(Note: WORD for DOS; Courier 12; 1" margins)
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 MARCH 31, 1996, 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
May 10, 1996: Common Stock, $1.00 par value; 22,976,237
Page 1
PART I. ITEM 1. FINANCIAL STATEMENTS
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
===========================
March 31, 1996 And December 31, 1995
(dollars in thousands, except per share data)
(Unaudited)
1996 1995
========= =========
ASSETS
Real Estate, at Cost:
Land $ 148,958 $ 147,789
Buildings and Improvements 367,469 367,637
--------- ---------
516,427 515,426
Less - Accumulated Depreciation
and Amortization (128,735) (126,062)
--------- ---------
Net Real Estate, at Cost 387,692 389,364
Cash and Cash Equivalents 1,992 1,650
Accounts Receivable 1,057 1,638
Due from Affiliates 493 493
Other Assets 1,861 1,927
Goodwill 22,338 22,567
--------- ---------
TOTAL ASSETS $ 415,433 $ 417,639
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Distributions Payable $ 3,561 $ 12,407
Accounts Payable and Accrued Expenses 400 673
Other Liabilities 4,755 4,541
Notes Payable -- 12,597
Line of Credit Payable 24,600 6,000
--------- ---------
TOTAL LIABILITIES 33,316 36,218
--------- ---------
Continued on next page
Page 2
(continued)
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
=======================================
March 31, 1996 And December 31, 1995
(dollars in thousands, except per share data)
(Unaudited)
1996 1995
========= =========
STOCKHOLDERS' EQUITY
Preferred Stock, Par Value
$1.00 Per Share, 5,000,000 Shares
Authorized, No Shares Issued
or Outstanding -- --
Common Stock, Par Value $1.00 Per
Share, 40,000,000 Shares
Authorized, 22,976,237 Shares
Issued and Outstanding 22,976 22,976
Capital in Excess of Par Value 516,088 516,119
Accumulated Distributions
in Excess of Net Income (156,947) (157,674)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 382,117 381,421
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 415,433 $ 417,639
========= =========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
Page 3
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Income
=================================
For The Three Months Ended March 31, 1996 And 1995
(dollars in thousands, except per share data)
(Unaudited)
Three Three
Months Months
Ended Ended
3/31/96 3/31/95
========== ==========
REVENUE
Rental $ 13,728 $ 11,807
Interest 23 106
Other 27 15
---------- ----------
13,778 11,928
---------- ----------
EXPENSES
Depreciation and Amortization 4,074 3,345
Property 446 370
Interest 520 335
General and Administrative 1,310 502
Advisor Fees -- 1,452
Provision for Impairment Losses 323 --
---------- ----------
6,673 6,004
---------- ----------
Income from Operations 7,105 5,924
Gain on Sales of Properties 745 77
---------- ----------
NET INCOME $ 7,850 $ 6,001
========== ==========
Net Income Per Share $ 0.34 $ 0.31
========== ==========
Weighted Average Number of
Shares Outstanding 22,976,891 19,503,080
========== ==========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
Page 4
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
=====================================
For The Three Months Ended March 31, 1996 And 1995
(dollars in thousands)
(Unaudited)
1996 1995
========= =========
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 7,850 $ 6,001
Adjustments to Net Income:
Depreciation and Amortization 4,074 3,345
Provision for Impairment Losses 323 --
Gain on Sales of Properties (745) (77)
Change in:
Accounts Receivable and
Other Assets 614 325
Accounts Payable, Accrued
Expenses and Other Liabilities (59) 271
--------- ---------
Net Cash Provided by
Operating Activities 12,057 9,865
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Properties 1,523 315
Acquisition of and Additions
to Properties (3,241) (12,566)
--------- ---------
Net Cash Used in
Investing Activities (1,718) (12,251)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of Distributions (15,969) (8,776)
Proceeds from Line of Credit 21,300 3,300
Payment of Line of Credit (2,700) --
Payment of Notes Payable (12,597) --
Stock Offering Costs (31) --
--------- ---------
Net Cash Used in
Financing Activities (9,997) (5,476)
--------- ---------
Continued on next page
Page 5
(continued)
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
=================================================
For The Three Months Ended March 31, 1996 And 1995
(dollars in thousands)
(Unaudited)
1996 1995
========= =========
Net Increase (Decrease) in
Cash and Cash Equivalents 342 (7,862)
Cash and Cash Equivalents,
Beginning of Period 1,650 11,673
--------- ---------
Cash and Cash Equivalents,
End of Period $ 1,992 $ 3,811
========= =========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
Page 6
REALTY INCOME CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
==========================================
March 31, 1996
(Unaudited)
1. Management Statement and General
- ------------------------------------
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, 1995,
which are included in the Company's 1995 Annual Report on Form
10-K, as certain disclosures which would substantially duplicate
those contained in such audited financial statements have been
omitted from this report.
During the first quarter of 1996, the Company adopted
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and of Long-Lived Assets
to Be Disposed Of" ("Statement 121"). Statement 121 provides
guidance for the recognition and measurement of impairment of
long-lived assets, including goodwill, related both to assets to
be held and used and assets to be disposed of. Under Statement
121, a provision for impairment loss is recognized for assets to
be held and used if estimated future 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 addition, for assets to be disposed of, a
provision for impairment loss is recognized for the amount by
which the current book value of the asset to be disposed of
exceeds its fair value less cost to sell.
During the first quarter of 1996, the Company recorded
provision for impairment losses of $323,000 related to two
properties to be disposed of.
Certain of the 1995 balances have been reclassified to
conform to 1996 presentation. The reclassifications had no
effect on stockholders' equity or net income.
Page 7
2. Credit Facility
- -------------------
The Company has a $130 million, three-year, revolving,
unsecured acquisition credit facility that expires in November
1998. As of March 31, 1996 and December 31, 1995, the
outstanding balance on the credit facility was $24.6 million and
$6.0 million, respectively, with an effective interest rate of
approximately 6.70% and 7.19%, respectively. 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, all of which the Company is
and has been in compliance with.
For the three months ended March 31, 1996 and 1995, interest
of $13,000 and $46,000 was capitalized on properties under
construction.
3. Notes Payable
- -----------------
The Company redeemed, at par, the $12.6 million principal
amount of variable rate senior notes due 2001 on March 29, 1996.
Interest incurred on the notes for the three months ended
March 31, 1996 and 1995 was $217,000 and $252,000, respectively.
4. Properties
- --------------
At March 31, 1996, the Company owned a diversified portfolio
of 689 properties in 42 states. Of the Company's properties, 679
are single tenant properties with the remaining properties being
multi-tenant properties. At March 31, 1996, four single-tenant
properties were vacant and available for lease.
Page 8
4. Properties (continued)
- --------------------------
Five properties were acquired during the first quarter of
1996 at an aggregate cost of $2.5 million.
Tenant Industry City/State Amount
================== =========== =============== ===========
Carver's Restaurant Glendale, AZ $ 1,521,000
Econo Lube N' Tune Automotive Chula Vista, CA 397,000
Econo Lube N' Tune Automotive Lewisville, TX 200,000
Econo Lube N' Tune Automotive Dallas, TX 235,000
Econo Lube N' Tune Automotive Broomfield, CO 155,000
-----------
Subtotal 2,508,000
Funding of buildings under construction
during the first quarter of 1996 574,000
Capitalized Expenditures Relating
to Existing Properties 9,000
Acquisition of the Outstanding Class A Units of
R.I.C. Trade Center, Ltd., Silverton Business
Center, Ltd. and Empire Business Center, Ltd.
(after this purchase, the Company owned 100%
of these partnerships) 150,000
-----------
TOTAL $ 3,241,000
===========
5. Gain on Sales of Properties
- -------------------------------
For the three months ended March 31, 1996, the Company sold a
property and received compensation for granting an easement
totaling $1.5 million and recognized a gain of $745,000. For the
three months ended March 31, 1995, the Company sold a property
for $315,000 and recognized a gain of $77,000.
Page 9
6. Related Party Transactions
- ------------------------------
A. Advisory Agreement
Prior to August 17, 1995, the Company was an advised Real
Estate Investment Trust pursuant to an advisory agreement under
which R.I.C. Advisor, Inc. (the "Advisor") advised the Company
with respect to its investments and assumed day-to-day management
of the Company. On August 17, 1995, the Advisor was merged into
the Company (the "Merger") and the advisory agreement was
terminated.
B. Acquisition of R.I.C. Advisor, Inc.
As consideration in the Merger, the Company issued 990,704
shares of common stock valued at approximately $21.2 million.
The following unaudited pro forma summary presents
information as if the Merger had occurred at the beginning of
1995. The pro forma information is provided for informational
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 companies.
For the Three Months Ended March 31, 1995
-----------------------------------------
Pro Forma
-----------
Revenue $11,987,000
Net Income $ 6,028,000
Net Income Per Share $ 0.29
7. Distributions Paid And Payable
- ----------------------------------
During the three months ended March 31, 1996, the Company
paid a special distribution of $0.23 per share and three monthly
distributions of $0.155 per share. The distributions for the
three months totaled $0.695 per share.
As of March 31, 1996, distributions of $0.155 per share were
declared and payable on April 15, 1996 to stockholders of record
on April 1, 1996.
Page 10
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
============
Realty Income Corporation ("Realty Income" or the "Company")
is a fully integrated and self-managed real estate company with
in-house acquisition, leasing, legal, financial underwriting,
portfolio management and capital markets expertise. The seven
senior officers of the Company have each participated in the
management of the Company's properties and operations for between
six and 27 years. Realty Income has elected to be taxed as a
real estate investment trust ("REIT"). As of April 30, 1996,
Realty Income owned a diversified portfolio of 690 properties in
42 states consisting of over 4.6 million square feet of leasable
space.
Realty Income typically acquires, then leases back, retail
store locations from retail chain store operators, providing
capital to the operators for continued expansion and other
purposes. The Company concentrates its investments in single-
tenant, retail properties leased to national and regional retail
chains under long-term, triple-net lease agreements. Triple-net
leases typically require the tenant to be responsible for
substantially all property operating costs including property
taxes, insurance, maintenance and structural repairs. Management
believes that long-term leases, coupled with tenants assuming
responsibility for property expenses under the triple-net lease
structure, generally produce a more predictable income stream
than many other types of real estate portfolios.
The Company's primary business objective is to generate a
consistent and predictable level of funds from operations ("FFO")
per share and distributions to stockholders. Additionally, the
Company generally will seek to increase FFO per share and
distributions to stockholders through both internal and external
growth, while also seeking to lower the ratio of distributions to
stockholders as a percentage of FFO in order to allow internal
cash flow to be used to fund additional acquisitions and for
other corporate purposes. The Company pursues internal growth
through (i) contractual rent increases on existing leases; (ii)
rental increases at the termination of existing leases when
market conditions permit; and (iii) the active management of the
Company's property portfolio, including selective sales of
properties. The Company generally pursues external growth
through the acquisition of additional properties under long-term,
triple-net lease agreements with initial contractual base rent
which, at the time of acquisition, is in excess of the Company's
estimated cost of capital.
Page 11
Prior to August 17, 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 Realty Income (the
"Merger"). As part of the Merger the advisory agreement between
the Company and the Advisor was terminated.
The Company's common stock is listed on the New York Stock
Exchange under the symbol "O."
Liquidity and Capital Resources
===============================
Cash Reserves
-------------
Realty Income was organized for the purpose of operating as
an equity REIT which 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
March 31, 1996, the Company had cash and cash equivalents
totaling approximately $2.0 million.
Capital Funding
---------------
Realty Income has a $130 million three-year, revolving,
unsecured acquisition credit facility that expires in November
1998. The credit facility currently bears interest at 1.25% over
the London Interbank Offered Rate and offers the Company other
interest rate options. As of April 30, 1996, $105.4 million of
borrowing capacity was available to the Company under the
acquisition credit facility. At that time, the outstanding
balance and effective interest rate on the credit facility was
$24.6 million and 6.70%. This credit facility has been and is
expected to be used to acquire additional retail properties
leased to national and regional retail chains under long term
lease agreements. Borrowings to fund additional properties will
increase the Company's exposure to interest rate risk.
On March 29, 1996, senior notes totaling $12.6 million were
redeemed at par. Proceeds from borrowings under the acquisition
credit facility were used to redeem the notes.
Realty Income expects to meet its long-term capital needs for
the acquisition of properties through the issuance of public or
private debt or equity. In August 1995, the Company filed a
universal shelf registration statement with the Securities and
Exchange Commission covering up to $200 million in value of
Page 12
common stock, preferred stock or debt securities. In the fourth
quarter of 1995, the Company issued 2,540,000 shares of common
stock at a price of $19.625 per share. The net proceeds of $46.6
million from the stock offering were used to repay borrowings
under the acquisition credit facility. These borrowings were
used to acquire properties in 1995.
The Company is not currently involved in any negotiations and
has not entered into any arrangements relating to any additional
securities issuances.
Property Acquisitions
---------------------
From January 1996 through April 1996, Realty Income purchased
six retail properties in four states for $3.0 million and funded
$669,000 for properties previously acquired and under
development. During this period, the Company invested an
additional $9,000 in existing properties and purchased the
outstanding Class A units in R.I.C. Trade Center, Ltd., Silverton
Business Center, Ltd. and Empire Business Center, Ltd. for an
aggregate of $150,000. After this purchase, Realty Income owned
100% of these partnerships.
From December 1994 through April 1996, Realty Income acquired
68 retail properties (the "New Properties") for an aggregate cost
of approximately $74.4 million (including the estimated unfunded
development costs on six properties under construction totaling
$2.2 million). The New Properties are located in 20 states,
contain approximately 682,700 leasable square feet and are 100%
leased under triple-net leases, with an average initial lease
term of 16.4 years. The weighted average annual unleveraged
return on the cost of the New Properties is estimated to be
11.3%, computed as estimated contractual net operating income
(which in the case of a triple-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
divided by the total acquisition and estimated development costs.
No assurance can be given that the actual return on the cost of
the New Properties will not differ from the foregoing percentage.
Of the New Properties, 62 were occupied as of April 30, 1996
and the remaining six were pre-leased and under construction
pursuant to contracts under which the tenants have agreed to
develop the properties (with development costs funded by the
Company) and to begin paying rent when the premises open for
business. All of the New Properties, including the properties
under development, are leased with initial terms of 10 to 20
years. The New Properties were purchased with $13.6 million of
cash on hand and $58.6 million from the acquisition credit
facility (of which, $46.6 million was repaid from the net
proceeds of the stock offering).
Page 13
1996 ACQUISITION ACTIVITY
Total
Approx-
Initial imate
Lease Leasable
Term Square
Tenant Industry Location (Years) Feet
============= ========== =============== ======= ========
1ST QTR
- -------
Carver's Restaurant Glendale, AZ 19.8 8,100
Econo Lube
N' Tune (1) Automotive Chula Vista, CA 15.0 2,800
Econo Lube
N' Tune (1) Automotive Broomfield, CO 15.0 2,800
Econo Lube
N' Tune (1) Automotive Dallas, TX 15.0 2,700
Econo Lube
N' Tune (1) Automotive Lewisville, TX 15.0 2,700
2ND QTR
- -------
Econo Lube
N' Tune (1) Automotive Arvada, CO 15.0 2,800
------- --------
Average/Total 15.8 21,900
======= ========
(1) The Company acquired these properties as undeveloped land and
is funding construction and other costs relating to the
development of the properties by the prospective tenants. The
prospective tenants have entered into leases with the Company
covering these properties and are contractually obligated to
complete construction on a timely basis and to pay construction
cost overruns to the extent they exceed the construction budget
by more than 5%. As of April 30, 1996, the total acquisition and
estimated construction costs for the properties under development
was $4.4 million, of which $2.2 million had not been funded.
Distributions
-------------
Cash distributions paid for the three months ended
March 31, 1996 and 1995 totaled $16.0 million and $8.8 million,
respectively. During the three months ended March 31, 1996, the
Company paid a special distribution of $0.23 per share and three
monthly distributions of $0.155 per share, totaling $0.695 per
Page 14
share. For the first quarter of 1995, the Company paid three
monthly distributions of $0.15 per share, totaling $0.45 per
share. In March and April 1996, the Company declared two
distributions of $0.155 per share payable on April 15 and
May 15, 1996, respectively.
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 months ended March 31, 1996 to the
three months ended March 31, 1995.
Rental revenue was $13.7 million for 1996 versus $11.8
million for 1995. The increase in rental revenue was primarily
due to the New Properties. In the first quarter of 1996 and
1995, these properties generated revenue of $1.95 million and
$156,000, respectively.
Substantially all the Company's leases provide for increases
in rents through (i) base rent increases tied to a consumer price
index with adjustment ceilings or (ii) overage rent based on a
percentage of the tenants' gross sales. Some leases contain both
types of clauses. Rental revenue generated on 625 properties
owned during both the first quarter of 1995 and 1996 increased by
$182,000 or 1.6%, from $11.66 million to $11.84 million,
respectively. Percentage rent, which is included in rental
revenue, in 1996 and 1995 was $220,000 and $213,000,
respectively.
Unleased properties are a factor in determining gross revenue
generated and property costs incurred by the Company. At
March 31, 1996 and 1995, the Company had four properties that
were not under lease. All of the remaining properties were under
lease agreements with third party tenants.
Page 15
The following table represents Realty Income's rental revenue
by industry for the quarters ended March 31, 1996 and 1995:
March 31, 1996 March 31, 1995
---------------------- ----------------------
Rental Percentage Rental Percentage
Industry Revenue of Total Revenue of Total
================= =========== ========== =========== ==========
Automotive $ 2,082,000 15% $ 1,862,000 16%
Child Care 5,768,000 42% 5,662,000 48%
Convenience Stores 646,000 5% 61,000 1%
Home Furnishings 624,000 4% -- 0%
Restaurant 3,371,000 25% 2,975,000 25%
Other 1,237,000 9% 1,247,000 10%
----------- ---- ----------- ----
Total $13,728,000 100% $11,807,000 100%
=========== ==== =========== ====
Interest revenue decreased by $83,000 in 1996 to $23,000 from
$106,000 in 1995. The decrease in interest was due to lower cash
balances, which reflects the Company's desire to maintain an
appropriate amount of cash as working capital reserves and invest
excess available cash in properties. During the first quarter of
1995, the Company invested $9.3 million of cash on hand in
properties.
Depreciation and amortization was $4.1 million in 1996 versus
$3.3 million in 1995. The increase was primarily due to the
depreciation of the New Properties and amortization of goodwill
recorded in connection with the Merger.
Property expenses were $446,000 in 1996 and $370,000 in 1995.
The increase in property expenses is primarily due to an increase
of $63,000 in bad debt expense, which totaled $70,000 in 1996.
Property expenses include but are not limited to costs for
blanket insurance coverage, property taxes, legal fees, utilities
and maintenance. Costs incurred on the ten multi-tenant
properties in 1996 and 1995 totaled $268,000 and $226,000,
respectively. The leases on these properties are not triple-net
leases.
Interest expense was $520,000 for 1996 as compared to
$335,000 for 1995. The $185,000 increase corresponds to an
increase in the average outstanding balance on the acquisition
credit facility. During 1996 and 1995 interest capitalized on
properties under development totaled $13,000 and $46,000,
respectively.
Page 16
General and administrative expenses were $1.31 million in
1996 versus $502,000 in 1995. The 1996 expenses reflect the
costs of being self-administered, such costs were the
responsibility of the Advisor in 1995. The $808,000 increase in
general and administrative expenses was due to expenses for
management, accounting systems, office facilities, professional
and support personnel. Prior to the Merger these costs were the
responsibility of the Advisor who received advisor fees of $1.5
million in the first quarter of 1995. As part of the Merger, the
advisory agreement was terminated.
The Company reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. In 1996, a $323,000
charge was taken to reduce the net carrying value on two
properties held for sale. No charge was recorded for an
impairment loss in 1995.
During 1996, the Company recorded a gain of $745,000 on the
sale of one restaurant property and the granting of an easement
on another property. During 1995, the Company recorded a gain of
$77,000 on the sale of one child care property. During 1996 and
1995 cash proceeds generated from these sales were $1.52 million
and $315,000, respectively. The Company anticipates a small
number of property sales will occur in the normal course of
business.
For 1996, the Company had net income of $7.9 million versus
$6.0 million in 1995. The increase in net income in 1996 is
primarily due to an increase in rental revenue of $1.8 million on
the New Properties.
Funds from Operations
=====================
FFO for 1996 was $11.5 million versus $9.3 million during
1995. Realty Income defines FFO as net income excluding gain or
loss from sales of properties, plus provision for impairment
losses, plus depreciation and amortization. In accordance with
the recommendations of the National Association of Real Estate
Investment Trusts ("NAREIT"), amortization of deferred financing
costs are not added back to net income to calculate FFO.
Amortization of financing costs are included in interest expense
on the consolidated statements of income.
Management considers FFO to be an appropriate measure of the
performance of an equity REIT. FFO 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.
Page 17
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.
Below is reconciliation of net income to funds from
operations:
1996 1995
=========== ===========
Net Income $ 7,850,000 $ 6,001,000
Plus Depreciation and Amortization 4,074,000 3,345,000
Plus Provision for Impairment Losses 323,000 --
Less Depreciation of Furniture,
Fixtures and Equipment (13,000) --
Less Gain on Sales of Properties (745,000) (77,000)
----------- -----------
Total Funds From Operations $11,489,000 $ 9,269,000
=========== ===========
Properties
==========
As of April 30, 1996, Realty Income owned a diversified
portfolio of 690 properties in 42 states consisting of over 4.6
million square feet of leasable space. The following table sets
forth certain geographic diversification information regarding
these properties:
Total
Number Approx. Percent
of Leasable Annualized of Total
Proper- Percent Square Base Annualized
State ties Leased Feet Rent (1) Base Rent
============ ======= ======= ========= =========== =========
Alabama 4 100% 20,300 $ 160,000 0.3%
Arizona 28 97 189,200 2,349,000 4.3
California 51 98 914,000 9,179,000 16.8
Colorado 40 100 228,200 2,821,000 5.2
Connecticut 3 100 7,100 160,000 0.3
Florida 40 100 298,600 2,974,000 5.4
Georgia 36 100 177,500 2,339,000 4.3
Page 18
(continued)
Total
Number Approx. Percent
of Leasable Annualized of Total
Proper- Percent Square Base Annualized
State ties Leased Feet Rent (1) Base Rent
============ ======= ======= ========= =========== =========
Idaho 11 100 52,000 653,000 1.2
Illinois 22 100 153,400 1,816,000 3.3
Indiana 20 100 89,800 1,315,000 2.4
Iowa 7 100 37,700 411,000 0.8
Kansas 13 100 80,500 900,000 1.7
Kentucky 10 100 30,600 746,000 1.4
Louisiana 2 100 10,700 126,000 0.2
Maryland 6 100 34,900 501,000 0.9
Massachusetts 4 100 20,900 431,000 0.8
Michigan 5 100 26,900 343,000 0.6
Minnesota 17 100 118,400 1,671,000 3.1
Mississippi 3 100 17,300 176,000 0.3
Missouri 26 96 161,300 1,775,000 3.3
Montana 1 100 5,400 71,000 0.1
Nebraska 8 100 47,100 509,000 0.9
Nevada 5 100 29,100 350,000 0.6
New Hampshire 1 100 6,400 119,000 0.2
New Jersey 2 100 22,700 344,000 0.6
New Mexico 3 100 12,000 102,000 0.2
New York 4 100 24,300 469,000 0.9
North Carolina 18 100 77,100 1,154,000 2.1
Ohio 38 100 170,700 2,529,000 4.6
Oklahoma 9 100 60,200 539,000 1.0
Oregon 19 100 105,200 1,204,000 2.2
Pennsylvania 4 100 28,300 420,000 0.8
South Carolina 19 95 82,000 1,022,000 1.9
South Dakota 1 100 6,100 79,000 0.1
Tennessee 8 100 56,400 784,000 1.4
Texas 125 99 833,000 8,546,000 15.6
Utah 7 100 45,400 588,000 1.1
Virginia 12 100 67,000 888,000 1.6
Washington 41 100 246,900 2,922,000 5.4
West Virginia 1 100 4,600 58,000 0.1
Wisconsin 10 100 55,200 665,000 1.2
Wyoming 6 100 32,100 410,000 0.8
------- ------- --------- ----------- ---------
Total/Average 690 99% 4,686,500 $54,618,000 100.0%
======= ======= ========= =========== =========
Page 19
(1) Does not include percentage rents (i.e., additional rent
calculated as a percentage of the tenant's gross sales above a
specified level), if any, that may be payable under leases
covering certain of the properties. Annualized base rent is
calculated by multiplying the monthly contractual base rent as of
April 30, 1996 for each of the properties by 12.
Realty Income's 690 properties consist of 139 after-market
automotive retail locations, 319 child care centers, 36
convenience stores, 4 home furnishings stores, 177 restaurant
facilities, and 15 other properties. Of the 690 properties, 621
or 90% are leased to national or major regional retail chain
operators; 44 or 6% are leased to franchisees of retail chain
operators; 21 or 3% are leased to other tenant types; and 4 or
less than 1% are available for lease. The following table sets
forth certain information regarding the Company's properties as
of April 30, 1996, classified according to the business of the
respective tenants:
Approx. Realty Total
Total Income Approx. Annual-
Loca- Owned Leasable ized
Industry tions Loca- Square Base
Tenant Segment (1) tions Feet Rent (2)
============== ============ ======= ====== ========= ===========
AUTOMOTIVE
- ----------
Discount Tire Parts 294 18 103,200 $ 1,155,000
Northern
Automotive Parts 560 79 409,100 4,177,000
R&S Strauss Parts 107 2 31,200 431,000
Econo Lube
N' Tune Service 214 6 16,700 402,000
Jiffy Lube Service 1,212 24 57,000 1,413,000
Q Lube Service 460 4 7,600 180,000
Speedy
Muffler
King Service 1,032 4 20,200 311,000
Other Automotive -- 2 6,500 90,000
------ --------- -----------
Total after-market automotive 139 651,500 8,159,000
Page 20
(continued)
Approx. Realty Total
Total Income Approx. Annual-
Loca- Owned Leasable ized
Industry tions Loca- Square Base
Tenant Segment (1) tions Feet Rent (2)
============== ============ ======= ====== ========= ===========
CHILD CARE
- ----------
Children's
World
Learning
Centers Child Care 500 134 964,000 13,272,000
KinderCare
Learning
Centers Child Care 1,150 13 79,800 1,055,000
La Petite
Academy Child Care 770 171 977,300 8,732,000
Other Child Care -- 1 4,200 --
------ --------- -----------
Total child care 319 2,025,300 23,059,000
CONVENIENCE STORES
- ------------------
7-ELEVEN Convenience 15,000 3 9,700 235,000
Dairy Mart Convenience 871 18 53,600 1,121,000
The Pantry Convenience 391 14 34,400 1,333,000
Other Convenience -- 1 2,100 31,000
------ --------- -----------
Total convenience stores 36 99,800 2,720,000
HOME FURNISHINGS
- ----------------
Levitz Home
Furnishings 135 4 376,400 2,496,000
------ --------- -----------
Total home furnishings 4 376,400 2,496,000
Page 21
(continued)
Approx. Realty Total
Total Income Approx. Annual-
Loca- Owned Leasable ized
Industry tions Loca- Square Base
Tenant Segment (1) tions Feet Rent (2)
============== ============ ======= ====== ========= ===========
RESTAURANTS
- -----------
Don Pablo's Dinner House 46 7 60,700 592,000
Carver's Dinner House 94 3 26,600 495,000
Other Dinner House -- 14 115,100 1,198,000
Golden Corral Family 448 90 529,600 6,981,000
Sizzler Family 597 7 37,600 837,000
Other Family -- 4 23,900 157,000
Hardees Fast Food 3,870 3 10,300 108,000
Taco Bell Fast Food 4,623 24 54,100 1,488,000
Whataburger Fast Food 517 9 23,000 616,000
Other Fast Food -- 16 45,200 952,000
------ --------- -----------
Total restaurants 177 926,100 13,424,000
Total other Miscellaneous 15 607,400 4,760,000
------ --------- -----------
Total 690 4,686,500 $54,618,000
====== ========= ===========
(1) Approximate total number of retail locations in operation
(including both owned and franchised locations), based on
information provided to the Company by the respective tenants in
the first quarter of 1996.
(2) Does not include percentage rents (i.e., additional rent
calculated as a percentage of the tenant's gross sales above a
specified level), if any, that may be payable under leases
covering certain of the properties. Annualized base rent is
calculated by multiplying the monthly contractual base rent as of
April 30, 1996 for each of the properties by 12.
Of the 690 properties owned at April 30, 1996, 680 are
single-tenant with the remaining being multi-tenant properties.
The average remaining lease term for all leases on the Company's
properties, excluding the multi-tenant properties, is
approximately 9.0 years. The lease expirations for six
properties under construction are based on the estimated date of
completion of such properties.
Page 22
The following table sets forth certain information regarding
the timing of lease expirations on the Company's 676 triple-net
leased, single tenant retail properties:
Percent of Total
Number of Annualized Annualized
Year Leases Expiring Base Rent (2) Base Rent
======== =============== ============= =================
1996 15 $ 572,000 1.1%
1997 15 587,000 1.2
1998 4 168,000 0.3
1999 20 897,000 1.8
2000 27 1,323,000 2.6
2001 46 3,599,000 7.1
2002 74 5,868,000 11.6
2003 70 5,206,000 10.2
2004 78 6,244,000 12.3
2005 87 6,022,000 11.9
2006 31 2,593,000 5.1
2007 78 4,383,000 8.6
2008 41 3,384,000 6.7
2009 11 714,000 1.4
2010 34 2,729,000 5.4
2011 15 1,179,000 2.3
2012 1 135,000 0.3
2013 0 -- --
2014 2 265,000 0.5
2015 25 4,789,000 9.4
2016 1 66,000 0.1
2017 0 -- --
2018 1 39,000 0.1
--------------- ------------- -----------------
Total 676 (1) $50,762,000 100.0%
=============== ============= =================
(1) The table does not include ten multi-tenant properties and
four vacant, unleased properties owned by the Company.
(2) Does not include percentage rents (i.e., additional rent
calculated as a percentage of the tenant's gross sales above a
specified level), if any, that may be payable under leases
covering certain of the properties. Annualized base rent is
calculated by multiplying the monthly contractual base rent as of
April 30, 1996 for each of the properties by 12.
Page 23
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. Approximately 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.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits:
Exhibit No. Description
=========== ===========
2.1 Agreement and Plan of Merger between Realty
Income Corporation and R.I.C. Advisor, Inc.
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 of Realty Income Corporation
(filed as Exhibit 3.1 to the Company's Form
10-Q for the quarter ended September 30, 1994
and incorporated herein by reference)
3.2 Amended and Restated Bylaws of Realty Income
Corporation (filed as Exhibit 3.2 to the
Company's 10-Q for the quarter ended
September 30, 1995 and incorporated herein by
reference)
27 Financial Data Schedule (electronically filed
with the Securities and Exchange Commission
only)
B. No report on Form 8-K was filed during the quarter for
which this report is filed.
Page 24
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: May 10, 1996 ----------------------------------
Gary M. Malino, Vice President
Chief Financial Officer (Principal
Financial and Accounting Officer)
Page 25
EXHIBIT INDEX
Exhibit No. Description Page
=========== =========== ====
27 Financial Data Schedule (Electronically
filed with the Securities and Exchange
Commission only)...............................27
Page 26