UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
=========
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 1995, or
==================
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
COMMISSION FILE NUMBER 1-13318
==============================
REALTY INCOME CORPORATION
=========================
(Exact name of registrant as specified in its charter)
DELAWARE
========
(State or other jurisdiction of incorporation or organization)
33-0580106
==========
(I.R.S. Employer Identification No.)
220 WEST CREST STREET, ESCONDIDO, CALIFORNIA 92025
===================================================
(Address of principal executive offices)
(619) 741-2111
==============
(Registrant's telephone number)
Indicate by checkmark 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 [ ]
Number of shares outstanding of common stock as of November 13,
1995: Common Stock, $1.00 par value; 22,836,237
Page 1 of 72
Exhibit Index located on Page 28
PART I. ITEM 1. FINANCIAL STATEMENTS
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
===========================
September 30, 1995 And December 31, 1994
(dollars in thousands, except per share data)
(Unaudited)
1995 1994
==== ====
ASSETS
Real Estate, at Cost:
Land $ 144,794 $ 122,059
Buildings and Improvements 361,228 328,644
--------- ---------
Real Estate, at Cost 506,022 450,703
Less - Accumulated Depreciation
and Amortization 122,455 112,169
--------- ---------
Net Real Estate, at Cost 383,567 338,534
Cash and Cash Equivalents 2,831 11,673
Accounts Receivable 809 1,266
Other Assets 2,125 1,295
Goodwill 22,601 --
--------- ---------
TOTAL ASSETS $ 411,933 $ 352,768
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts Payable and Accrued Expenses $ 1,026 $ 658
Due to Advisor -- 34
Distributions Payable 3,168 2,925
Other Liabilities 4,300 1,119
Notes Payable 12,597 12,616
Line of Credit Payable 44,600 --
--------- ---------
TOTAL LIABILITIES 65,691 17,352
--------- ---------
Continued on next page
Page 2 of 72
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
=======================================
September 30, 1995 And December 31, 1994
(dollars in thousands, except per share data)
(Unaudited)
1995 1994
==== ====
Stockholders' Equity
Common Stock, Par Value $1.00 Per
Share, 40,000,000 Shares Authorized,
20,436,237 and 19,502,091
Shares Issued and Outstanding in 1995
and 1994, respectively 20,436 19,502
Preferred Stock, Par Value $1.00 Per
Share, 5,000,000 Shares Authorized,
No Shares Issued or Outstanding -- --
Capital in Excess of Par Value 472,029 452,996
Accumulated Distributions in Excess
of Net Income (146,223) (137,082)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 346,242 335,416
Commitments and Contingencies
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 411,933 $ 352,768
========= =========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
Page 3 of 72
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Operations
=====================================
For The Three And Nine Months Ended September 30, 1995 And 1994
(dollars in thousands, except per share data)
(Unaudited)
Three Nine
Three Months Nine Months
Months Ended Months Ended
Ended 9/30/94 Ended 9/30/94
9/30/95 (Note 2) 9/30/95 (Note 2)
======= ======== ======= ========
REVENUES
Rental $ 13,023 $ 11,894 $ 37,001 $ 35,407
Interest 48 266 204 703
Other 31 17 68 78
---------- ---------- ---------- ----------
13,102 12,177 37,273 36,188
---------- ---------- ---------- ----------
EXPENSES
Depreciation
and
Amortization 3,863 3,449 10,793 10,362
Advisor Fees 753 1,385 3,661 3,971
General and
Administrative 1,329 1,318 3,050 2,811
Interest 1,016 119 1,910 134
REIT Trans-
action Costs -- 11,201 -- 11,201
---------- ---------- ---------- ----------
6,961 17,472 19,414 28,479
---------- ---------- ---------- ----------
Income (Loss)
Before Gain
(Loss) on
Sales of
Properties 6,141 (5,295) 17,859 7,709
Gain (Loss) on
Sales of
Properties (21) -- 56 366
---------- ---------- ---------- ----------
NET INCOME
(LOSS) $ 6,120 $ (5,295) $ 17,915 $ 8,075
========== ========== ========== ==========
Continued on next page
Page 4 of 72
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Operations (continued)
=================================================
For The Three And Nine Months Ended September 30, 1995 And 1994
(dollars in thousands, except per share data)
(Unaudited)
Three Nine
Three Months Nine Months
Months Ended Months Ended
Ended 9/30/94 Ended 9/30/94
9/30/95 (Note 2) 9/30/95 (Note 2)
======= ======== ======= ========
Net Income
Per Share
(Note 4) $ 0.31 -- $ 0.91 --
========== ========== ========== ==========
Weighted
Average
Number of
Shares
Outstanding
(Note 4) 19,949,843 -- 19,653,479 --
========== ========== ========== ==========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
Page 5 of 72
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
=====================================
For The Nine Months Ended September 30, 1995 And 1994
(dollars in thousands)
(Unaudited)
1994
1995 (Note 2)
==== ========
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 17,915 $ 8,075
Adjustments to Net Income:
Depreciation and Amortization 10,793 10,362
Gain on Sales of Properties (56) (366)
Provision for Impairment Loss -- 135
Changes in Assets and Liabilities
(net of the Merger with R.I.C.
Advisor, Inc.):
Change in Accounts Receivable
and Other Assets (772) 2,552
Change in Due to Advisor (32) (718)
Change in Other Liabilities 520 2,020
--------- ---------
Net Cash Provided by
Operating Activities 28,368 22,060
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Properties 463 1,563
Investments in Properties (56,107) (141)
--------- ---------
Net Cash Provided by (Used in)
Investing Activities (55,644) 1,422
--------- ---------
Continued on next page
Page 6 of 72
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows (continued)
=================================================
For The Nine Months Ended September 30, 1995 And 1994
(dollars in thousands)
(Unaudited)
1994
1995 (Note 2)
==== ========
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Acquired from Advisor Merger 647 --
Proceeds from Lines of Credit 44,600 625
Payments of Lines of Credit -- (880)
Payment of Distributions (26,813) (35,886)
Payments in lieu of Promissory Notes
and Fractional Shares -- (1,521)
--------- ---------
Net Cash Provided by (Used in)
Financing Activities 18,434 (37,662)
--------- ---------
Net Decrease in Cash and
Cash Equivalents (8,842) (14,180)
Cash and Cash Equivalents,
Beginning of Period 11,673 29,329
--------- ---------
Cash and Cash Equivalents,
End of Period $ 2,831 $ 15,149
========= =========
For supplemental disclosure of cash flow information, see Note 7.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
Page 7 of 72
REALTY INCOME CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
==========================================
September 30, 1995
(Unaudited)
1. Management Statement
- - ------------------------
The financial statements of Realty Income Corporation ("Realty
Income" or the "Company") were prepared from the books and
records of the Company without audit or verification and in the
opinion of management include all adjustments (consisting of only
normal recurring accruals) necessary to present a fair statement
of results for the interim periods presented. Readers of this
quarterly report should refer to the audited financial statements
of the Company for the year ended December 31, 1994, which are
included in the Company's 1994 Annual Report on Form 10-K/A, as
certain disclosures which would substantially duplicate those
contained in such audited financial statements have been omitted
from this report.
Certain of the 1994 balances have been reclassified to conform to
1995 presentation. The reclassifications had no effect on
stockholders' equity or net income (loss).
2. Organization and Operation
- - ------------------------------
The Company was organized in the state of Delaware on
September 9, 1993 to facilitate the merger, which was effected on
August 15, 1994 (the "Consolidation"), of 10 privately-held real
estate limited partnerships and 15 publicly-held real estate
limited partnerships (the "Partnerships") with and into Realty
Income. Realty Income invests in commercial real estate and has
elected to be taxed as a real estate investment trust ("REIT").
The Consolidation was accounted for as a reorganization of
affiliated entities under common control in a manner similar to a
pooling-of-interests. Under this method, the assets and
liabilities of the Partnerships were carried over at their
historical book values and their operations have been recorded on
a combined historical basis. The pooling-of-interests method of
accounting also requires the reporting of the results of
operations as though the entities had been combined as of the
beginning of the earliest period presented. Accordingly, the
results of operations for the three and nine month period ended
September 30, 1994 comprise those of the separate entities
combined from the beginning of the period through August 15, 1994
and those of the Company from August 16, 1994 through
Page 8 of 72
September 30, 1994. Prior to the Consolidation, the Company had
no significant operations; therefore, the combined operations for
the periods prior to the Consolidation represent the operations
of the Partnerships. The Consolidation did not require any
material adjustments to conform the accounting policies of the
separate entities to that of the Company. All intercompany
transactions and balances have been eliminated.
3. Acquisition of R.I.C. Advisor, Inc.
- - ---------------------------------------
On August 17, 1995, the Company acquired all of the outstanding
capital stock of R.I.C. Advisor, Inc. (the "Advisor") for 990,704
shares of the Company's common stock valued at approximately
$21.2 million. The acquisition was accounted for using the
purchase method. Accordingly, the purchase price was allocated
to assets acquired based on their estimated fair values. This
treatment resulted in approximately $22.7 million in cost in
excess of net assets acquired. Such excess is being amortized on
a straight line basis over 25 years.
The following unaudited pro forma summary presents information as
if the acquisition had occurred at the beginning of each period
presented. The pro forma information is provided for information
purposes only. It is based on historical information and does
not necessarily reflect the actual results that would have
occurred nor is it necessarily indicative of future results of
operations of the combined company. The Advisor had several
non-recurring expenses during 1994 and 1995 which negatively
impacted net income and net income per share amounts.
For the Nine Months Ended September 30, 1995 and 1994
(Unaudited)
(Dollars in thousands, except per share data)
Proforma Proforma
1995 1994
==== ====
Revenues $ 37,483 $ 36,015
Net Income 16,495 5,298
-------- --------
Net Income Per Share $ 0.81 N/A
-------- --------
Page 9 of 72
4. Net Income Per Share
- - ------------------------
The computation of net income per share for the three and nine
months ended September 30, 1995 is based upon 19,503,080
outstanding shares for the period January 1, 1995 through
August 17, 1995 and 20,436,237 shares for the period August 18,
1995 through September 30, 1995 of Realty Income's common stock.
An adjustment of 471 shares, for options vested, was added to the
weighted average number of shares outstanding for the third
quarter of 1995. Prior to the Consolidation on August 15, 1994,
the capital of the Partnerships consisted of limited partner
units and general partners interest with no long term debt. In
the Consolidation, limited partners exchanged their units for
shares of common stock or Variable Rate Senior Notes of the
Company due 2001 (the "Notes"). The general partners did not
receive any shares or Notes for their general partner interests.
Due to these changes in capital structure, which were caused by
the Consolidation, and additional expenses associated with the
operations of a publicly traded REIT, net income (loss) per share
would not be comparable or meaningful for the three and nine
months ended September 30, 1994.
5. Credit Facility Available for Acquisitions
- - ----------------------------------------------
In November 1994, the Company obtained a $100 million,
three-year, revolving, unsecured acquisition credit facility from
The Bank of New York, as agent, and several major U.S. and
non-U.S. banks. This credit facility has been and is anticipated
to continue to be used to acquire additional retail properties.
The credit facility currently bears interest at 1.375% over the
London Interbank Offered Rate ("LIBOR") and offers the Company
other interest rate options. A commitment fee of 0.35% or less,
per annum, accrues on the average amount of the unused available
credit commitment. The credit facility is subject to various
leverage and interest coverage ratio limitations. As of
September 30, 1995 and December 31, 1994, the outstanding balance
on the credit facility was $44,600,000 and $0, respectively. The
effective interest rate at September 30, 1995 was 7.28%.
Interest of $29,000 and $187,000 was capitalized on properties
under construction during the three and nine months ended
September 30, 1995. No interest was capitalized in 1994.
Page 10 of 72
6. Notes Payable
- - -----------------
In connection with the Consolidation, certain investors elected
to receive Notes totaling $12,597,000. The Notes mature on
June 30, 2001 and the interest rate is adjusted quarterly. The
interest rate on the Notes was 7.50% and 6.94% at September 30,
1995 and December 31, 1994, respectively. On October 2, 1995 the
interest rate adjusted to 7.44%.
7. Properties
- - --------------
A. At September 30, 1995, the Company owned a diversified
portfolio of 676 properties in 42 states consisting of over 4.6
million square feet of leasable space. Of the Company's
properties, 666 are single tenant properties with the remaining
properties being multi-tenant properties. Over 99% (663) of the
single tenant properties were leased at September 30, 1995. The
remaining three single tenant properties are vacant and available
for lease. The average remaining lease term for all leases on
the Company's 666 single tenant properties, is approximately 9.4
years as of September 30, 1995.
Page 11 of 72
Completed retail properties acquired during the quarter ended
September 30, 1995 include:
INDUSTRY TENANT CITY/STATE AMOUNT
======== ====== ========== ======
Automotive Econo Lube
N' Tune San Antonio, TX $ 636,000
Convenience Pantry Henderson, KY 740,000
Convenience Pantry Owensboro, KY 950,000
Convenience Pantry Cary, NC 1,275,000
Convenience Pantry Greenville, NC 845,000
Convenience Pantry Greenville, NC 630,000
Convenience Pantry Jacksonville, NC 680,000
Convenience Pantry Columbia, SC 600,000
Convenience Pantry Johns Island, SC 520,000
Convenience Pantry Lexington, SC 800,000
Convenience Pantry Myrtle Beach, SC 730,000
Convenience Pantry North Charleston, SC 1,050,000
Convenience Pantry Summerville, SC 630,000
Convenience Pantry La Vergne, TN 990,000
Convenience Pantry Shelbyville, TN 665,000
Restaurant DF&R Oklahoma City, OK 760,000
-----------
Subtotal 12,501,000
-----------
Page 12 of 72
Land acquired and/or buildings under construction funded during
the quarter ended September 30, 1995:
INDUSTRY TENANT CITY/STATE AMOUNT
======== ====== ========== ======
Automotive R&S Strauss Cherry Hill, NJ 500,000
Automotive R&S Strauss Philadelphia, PA 79,000
Convenience Dairy Mart Perrysburg, OH 212,000
Restaurant Golden Corral St. Charles, MO 73,000
Restaurant Golden Corral Omaha, NE 202,000
Restaurant Golden Corral Amherst, NY 193,000
Restaurant Golden Corral Memphis, TN 511,000
Interest capitalized 29,000
Capitalized expenditures relating to existing
properties 200,000
-----------
Subtotal 1,999,000
-----------
TOTAL $14,500,000
===========
B. Realty Income industry diversification by number of
properties:
SEPTEMBER 30, 1995 DECEMBER 31, 1994
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
INDUSTRY PROPERTIES OF TOTAL PROPERTIES OF TOTAL
======== ========== ========== ========== ==========
Child Care 320 47% 321 51%
Restaurant 175 26% 164 26%
Automotive 130 19% 128 20%
Convenience 32 5% 1 0%
Home Furnishings 4 1% 0 0%
Other 15 2% 16 3%
--- ---- --- ----
Total 676 100% 630 100%
=== ==== === ====
Page 13 of 72
8. Supplemental Disclosure of Cash Flow Information
- - ----------------------------------------------------
A. The merger of the Advisor into the Company on August 17, 1995
resulted in the following:
Increases in:
Other Assets $ (1,143,000)
Goodwill (21,184,000)
Common Stock retired after the merger (1,230,000)
Increases/(Decrease) in:
Other Liabilities 3,029,000
Due to Advisor (2,000)
Common Stock 991,000
Capital in Excess of Par Value 20,186,000
------------
Cash Acquired from Merger $ 647,000
============
After the merger, shares acquired by the Company in the merger
were retired resulting in the following decreases:
Common Stock $ (58,000)
Capital in Excess of Par Value (1,172,000)
------------
Total $ (1,230,000)
============
In 1995, Other Assets of $1,526,000 were reclassified to
Goodwill.
B. In 1995, the following increases (decreases) occurred
resulting from exchanges of Notes Payable for Common Stock:
Notes Payable $ (19,000)
Common Stock 1,000
Capital in Excess of Par Value 19,000
Page 14 of 72
C. In August 1994, the following increases occurred resulting
from exchanges of limited partnership units for Notes Payable and
Common Stock:
Notes Payable $ 13,086,000
Common Stock 19,478,000
Capital in Excess of Par Value 452,534,000
9. Related Party Transactions
- - ------------------------------
A. Advisory Agreement
On August 15, 1994, in connection with the Consolidation, the
Company entered into an advisory agreement under which R.I.C.
Advisor, Inc. advised the Company with respect to its investments
and assumed day-to-day management of the Company.
On April 28, 1995 the Company signed an agreement and plan of
merger with the Advisor (the "Agreement"). The Agreement
provided for the merger of the Advisor into Realty Income,
pursuant to which all of the outstanding common stock of the
Advisor would be converted into up to 990,704 shares of common
stock of Realty Income.
On August 17, the Advisor was merged into the Company. The
Company issued 990,704 shares of common stock as consideration
for the outstanding common stock of the Advisor. The Advisor had
held 57,547 shares of common stock of the Company which were
retired. As part of the merger, the advisory agreement was
terminated.
B. Related Party Transactions Prior to the Consolidation
Cash Distributions - the Advisor and William E. and Evelyn J.
Clark, the former general partners of the Partnerships,
collectively, received approximately 1.0% of the Partnerships'
distributions. For the three and nine months ended September 30,
1994, general partners' distributions totaled $118,000 and
$336,000, respectively.
Management Fees - the Advisor received management fees of
approximately 1.5% of gross receipts of the Partnerships. For
the three and nine months ended September 30, 1994, management
fees totaled $92,000 and $432,000, respectively.
Page 15 of 72
Administrative Expenses - the Advisor received reimbursements for
personnel and overhead costs incurred to administer the
operations of the Partnerships. For the three and nine months
ended September 30, 1994, reimbursements totaled $558,000 and
$2,804,000, respectively.
The administrative expenses and management fees described in the
preceding paragraphs are included in Advisor Fees in the
accompanying consolidated statements of operations for the three
and nine months ended September 30, 1994.
10. Distributions Paid And Payable
- - ----------------------------------
For the nine months ended September 30, 1995, the Company paid
monthly distributions of $0.15 per share from January through
July and increased its monthly distributions to $0.155 per share
in August and September. The distributions for the nine months
totaled $1.36 per share.
As of September 30, 1995, distributions of $0.155 per share were
declared and payable on October 16, 1995 to stockholders of
record on October 2, 1995. On October 17, 1995, distributions of
$0.155 per share were declared and payable on November 15, 1995
to stockholders of record on November 1, 1995.
11. Commitments and Contingencies
- - ----------------------------------
As of September 30, 1995, the Company had entered into agreements
with unrelated parties to acquire three properties to be
purchased under sale/leaseback agreements for an estimated
aggregate amount of $4.6 million and to fund four buildings under
construction on land owned by the Company for an estimated
aggregate amount of $2.0 million.
The Company is a defendant in a civil action concerning a
transaction in which certain of the Company's predecessor
partnerships acquired an interest in three private limited
partnerships previously owned by the plaintiff. In 1992, the
court awarded a judgment against the plaintiff and in favor of
the Company. The plaintiff has appealed the judgment. The
Company believes the plaintiff's appeal is without merit and will
continue to vigorously defend this action.
In the ordinary course of its business, the Company is a party to
various legal actions which the Company believes are routine in
nature and incidental to the operation of the business of the
Company. The Company believes that the outcome of the
proceedings will not have a material adverse effect upon its
operations or financial condition.
Page 16 of 72
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
- - -------
Realty Income Corporation ("Realty Income" or the "Company") was
organized to operate as an equity real estate investment trust
(REIT). The Company is a fully integrated, self-administered and
self-managed REIT. The Company is the nation's largest publicly
traded owner of freestanding, single-tenant, retail properties
diversified geographically and by industry and operated under
triple-net lease agreements and, through its predecessors, has
been in the real estate investment business since 1969.
Realty Income concentrates its investments in triple-net leased
retail properties used in various industries. As of October 31,
1995, the Company owned a diversified portfolio of 676 properties
in 42 states consisting of over 4.6 million square feet of
leasable space. As of October 31, 1995, the portfolio consisted
of 320 child care centers, 175 restaurant facilities, 130
after-market automotive retail locations, 32 convenience stores,
4 home furnishings stores and 15 other properties. Of the 676
properties, 617 or 91% are leased to national or major regional
retail chain operators; 35 or 5% are leased to franchisees of
retail chain operators; 21 or 3% are leased to other tenant
types; and three or less than 1% are available for lease. Six
hundred sixty four properties (over 98%) were leased to tenants
under triple-net leases at October 31, 1995. Triple-net leases
typically require the tenant to be responsible for substantially
all property operating costs including, but not limited to,
property taxes, insurance, maintenance and structural repairs.
The average remaining lease term (excluding extension options)
for all leases on the Company's properties, excluding ten
multi-tenant properties, is approximately 9.3 years as of
October 31, 1995.
Realty Income was organized in the state of Delaware on
September 9, 1993 to facilitate the consolidation of the Company
with 25 public and private real estate limited partnerships (the
"Partnerships") formed between 1970 and 1989 (the
"Consolidation"). The Consolidation occurred on August 15, 1994.
The Company's common stock is listed and traded on the New York
Stock Exchange (NYSE) under the symbol "O."
Investors in the Partnerships who elected to invest in the equity
of the Company received a total of 19,503,080 shares of common
stock. Certain investors elected to receive Variable Rate Senior
Notes (the "Notes") totaling $12,597,000. The Notes are due in
2001 and are listed on the NYSE under the symbol "O01." In 1994
Page 17 of 72
the Company paid $987,000 in cash in lieu of issuing promissory
notes and $517,000 in cash in lieu of issuing fractional shares.
In accordance with the Company's certificate of incorporation and
bylaws, the responsibility for the management and control of the
Company's operations is vested in its board of directors. Prior
to August 18, 1995, the Company's day-to-day affairs were managed
by R.I.C. Advisor, Inc. (the "Advisor") which provided advice and
assistance regarding acquisitions of properties by the Company
and performed the day-to-day management of the Company's
properties and business. On August 17, 1995, the Advisor was
merged with and into the Company (the "Merger") and the advisory
agreement between the Company and the Advisor was terminated.
The Company issued 990,704 shares of common stock as
consideration for the outstanding common stock of the Advisor.
The Advisor had held 57,547 shares of common stock of the Company
which were retired after the merger. As a result of the Merger,
the Company is a fully integrated, self-administered and
self-managed REIT.
Liquidity and Capital Resources
- - -------------------------------
The Company was organized for the purpose of operating as an
equity real estate investment trust which 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 lease revenue. The Company intends to retain
an appropriate amount of cash as working capital reserves. At
September 30, 1995, the Company had cash and cash equivalents
totaling $2.8 million.
In November 1994 the Company entered into a $100 million
three-year, revolving, unsecured acquisition credit facility.
This facility has been and is expected to be used to acquire
additional retail properties leased to national and regional
retail chains under long term lease agreements. The line
currently bears interest at 1.375% over the London Interbank
Offered Rate ("LIBOR") and offers the Company other interest rate
options. As of November 10, 1995, $55.4 million was available to
the Company under the credit facility.
The Company expects to meet its long-term capital needs for the
acquisition of properties through the issuance of public or
private debt or equity. On August 3, 1995, the Company filed a
universal shelf registration statement with the Securities and
Exchange Commission covering up to $200 million in value of
common stock, preferred stock or debt securities.
Page 18 of 72
On November 6, 1995, the Company issued 2,400,000 shares of
common stock at a price of $19.65 per share. The shares were
issued pursuant to the registration statement and a related
prospectus supplement. The net proceeds from this offering will
be used to repay the outstanding borrowings under the acquisition
credit facility and, to the extent that the net proceeds of the
offering exceed the outstanding borrowings, for other general
corporate purposes, which may include property acquisitions.
During the nine months ended September 30, 1995, the Company
purchased 48 properties for $55.9 million. The 48 properties and
$55.9 million invested consist of 44 retail properties ($53.1
million) and four properties currently under development ($2.8
million). All of the above mentioned properties, including the
properties under development, are leased with terms of 10 to 20
years. The properties were purchased with $11.3 million of cash
on hand and $44.6 million from the acquisition credit facility.
The Company invested an additional $230,000 in existing
properties.
Cash distributions paid for the nine months ended September 30,
1995 and 1994 were $26.8 million and $35.9 million, respectively.
Of these distributions, $8.9 million and $27.8 million,
respectively, represented return of capital.
For the nine months ended September 30, 1995, the Company paid
monthly distributions of $0.15 per share from January through
July and increased its monthly distributions to $0.155 per share
in August and September. The distributions for the nine months
totaled $1.36 per share. Of the $1.36 in distributions per
share, $0.45 represents return of capital for book purposes. In
September and October 1995, the Company declared two additional
monthly distributions of $0.155 per share payable on October 16
and November 15, 1995. It is currently unknown what percentage,
if any, of the October and November 1995 distributions will
consist of return of capital. Management of the Company believes
that cash provided from operating activities will be sufficient
to meet operating requirements and provide the level of
stockholder distributions required to maintain its status as a
REIT.
As a result of the Merger with the Advisor, the amount of the
earnings and profits of the Advisor (the "Acquired Earnings")
carried over from the Advisor to the Company. In addition to the
distribution requirements to maintain its status as a REIT, the
Company must distribute or be deemed to have distributed all of
the Acquired Earnings on or before December 31, 1995 to retain
its REIT status. Accordingly, the Company will be required to
accurately determine the amount of the Acquired Earnings. At the
Company's request, KPMG Peat Marwick LLP ("KPMG") performed
Page 19 of 72
certain procedures relating to the amount of the Acquired
Earnings as of August 17, 1995 (the date of the Merger); KPMG
concluded that the Acquired Earnings did not exceed $5,000,000.
Such conclusion was based on the Advisor's tax returns as filed
with the Internal Revenue Service (the "IRS"), certain other
information provided by the Advisor and other assumptions and
qualifications which were set forth in KPMG's report. However,
KPMG's conclusion is not binding on the IRS, and calculation of
the amount of the Acquired Earnings involves the application of
certain complex and technical provisions of the Code and also
requires that certain complex factual determinations be made.
Furthermore, the amount of distributions required to eliminate
the Acquired Earnings will in part depend on the Company's income
through December 31, 1995. As a result, there can be no
assurance that the IRS will not challenge the positions taken by
the Advisor in the tax returns provided to KPMG or KPMG's
conclusion regarding the amount of the Acquired Earnings or
subsequently determine that the Company failed to distribute all
the Acquired Earnings. In the event the IRS makes such a
determination, the Company would lose its REIT qualification for
the year of the Merger and, perhaps, for subsequent years, which
would have a material adverse effect on the financial position
and results of operations of the Company and its ability to make
distributions to stockholders and debt service payments.
The Company is exploring its alternatives with respect to making
distributions sufficient to eliminate the Acquired Earnings and,
based on its monthly distribution history, the Company will be
required to make, or be deemed to make, additional distributions
to stockholders in order to eliminate the Acquired Earnings. The
Company may accomplish these additional distributions (i) by
increasing its monthly distribution, (ii) by making special
distributions during 1995, (iii) by causing certain monthly or
special distributions paid in January 1996 to relate back to 1995
for income tax purposes (in which case such distributions would
be deemed to have been paid in 1995 for income tax purposes), or
(iv) by some combination of the foregoing. In this regard, the
Company has applied for a ruling from the IRS relating to the
distribution of the Acquired Earnings which, if granted as
requested, would substantially reduce or eliminate the need to
make, or be deemed to make, any special cash distributions or to
increase the amount of its monthly distributions in order to
eliminate the Acquired Earnings. Accordingly, there can be no
assurance that the Company will be required to make or will make
any special cash distributions, or will be required to increase
or will increase the amount of its monthly distributions, in
order to eliminate the Acquired Earnings. However, even if the
ruing is granted, the Company expects that it will be required to
cause certain monthly distributions which it expects to make in
January 1996 to relate back to 1995 for income tax purposes (in
Page 20 of 72
which case such distributions would be treated for income tax
purposes as having been received by stockholders on December 31,
1995). If this were to occur, stockholders would be required to
include those distributions, to the extent they represent
dividend income or capital gain, in their taxable income for
1995, even though actually received by stockholders in 1996. In
any event, as a result of the Merger, the Company's stockholders
will recognize additional dividend income in 1995 to the extent
of the Acquired Earnings.
Management believes that the Company's cash provided from
operating activities and borrowing capacity are sufficient to
meet its liquidity needs for the foreseeable future.
Results of Operations
- - ---------------------
Comparison of the three and nine months ended September 30, 1995
and 1994
Prior to the Consolidation on August 15, 1994, the capital of the
Partnerships consisted of limited partner units and general
partner interests with no long term debt. In the Consolidation,
limited partners exchanged their units for shares of common stock
or Notes of the Company. The general partners did not receive
any shares or Notes for their general partner interests. Due to
these changes in capital structure, which were caused by the
Consolidation, and additional expenses associated with the
operations of a publicly traded REIT, the results of operations
for the three and nine months ended September 30, 1995 and 1994
are not necessarily comparable.
Rental revenue was $13.0 million for the quarter ended
September 30, 1995 versus $11.9 million for the comparable
quarter in 1994. Rental revenue was $37.0 million for the nine
months ended September 30, 1995 versus $35.4 million for the
comparable nine months in 1994. The increase in the 1995 rental
revenue was primarily due to the acquisition of additional
properties.
Vacant properties are a factor in determining revenue generated
and property expenses paid by the Company. At September 30,
1995, the Company had three properties that were not under lease
as compared to four properties at September 30, 1994. All of the
remaining properties are under lease agreements with third party
tenants.
Depreciation and amortization was $3.9 million for the quarter
ended September 30, 1995 versus $3.4 million for the comparable
quarter in 1994. Depreciation and amortization was $10.8 million
Page 21 of 72
for the nine months ended September 30, 1995 versus $10.4 million
for the comparable nine months in 1994. The increase in the 1995
depreciation and amortization was primarily due to the
acquisition of additional properties and amortization of goodwill
recognized in connection with the merger of the Advisor.
Advisor fees decreased by $632,000 in the third quarter of 1995
as compared to the third quarter of 1994. Advisor fees decreased
by $310,000 in the nine months ended September 30, 1995 as
compared to the nine months ended September 30, 1994. On
August 17, 1995 the Advisor was merged into the Company. The
advisor fees for the three and nine months ended September 30,
1995 were calculated in accordance with the terms of the Advisory
Agreement which became effective August 15, 1994 and was
terminated on August 17, 1995. After August 17, 1995, the
Company became a fully integrated, self-administered and
self-managed REIT. The advisor fees for the quarter and nine
months ended September 30, 1994 do not include distributions of
$118,000 and $336,000, respectively, paid to the general
partners of the Partnerships. Distributions paid to the general
partners of the Partnerships were a component of the formula used
to determine the advisor fee after the Consolidation on
August 15, 1994. Prior to August 15, 1994, advisor fees were
calculated in accordance with the terms of the Partnership
agreements of the Partnerships.
General and administrative expenses were $1.3 million in the
third quarter of 1995 and 1994. An $11,000 increase in general
and administrative expenses was due to a $199,000 increase in
administrative expenses reduced by a $188,000 decrease in
property operating expenses. The increase in administrative
expenses was due to additional expenses associated with the
operations of a publicly traded REIT including, but not limited
to, transfer agent fees, NYSE fees, board of directors fees and
property acquisition expenses. The decrease in property
operating expenses was primarily due to the decline in expenses
associated with vacant and underperforming properties.
General and administrative expenses were $3.1 million in the nine
months ended September 30, 1995 versus $2.8 million in the
comparable nine month of 1994. The $239,000 increase in general
and administrative expenses was due to a $688,000 increase in
administrative expenses reduced by a $449,000 decrease in
property operating expenses. The increase in administrative
expenses was due to additional expenses associated with the
operations of a publicly traded REIT including, but not limited
to, transfer agent fees, NYSE fees, board of directors fees and
property acquisition expenses. The reduction in property
Page 22 of 72
operating expenses was primarily due to the decline in expenses
associated with vacant and underperforming properties.
After August 17, 1995, when the Advisor merged into the Company,
general and administrative expenses include costs for management,
accounting systems, professional and support personnel and office
facilities. Prior to August 17, 1995 these costs were the
responsibility of the Advisor.
In accordance with FAS 121, provision is made for impairment loss
if estimated future operating cash flows (undiscounted and
without interest charges) over a long-term holding period plus
estimated disposition proceeds (undiscounted) are less than
current book value. In August 1994, a $135,000 charge was made
to general and administrative expenses to reduce the net carrying
value of one property. No charge was recorded in 1995.
Interest expense was $1.0 million for the quarter ended
September 30, 1995 as compared to $119,000 for the comparable
quarter in 1994. The $897,000 increase was primarily due to
interest on the acquisition credit facility from borrowings used
to acquire properties in 1995. During the quarter ended
September 30, 1995, $29,000 of interest was capitalized. No
interest was capitalized in 1994.
Interest expense was $1.9 million for the nine months ended
September 30, 1995 as compared to $134,000 for the comparable
nine months in 1994. The $1.8 million increase was primarily due
to interest on the acquisition credit facility from borrowings
used to acquire properties in 1995. During the nine months ended
September 30, 1995, $187,000 of interest was capitalized. No
interest was capitalized in 1994.
Interest expense is expected to be lower in the fourth quarter of
1995 and the first quarter of 1996 because the net proceeds from
the 2.4 million shares issued on November 6, 1995 will be used to
repay approximately $44.1 million of the outstanding borrowings
under the acquisition credit facility.
Total operating expenses were $7.0 million during the quarter
ended September 30, 1995 versus $6.3 million for the comparable
quarter in 1994. The majority of the increase in operating
expenses relates to an increase in interest expense of $897,000.
Total operating expenses were $19.4 million during the nine
months ended September 30, 1995 versus $17.3 million for the
comparable nine months in 1994. The majority of the increase in
operating expenses relates to an increase in interest expense of
$1.8 million.
Page 23 of 72
For the three and nine months ended September 30, 1994, REIT
transaction costs aggregating $11.2 million represented
nonrecurring costs incurred to effect the Consolidation. Under
the pooling-of-interests method of accounting for the
Consolidation, these costs were charged to expense upon
consummation of the Consolidation. Such costs included, but were
not limited to, fees paid to underwriters, attorneys, and
accountants, as well as costs associated with obtaining a
fairness opinion, soliciting the shareholders, and registering
and listing the common stock and the notes on the NYSE.
For the three months ended September 30, 1995, the Company had
net income of $6.1 million compared to a net loss of $5.3 million
for the same period in 1994. The third quarter of 1994 was
negatively impacted by the REIT transaction costs of $11.2
million. Income for the third quarter of 1994 excluding the REIT
transaction costs was $5.9 million.
For the nine months ended September 30, 1995, the Company had net
income of $17.9 million compared to $8.1 million for the same
period in 1994. The net income for 1994 was negatively impacted
by the REIT transaction costs of $11.2 million. Income for the
first nine months of 1994 excluding the REIT transaction costs
was $19.3 million.
Impact of Inflation
- - -------------------
Tenant leases generally provide for increases in rent as a result
of increases in the tenant's sales volumes or increases in the
consumer price index. Management expects that inflation will
cause these lease provisions to result in increases in rent over
time. However, inflation and increased costs may have an adverse
impact on the tenants if increases in the tenant's operating
expenses exceed increases in revenues. Over 98% of the
properties are leased to tenants under triple-net leases in which
the tenant is responsible for substantially all property costs
and expenses. These features in the leases reduce the Company's
exposure to rising expenses due to inflation.
Funds from Operations
- - ---------------------
Funds from operations ("FFO") for the third quarter of 1995 was
$10.0 million versus $9.4 million during the third quarter of
1994. FFO for the nine months ended September 30, 1995 was $28.7
million versus $29.3 million during the comparable nine months of
1994. FFO is calculated by adding depreciation and amortization
to net income (loss) before gain (loss) on sales of properties
Page 24 of 72
and the one-time REIT transaction costs associated with the
Consolidation in August 1994.
Management considers FFO to be an appropriate measure of the
performance of an equity REIT. Funds from operations is used by
financial analysts in evaluating REITs and can be one measure of
a REIT's ability to make cash distribution payments.
Presentation of this information provides the reader with an
additional measure to compare the performance of different REITs.
FFO is not necessarily indicative of cash flow available to fund
cash needs and should not be considered as an alternative to net
income as an indication of the Company's performance or to cash
flow from operating, investing, and financing activities as a
measure of liquidity or ability to make cash distributions.
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of Realty Income Corporation
was held on August 17, 1995 for the purpose of electing a board
of directors and voting on the proposals described below.
Proxies for the meeting were solicited pursuant to Section 14(a)
of the Securities Exchange Act of 1934 and there was no
solicitation in opposition to management's solicitations.
Proposal one: Adoption and approval of the Agreement and Plan of
Merger dated as of April 28, 1995 (the "Merger"), as amended,
among the Company, R.I.C. Advisor, Inc. and the shareholders of
R.I.C. Advisor, Inc. with and into the Company, with the Company
continuing as the surviving corporation.
SHARES SHARES SHARES BROKER
VOTED FOR AGAINST ABSTAIN NON-VOTES
========= ======= ======= =========
11,161,163 738,096 887,755 1,781,650
Proposal two: Approval of an amendment to the Amended and
Restated Bylaws of the Company to exclude the Merger from the
provisions of Section 7(b) of the Bylaws which require the
Company to obtain an appraisal of any property being purchased by
the Company from related or affiliated parties.
Page 25 of 72
SHARES SHARES SHARES BROKER
VOTED FOR AGAINST ABSTAIN NON-VOTES
========= ======= ======= =========
10,931,953 912,531 942,530 1,781,650
Proposal three: All of management's nominees for directors as
listed in the proxy statement were elected with the following
vote:
SHARES WITHHOLD
VOTED FOR AUTHORITY
========= =========
Donald R. Cameron 13,964,687 603,977
William E. Clark 13,956,614 612,050
Roger P. Kuppinger 13,964,545 604,119
Thomas A. Lewis 13,961,503 607,161
Michael D. McKee 13,963,037 605,627
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits:
Exhibit No. Description
=========== ===========
2.1 Agreement and Plan of Merger dated as of April
28, 1995 (incorporated by reference to Appendix A
to the Company's definitive Proxy Statement filed
June 30, 1995)
3.1 Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the
Company's Form 10-Q for the quarter ended
September 30, 1994)
3.2 Amended and Restated Bylaws of Realty Income
Corporation, as amended
27 Financial Data Schedule*
* Electronically filed with the Securities and Exchange
Commission only
Page 26 of 72
B. One report on Form 8-K was filed during the quarter for which
this report is filed.
A report on Form 8-K dated August 17, 1995 was filed on
September 5, 1995 reporting that on August 17, 1995 Realty Income
Corporation merged with R.I.C. Advisor, Inc.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
REALTY INCOME CORPORATION
(Signature and Title) /s/ GARY M. MALINO
Date: November 14, 1995 ------------------------
Gary M. Malino
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 27 of 72