
estimated useful life of 25 years. Amortization of goodwill for each of the
years 2001, 2000 and 1999 was $924,000. In accordance with the Financial
Accounting Standards Board Statement No. 142, "Goodwill and Other Intangible
Assets," effective January 2002, our goodwill will no longer be amortized, but
instead will be tested for impairment at least annually.
Leases - All leases are accounted for as operating leases. Under this method,
lease payments are recognized as revenue on a straight-line basis over the lease
term regardless of when the payments are due. We recognize contingent rent
revenue from tenants only after the tenants exceed their sales breakpoint.
Rental increases based upon changes in the consumer price indexes are recognized
only after the changes in the indexes have occurred, and then applied according
to the lease agreements.
24
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 reflects the basic principles of revenue recognition in existing accounting
principles generally accepted in the United States of America ("U.S."). The
Company adopted SAB 101 in the first quarter of 2000, which had no effect on the
Company's consolidated financial statements.
Federal Income Taxes - We have elected to be taxed as a REIT under the Internal
Revenue Code of 1986, as amended ("IRS Code"). We believe Realty Income has
qualified and continues to qualify as a REIT and therefore will be permitted to
deduct distributions paid to its stockholders, eliminating the federal taxation
of income represented by those distributions at the Company's level.
Accordingly, no provision has been made for federal income taxes in the
accompanying consolidated financial statements, except for federal income taxes
of Crest Net, which totaled $1.2 million and $264,000 in 2001 and 2000,
respectively, and are included in other expenses.
Earnings and profits, which determine the taxability of distributions to
stockholders, differ from net income reported for financial reporting purposes
due to differences for IRS Code purposes in the estimated useful lives and
methods used to compute depreciation and the carrying value (basis) on the
investments in properties, among other things.
The following reconciles our net income available to common stockholders to
taxable income for the year ended December 31, 2001 (dollars in thousands)
(unaudited):
Net income available to common stockholders $ 57,846
Tax gain on sale of real estate less than book gain (12,734)
Dividends received from Crest Net 2,500
Elimination of net revenue and expenses from Crest Net (3,314)
Preferred dividends not deductible for tax 9,712
Depreciation and amortization timing differences 9,951
Impairment losses 1,450
Other adjustments (617)
- --------------------------------------------------------------------------------
Estimated taxable net income $ 64,794
================================================================================
Maintenance and Repairs - Expenditures for maintenance and repairs are expensed
as incurred. Replacements and betterments are capitalized.
Provision for Impairment Losses - We review long-lived assets, including
goodwill, for impairment whenever events or changes in circumstances indicate
that the carrying amount of an 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 loss is measured
as the amount by which the current book value of the asset exceeds the fair
value of the asset. If a property is held for sale, it is carried at the lower
of cost or estimated fair value, less costs to sell. A provision for impairment
losses of $1.45 million was recorded in 2001, of which $70,000 is included in
income from discontinued operations. No provision for impairment loss was
recorded in 2000 or 1999.
Net Income Per Common Share - Basic net income per common share is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding during each period. Diluted net income per
common share is computed by dividing the amount of net income available to
common stockholders for the period by the number of common shares that would
have been outstanding assuming the issuance of common shares for all potentially
dilutive common shares outstanding during the reporting period.
25
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 years ended December 31:
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Weighted average shares used for
basic net income per share computation 29,225,359 26,684,598 26,822,285
Incremental shares from the assumed
exercise of stock options 55,761 16,208 3,805
- -----------------------------------------------------------------------------------------------------------------------
Adjusted weighted average shares used for
diluted net income per share computation 29,281,120 26,700,806 26,826,090
=======================================================================================================================
In 2001, no stock options were anti-dilutive. In 2000 and 1999, 296,653 and
186,181 stock options, respectively, were anti-dilutive and therefore excluded
from the incremental shares from the assumed exercise of stock options.
Stock Option Plan - We account for our stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), permits entities to recognize as expense over
the vesting period, the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
income per share disclosures for employee stock option grants made after 1994,
as if the fair-value based method defined in SFAS No. 123 had been applied. We
have elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
Derivative Financial Instruments - In two instances, in 1996 and 1998, we used
interest rate treasury lock agreements to protect against the possibility of
rising interest rates. These instruments each met the requirement for hedge
accounting, including a high correlation to a specific transaction. Accordingly,
the amount received and paid under the terms of the agreements is recognized in
income as a yield adjustment to interest expense.
Use of Estimates - The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Management believes that the estimates and assumptions that are most important
to the portrayal of the Company's financial condition and results of operations,
in that they require management's most difficult, subjective or complex
judgments, form the basis for the accounting policies deemed to be most critical
to the Company. These critical accounting policies relate to depreciable lives
of our real estate assets and recoverability (impairment) of our real estate
assets. We believe our estimates and assumptions related to these critical
accounting policies are appropriate under the circumstances; however, should
future events or occurrences result in unanticipated consequences, there could
be a material impact on our future financial condition or results of operations.
Reclassifications - Certain of the 2000 and 1999 balances have been reclassified
to conform to the 2001 presentation.
26
3. DISCONTINUED OPERATIONS
The operations of nine properties listed as held for sale at September 30, 2002,
plus 22 properties sold during the first nine months of 2002 were reported as
income from discontinued operations for the years ended 2001, 2000 and 1999. The
following is a summary of our income from discontinued operations for the years
ended December 31, 2001, 2000 and 1999 (dollars in thousands):
2001 2000 1999
----------------------------------------------------------------------------------------------------
Rental revenue $ 2,173 $ 2,256 $ 2,408
Other revenue 14 -- 32
Depreciation and amortization (590) (590) (567)
Property expenses (100) (23) (7)
Provision for impairment loss (70) -- --
----------------------------------------------------------------------------------------------------
Income from discontinued operations $ 1,427 $ 1,643 $ 1,866
====================================================================================================
Basic and diluted income from discontinued
operations per common share $ 0.05 $ 0.06 $ 0.07
The following is a summary of the assets and liabilities associated with the
nine properties listed as held for sale at September 30, 2002, plus 22
properties sold during the first nine months of 2002 (dollars in thousands):
As of December 31, 2001 2000
-------------------------------
Segment net real estate:
Automotive parts $ 347 $ 364
Child care 2,298 2,480
Health and fitness 87 87
Home furnishings 2,696 2,788
Restaurants 6,640 6,934
Other non-reportable segments 1,590 1,638
- --------------------------------------------------------------------------------
Total net real estate 13,658 14,291
Non-real estate assets 76 114
- --------------------------------------------------------------------------------
Total assets $13,734 $ 14,405
================================================================================
Accounts payable and accrued expenses $ 161 $ 162
Other liabilities 60 25
- --------------------------------------------------------------------------------
Total liabilities $ 221 $ 187
================================================================================
4. INVESTMENT IN SUBSIDIARY
In January 2000, we acquired 95% of the common stock of Crest Net, all of which
is non-voting, and certain members of our management and Crest Net management
acquired 5% of the common stock, all of which is voting stock. In May 2001, we
acquired the 5% of common stock of Crest Net owned by certain members of our
management and management of Crest Net for $507,000. The acquisition of the 5%
of common stock was accounted for under the purchase method of accounting. After
this transaction, Realty Income owns 100% of the stock of Crest Net. Crest Net
was created to buy, own and sell properties, primarily to buyers using
tax-deferred exchanges, under Section 1031 of the IRS Code.
27
At December 31, 2001 and 2000, investments in properties owned by Crest Net
totaled $22.3 million and $23.1 million, respectively, and are included in real
estate held for sale, net in our consolidated balance sheets.
5. CREDIT FACILITIES
A. In December 1999, we entered into a $200 million, revolving, unsecured
acquisition credit facility that expires in December 2003. The $200 million
credit facility is with The Bank of New York, as administrative agent, and
several U.S. and non-U.S. banks. At December 31, 2001 and 2000, the outstanding
balances on the acquisition credit facility were $63.7 million and $149.9
million, respectively, with an effective interest rate of approximately 3.1% and
7.8%, respectively. The $200 million credit facility currently bears interest at
1.225% over the London Interbank Offered Rate ("LIBOR") and offers us other
interest rate options. A facility fee of 0.225% per annum accrues on the total
commitment of the credit facility.
In December 1999, our previous $170 million credit facility was canceled
simultaneously with the execution of the $200 million credit facility, and
unamortized fees of $355,000 relating to our $170 million credit facility were
recorded as an extraordinary loss on early extinguishment of the credit
facility. This resulted in an extraordinary item of $0.01 per basic and diluted
common share in 1999.
B. In February 2000, we entered into a $25 million, three-year, revolving,
unsecured credit agreement with the Bank of Montreal, which expires in February
2003. At December 31, 2001 and 2000, the outstanding balances on the credit
facility were $21.6 million and $24.1 million, respectively, with an effective
interest rate of approximately 3.2% and 7.9%, respectively. The $25 million
credit facility bears interest at 1.225% over LIBOR. A facility fee of 0.225%
per annum accrues on the total commitment of the credit facility.
C. The average borrowing rate on our credit facilities during 2001 was 6.4% or
130 basis points lower than our average borrowing rate during 2000 of 7.7%. Our
credit facilities are subject to various leverage and interest coverage ratio
limitations. The Company is and has been in compliance with these covenants.
D. In 2001, 2000 and 1999, interest of $385,000, $1.0 million and $1.6 million,
respectively, was capitalized with respect to properties under development.
6. NOTES PAYABLE
In January 1999, we issued $20 million of 8.0% senior notes due 2009 (the "1999
Notes"). The 1999 Notes are unsecured and were sold at 98.757% of par to yield
8.1%. Interest on the 1999 Notes is payable semiannually.
In October 1998, we issued $100 million of 8.25% Monthly Income Senior Notes due
2008 (the "1998 Notes"). The 1998 Notes are unsecured and were sold at par
($25.00). In May 1998, we entered into a treasury interest rate lock agreement
associated with the 1998 Notes. In settlement of the agreement, we made a
payment of $8.7 million in October 1998. The payment on the agreement is being
amortized over 10 years (the life of the 1998 Notes) as a yield adjustment to
interest expense. After taking into effect the results of a treasury interest
rate lock agreement, the effective rate to us on the 1998 Notes is 9.12%.
Interest on the 1998 Notes is payable monthly.
In May 1997, we issued $110 million of 7.75% senior notes due 2007 (the "1997
Notes"). The 1997 Notes are unsecured and were sold at 99.929% of par to yield
7.76%. In December 1996, we entered into a treasury interest rate lock agreement
associated with the 1997 Notes. In settlement of the agreement, we received $1.1
million in June 1997. The payment received on the agreement is being amortized
over 10 years (the life of the 1997 Notes) as a yield adjustment to interest
expense. After taking into effect the results of a treasury interest rate lock
agreement, the effective interest rate to us on the 1997 Notes is 7.62%.
Interest on the 1997 Notes is payable semiannually.
28
Interest incurred on the 1999 Notes, 1998 Notes and 1997 Notes collectively for
the years ended December 31, 2001, 2000 and 1999 was $18.4 million, $18.4
million and $18.3 million, respectively.
7. PROPERTY ACQUISITIONS
A. In 2001, we invested $131.8 million in 91 new retail properties and
properties under development with an average initial contractual lease rate of
11.0%. In 2000, we invested $70.0 million in 13 new retail properties and
properties under development with an average initial contractual lease rate of
10.8%.
B. In 2001, Crest Net invested $24.7 million in 26 new retail properties. In
2000, Crest Net invested $28.6 million in nine new retail properties. At
December 31, 2001, Crest Net owned 24 properties that are held for sale.
8. DISTRIBUTIONS PAID AND PAYABLE
A. We pay monthly distributions to our common stockholders. The following is a
summary of monthly cash distributions paid per common share for the years ended
December 31:
Month 2001 2000 1999
- --------------------------------------------------------------------------------
January $0.18500 $0.18000 $0.17000
February 0.18500 0.18000 0.17000
March 0.18500 0.18000 0.17000
April 0.18625 0.18125 0.17250
May 0.18625 0.18125 0.17250
June 0.18625 0.18125 0.17250
July 0.18750 0.18250 0.17500
August 0.18750 0.18250 0.17500
September 0.18750 0.18250 0.17500
October 0.18875 0.18375 0.17750
November 0.18875 0.18375 0.17750
December 0.18875 0.18375 0.17750
- --------------------------------------------------------------------------------
Total $2.24250 $2.18250 $2.08500
================================================================================
The following presents the federal income tax characterization of distributions
paid or deemed to be paid to common stockholders for the years ended
December 31:
2001 2000 1999
- --------------------------------------------------------------------------------
Ordinary income $1.94838 $1.76796 $1.84680
Return of capital 0.29412 0.41454 0.19860
Capital gain -- -- 0.03960
- --------------------------------------------------------------------------------
Totals $2.24250 $2.18250 $2.08500
================================================================================
At December 31, 2001, a distribution of $0.19 per common share was declared (and
was paid in January 2002). At December 31, 2000, a distribution of $0.185 per
common share was declared (and was paid in January 2001).
29
B. In May 1999, we issued 2,760,000 shares of 9 3/8% Class B cumulative
redeemable preferred stock (the "Class B Preferred"). Beginning May 25, 2004,
the Class B Preferred shares are redeemable at our option at $25.00 per share.
Dividends on the Class B Preferred are paid quarterly in arrears. For the years
ended December 31, 2001, 2000 and 1999, dividends of $6.4 million, $6.4 million
and $3.9 million, respectively, were paid on our Class B Preferred.
The following presents the federal income tax characterization of dividends paid
or deemed to be paid to Class B Preferred stockholders for the years ended
December 31:
2001 2000 1999
- --------------------------------------------------------------------------------
Ordinary income $2.34360 $2.34360 $1.37310
Capital gain -- -- 0.02660
- --------------------------------------------------------------------------------
Totals $2.34360 $2.34360 $1.39970
================================================================================
C. In July 1999, we issued 1,380,000 shares of 9 1/2% Class C cumulative
redeemable preferred stock (the "Class C Preferred"). Beginning July 30, 2004,
the Class C Preferred shares are redeemable at our option at $25.00 per share.
Dividends on the Class C Preferred are paid monthly in arrears. For the years
ended December 31, 2001, 2000 and 1999, dividends of $3.3 million, $3.3 million
and $1.4 million, respectively, were paid on our Class C Preferred.
The following presents the federal income tax characterization of dividends paid
or deemed to be paid to Class C Preferred stockholders for the years ended
December 31:
2001 2000 1999
- --------------------------------------------------------------------------------
Ordinary income $2.37480 $2.37480 $0.97070
Capital gain -- -- 0.01880
- --------------------------------------------------------------------------------
Totals $2.37480 $2.37480 $0.98950
================================================================================
9. COMMON STOCK OFFERINGS
A. In May 2001, we issued 2,850,000 shares of common stock at a price of $27.80
per share. We issued an additional 100,000 shares in May 2001 when the
underwriters exercised their over-allotment option. The net proceeds of
$77.5 million were used to repay borrowings under our $200 million acquisition
credit facility and for other general corporate purposes.
B. In October 2001, we issued 2,600,000 shares of common stock at a price of
$28.50 per share. In November 2001, 350,000 additional shares were issued when
the underwriters exercised their over-allotment option. The net proceeds of
$79.5 million were used to repay borrowings under our $200 million acquisition
credit facility and for other general corporate purposes.
10. PREFERRED STOCK OFFERINGS
A. In May 1999, we issued 2,760,000 shares of Class B Preferred stock at a price
of $25.00 per share. The net proceeds of $66.5 million were used to repay bank
borrowings. At December 31, 2001 and 2000, 2,745,700 of these shares were
outstanding.
30
B. In July 1999, we issued 1,380,000 shares of Class C Preferred stock at a
price of $25.00 per share. The net proceeds of $33.2 million were used to repay
bank borrowings. At December 31, 2001 and 2000, all of these shares were
outstanding.
11. PURCHASES OF REALTY INCOME SECURITIES
In January 2000, our Board of Directors authorized the purchase of up to $10
million of our outstanding common stock, preferred stock and senior debt
securities. We purchased an aggregate of $6.7 million of our securities from
January 2000 through December 2001.
In 2001, we invested $169,000 to purchase 6,800 shares of our common stock at an
average price of $24.82 per share. In 2000, we invested $6.5 million to purchase
284,500 shares of common stock at an average price of $21.87 per share and
14,300 shares of our Class B preferred stock at an average price of $19.27 per
share.
12. OPERATING LEASES
A. General - At December 31, 2001, we owned 1,124 properties in 48 states,
excluding properties owned by Crest Net. Of these 1,124 properties, 1,119 are
single-tenant and the remainder are multi-tenant. At December 31, 2001, 20
properties were vacant and available for lease or sale.
Substantially all leases are net leases whereby the tenant pays property taxes
and assessments, maintains the interior and exterior of the building and leased
premises, and carries insurance coverage for public liability, property damage,
fire and extended coverage.
Percentage rent for 2001, 2000 and 1999 was $1.7 million, $2.0 million and $1.7
million, respectively.
At December 31, 2001, minimum annual rents to be received on the operating
leases are as follows (dollars in thousands):
For the years ending December 31,
- -----------------------------------------------------------------------
2002 $ 127,981
2003 119,882
2004 112,221
2005 102,963
2006 96,383
Thereafter 816,032
- ------------------------------------------------------------------------
TOTAL $ 1,375,462
========================================================================
B. Major Tenants - The following schedule presents rental revenue, including
percentage rents, from tenants representing more than 10% of our total revenue
for the years ended December 31, 2001, 2000 or 1999 (dollars in thousands):
Tenants 2001 2000 1999
- ------------------------------------------------------ ------------------- -------------------- -------------------
Children's World Learning Centers, Inc. (1) $14,830 $14,698 $14,371
La Petite Academy, Inc. (2) -- (3) 12,233 10,730
(1) Includes $291, $320 and $312 relating to rental revenue included in income
from discontinued operations for 2001, 2000 and 1999, respectively.
(2) Includes $354 and $523 relating to rental revenue included in income from
discontinued operations for 2000 and 1999, respectively.
(3) Rental revenue from La Petite Academy, Inc. represented less than 10% of our
total revenue for 2001.
31
13. GAIN ON SALES OF REAL ESTATE ACQUIRED FOR RESALE
In 2001, Crest Net sold nine properties for $28.9 million. We recognized a gain
of $3.4 million on the sales of these properties.
In 2000, Crest Net sold two properties for $6.2 million. We recognized a gain of
$766,000 on the sales of these properties.
14. GAIN ON SALES OF INVESTMENT PROPERTIES
In 2001, we sold 35 properties for $39.5 million and recognized a gain of $10.5
million.
In 2000, we sold or exchanged 21 properties for $45.2 million and recognized a
gain of $6.7 million. Included in the 21 properties were two properties leased
by one of our tenants that we exchanged for two other properties owned by that
tenant for no gain (see note 16B).
In 1999, we sold three properties for $9.4 million and recognized a gain of $1.3
million.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
We believe that the carrying values reflected in the consolidated balance sheets
at December 31, 2001 and 2000 reasonably approximate the fair values for cash
and cash equivalents, accounts receivable, and all liabilities, due to their
short-term nature, except for lines of credit payable and notes payable. In
making these assessments, we used estimates. The fair value of the lines of
credit payable approximates its carrying value because its terms are similar to
those available in the market place. The fair value of the notes payable at
December 31, 2001 and 2000 is estimated to be $230.1 million and $212.2 million,
respectively, based upon the closing market price per note or indicative price
per each note at December 31, 2001 and 2000, respectively.
16. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid in 2001, 2000 and 1999 was $25.3 million, $29.8 million and $22.4
million, respectively.
The following non-cash investing and financing activities are included in the
accompanying consolidated financial statements (dollars in thousands):
A. Additions to properties resulted in the following:
2001 1999
---- ----
Buildings $421 $9,057
Real estate held for sale, net 183 --
Other liabilities 604 9,057
32
B. In 2000, we exchanged two properties leased by one of our tenants for two
other properties owned by that tenant, which resulted in the following:
Land $(2,031)
Buildings 1,386
Accumulated depreciation 645
C. In 2001, the acquisition of the 5% of Crest Net common stock not previously
owned by Realty Income resulted in the following:
Accounts receivable $ (450)
Accounts payable and accrued expenses (450)
D. In 2001, we reclassified unamortized amounts of restricted stock grants
included in other assets to deferred stock compensation (reported as a component
of common stock and paid in capital), which resulted in the following:
Other assets $ (376)
Deferred stock compensation 376
E. Restricted stock grants resulted in the following:
2001 2000 1999
---- ---- ----
Other assets $ -- $ 377 $ 139
Common stock and paid in capital 1,564 377 139
Deferred stock compensation 1,564 -- --
F. Restricted stock forfeitures resulted in the following:
2001 2000 1999
---- ---- ----
Other assets $ -- $ (49) $(14)
Common stock and paid in capital (202) (49) (14)
Deferred stock compensation (202) -- --
17. EMPLOYEE BENEFIT PLAN
We have a 401(k) plan covering substantially all of our employees. Under our
401(k) plan, employees may elect to make contributions to the plan up to a
maximum of 15% of their compensation, subject to limits under the IRS Code. We
match 50% of our employee's contributions, up to 3% of the employee's
compensation. Our aggregate matching contributions each year has been immaterial
to our results of operations.
18. STOCK INCENTIVE PLAN
In 1993, our Board of Directors approved a stock incentive plan (the "Stock
Plan") designed to attract and retain directors, officers and employees of the
Company by enabling those individuals to participate in the ownership of the
Company. The Stock Plan authorizes the issuance in each calendar year of up to
3% of the total shares outstanding at the end of such year. The Stock Plan
provides for grants of up to 1,950,308 shares. The Stock Plan provides for the
award (subject to ownership limitations) of a broad variety of stock-based
compensation alternatives such as nonqualified stock options, incentive stock
options, restricted stock and performance awards.
Stock options are granted with an exercise price equal to the underlying stock's
fair market value at the date of grant. Stock options expire 10 years from the
date they are granted and vest over service periods of one, three, four and five
years.
33
In 2001, 2000 and 1999, the Company issued 61,500, 17,800 and 5,600 shares of
restricted stock, respectively, which vest over periods ranging from three years
to ten years. The weighted average fair market values of the restricted stock
issued in 2001, 2000 and 1999 were $25.43, $21.15 and $24.85, respectively.
The following table summarizes our stock option activity for the years 2001,
2000 and 1999:
2001 2000 1999
-------------------------- -------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------------
Outstanding,
beginning of year 618,186 $23.77 647,848 $24.73 438,604 $24.77
Options granted -- -- 142,000 20.65 220,371 24.67
Options exercised (319,027) 24.38 (10,000) 21.63 -- --
Options canceled (24,096) 22.50 (161,662) 25.02 (11,127) 25.16
- ---------------------------------------------- ---------------- ----------------
Outstanding,
end of year 275,063 23.16 618,186 23.77 647,848 24.73
============================================== ================ ================
Options exercisable,
end of year 229,875 438,437 380,064
Weighted average fair
value of each option
granted during the year -- $1.65 $2.23
At December 31, 2001, the options exercisable under the Stock Plan had exercise
prices ranging from $20.00 to $26.06 with a weighted average price of $23.29,
and expiration dates ranging from August 2004 to February 2010 with a weighted
average remaining term of 6.4 years.
The fair value of each stock option grant was estimated at the date of grant
using the binomial option-pricing model with the following assumptions:
2000 1999
- --------------------------------------------------------------------------------
Expected dividend yield 9.70% 7.66%
Risk-free interest rate 6.30% 5.04%
Volatility 15.00% 15.20%
Expected life of options 10 years 10 years
We apply APB Opinion No. 25 in accounting for the Stock Plan and, accordingly,
no compensation cost has been recognized for our stock options in the
consolidated financial statements. Had we determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, our
net income available to common stockholders and diluted net income per common
share would have been as follows:
34
2001 2000 1999
- -------------------------------------------------------------------------- --------------------------------------------
Net income available to common stockholders (dollars in thousands):
As reported $ 57,846 $ 45,076 $ 41,012
Pro forma 57,630 44,983 40,536
Diluted net income per common share:
As reported $ 1.98 $ 1.69 $ 1.53
Pro forma 1.97 1.68 1.51
19. STOCKHOLDER RIGHTS PLAN
In 1998, our Board of Directors adopted a Stockholder Rights Plan (the "Rights
Plan") that will expire in July 2008. The Rights Plan assigns one right (a
"Right") to purchase one one-hundredth (1/100th) of a share of our Class A
Junior Participating Preferred Stock, par value $1.00 per share, for each share
of common stock owned on or issued after July 1, 1998. Currently, the Rights are
not exercisable and do not trade separately from our common stock.
Under specified circumstances, stockholders will be able to exercise their
Rights if a person or group acquires 15% of our common stock or makes a tender
offer to acquire 15% or more of our common stock. In these circumstances,
stockholders other than the acquirer would be able to exercise the Rights to
purchase our common stock or, in some situations, the acquirer's stock at a 50%
discount.
35
20. SEGMENT INFORMATION
We evaluate performance and make resource allocation decisions on a property by
property basis. For financial reporting purposes, we have grouped our tenants
into 11 reportable segments based upon the business the tenants are in, except
for properties owned by Crest Net that are grouped in a separate segment. The
Crest Net segment is included in "other non-reportable segments." All of the
properties are incorporated into one of the applicable segments. Revenue is the
only component of segment profit and loss we measure. The accounting policies of
the segments are the same as those described in note 2.
The following tables set forth certain information regarding the properties
owned by us, classified according to the business of the respective tenants as
of December 31, 2001 (dollars in thousands):
Revenue
--------------------------------------------------------
For the years ended December 31, 2001 2000 1999
--------------------------------------------------------
Segment rental revenue:
Automotive parts $ 9,883 $ 9,482 $ 8,826
Automotive service 6,893 6,864 6,869
Child care 28,160 27,917 25,593
Consumer electronics 4,734 5,728 5,794
Convenience stores 10,137 9,679 7,557
Health and fitness 4,280 2,781 614
Home furnishings 6,817 6,352 6,658
Restaurants 13,646 13,258 12,751
Sporting goods 1,116 -- --
Theaters 5,209 3,175 582
Video rental 4,465 4,514 4,444
Other non-reportable segments(1) 24,548 25,184 22,174
Reconciling items:
Gain on sales of real estate acquired for resale 3,374 766 --
Interest and other 822 353 209
- ----------------------------------------------------------------------------------------------------------------------
Total revenue $124,084 $116,053 $102,071
======================================================================================================================
<FN>
(1) Consolidates 13 retail industry segments and Crest Net.
</FN>
36
Assets
----------------------------------------
As of December 31, 2001 2000
------------------- --------------------
Segment net real estate:
Automotive parts $ 73,240 $ 74,487
Automotive service 44,438 47,603
Child care 142,163 149,838
Consumer electronics 35,950 40,820
Convenience stores 81,701 81,639
Health and fitness 43,549 34,918
Home furnishings 68,384 70,140
Restaurants 130,393 82,402
Sporting goods 50,506 --
Theaters 47,273 48,003
Video rental 37,719 39,598
Other non-reportable segments(1) 212,354 224,830
- ----------------------------------------------------------------------------------------------------------------------
Total net real estate 967,670 894,278
Non-real estate assets 36,038 40,488
- ----------------------------------------------------------------------------------------------------------------------
Total assets $1,003,708 $934,766
======================================================================================================================
<FN>
(1) Consolidates 13 retail industry segments and Crest Net.
</FN>
21. COMMITMENTS AND CONTINGENCIES
In the ordinary course of our business, we are party to various legal actions
which we believe are routine in nature and incidental to the operation of our
business. We believe that the outcome of the proceedings will not have a
material adverse effect upon our consolidated statements taken as a whole.
22. SUBSEQUENT EVENT
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.
37
REALTY INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED QUARTERLY FINANCIAL DATA
--------------------------------------------------------------------
(dollars in thousands, except per share data)
(not covered by Independent Auditors' Report)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------------------------------------
2001
Total revenue $ 31,009 $ 29,372 $ 30,441 $ 33,262 $ 124,084
Interest expense 8,059 6,587 6,080 5,740 26,466
Depreciation and
amortization expense 7,062 7,010 7,087 7,376 28,535
Other expenses 3,755 2,863 3,287 3,525 13,430
Income from operations 12,133 12,912 13,987 16,621 55,653
Income from discontinued operations 389 400 393 245 1,427
Net income 18,473 13,476 17,186 18,423 67,558
Net income available to
common stockholders 16,045 11,048 14,758 15,995 57,846
Basic and diluted net
income per common share(1) 0.60 0.39 0.50 0.50 1.98
Dividends paid per
common share 0.55500 0.55875 0.56250 0.56625 2.24250
2000
Total revenue $ 27,774 $ 27,865 $ 29,343 $ 31,071 $ 116,053
Interest expense 7,158 7,471 8,184 8,734 31,547
Depreciation and
amortization expense 6,601 6,697 6,765 8,350 28,413
Other expenses 2,197 2,198 2,666 2,599 9,660
Income from operations 11,818 11,499 11,728 11,388 46,433
Income from discontinued operations 432 426 392 393 1,643
Net income 12,912 12,863 12,351 16,662 54,788
Net income available to
common stockholders 10,484 10,435 9,923 14,234 45,076
Basic and diluted net
income per common share 0.39 0.39 0.37 0.54 1.69
Dividends paid per
common share 0.54000 0.54375 0.54750 0.55125 2.18250
<FN>
(1) Net income per share is computed independently for each quarter and the full
year based on the respective weighted average shares outstanding. Therefore, the
sum of the quarterly net income per common share amounts may not equal the
annual amount reported.
</FN>
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REALTY INCOME CORPORATION
By: /s/THOMAS A. LEWIS
-----------------------------------
Thomas A. Lewis
Vice Chairman of the Board of Directors,
Chief Executive Officer
Date: December 18, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
By: /s/WILLIAM E. CLARK
-----------------------------------
William E. Clark
Chairman of the Board of Directors
Date: December 18, 2002
By: /s/THOMAS A. LEWIS
-----------------------------------
Thomas A. Lewis
Vice Chairman of the Board of Directors,
Chief Executive Officer
(Principal Executive Officer)
Date: December 18, 2002
By: /s/DONALD R. CAMERON
----------------------------
Donald R. Cameron
Director
Date: December 18, 2002
By: /s/ROGER P. KUPPINGER
Roger P. Kuppinger
Director
Date: December 18, 2002
39
SIGNATURES (continued)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
By: /s/MICHAEL D. MCKEE
---------------------
Michael D. McKee
Director
Date: December 18, 2002
By: /s/WILLARD H. SMITH JR
----------------------------
Willard H. Smith Jr
Director
Date: December 18, 2002
By: /s/KATHLEEN R. ALLEN, Ph.D.
----------------------------
Kathleen R. Allen, Ph.D.
Director
Date: December 18, 2002
By: /s/PAUL M. MEURER
----------------------------
Paul M. Meurer
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: December 18, 2002
By: /s/GREGORY J. FAHEY
----------------------------
Gregory J. Fahey
Vice President, Controller
(Principal Accounting Officer)
Date: December 18, 2002
40
OFFICER CERTIFICATIONS
I, Thomas A. Lewis, certify that:
1. I have reviewed this amendment to the annual report on Form 10-K/A of Realty
Income Corporation;
2. Based on my knowledge, this annual 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 annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
Date: December 18, 2002 /s/ THOMAS A. LEWIS
-----------------------------------
Thomas A. Lewis
Chief Executive Officer and
Vice Chairman of the Board
41
I, Paul M. Meurer, certify that:
1. I have reviewed this amendment to the annual report on Form 10-K/A of Realty
Income Corporation;
2. Based on my knowledge, this annual 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 annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
Date: December 18, 2002 /s/ PAUL M. MEURER
-----------------------------------
Paul M. Meurer
Executive Vice President,
Chief Financial Officer and Treasurer
42
EXHIBIT INDEX
Exhibit No. Description
23.1 Independent Auditors' Consent.
43