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, 1997, 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)
MARYLAND
========
(State or other jurisdiction of incorporation or organization)
33-0580106
==========
(I.R.S. Employer Identification No.)
220 WEST CREST STREET, ESCONDIDO, CALIFORNIA 92025
===================================================
(Address of principal executive offices)
(760) 741-2111
==============
(Registrant's telephone number)
Indicate by 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 [ ]
There were 25,698,664 shares of common stock outstanding as of
November 10, 1997.
Page 1
REALTY INCOME CORPORATION
Form 10-Q
September 30, 1997
Table of Contents
-----------------
PART I. FINANCIAL INFORMATION Pages
============================== -----
Item 1: Financial Statements
Consolidated Balance Sheets........................ 3-4
Consolidated Statements of Income.................. 5
Consolidated Statements of Cash Flows.............. 6-7
Notes to Consolidated Financial Statements......... 8-12
Item 2: Management's Discussion And Analysis Of
Financial Condition And Results Of Operations......13-34
PART II. OTHER INFORMATION
==========================
Item 6: Exhibits and Reports on Form 8-K...................34-35
SIGNATURE................................................... 35
EXHIBIT INDEX............................................... 36
EXHIBITS.................................................... 37
Page 2
PART I. FINANCIAL INFORMATION
==============================
ITEM 1. FINANCIAL STATEMENTS
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
===========================
September 30, 1997 And December 31, 1996
(dollars in thousands, except per share data)
1997
(Unaudited) 1996
=========== =========
ASSETS
Real estate, at cost:
Land $ 204,807 $ 165,598
Buildings and improvements 469,301 398,942
--------- ---------
674,108 564,540
Less - accumulated depreciation
and amortization (147,677) (138,307)
--------- ---------
Net real estate 526,431 426,233
Cash and cash equivalents 6,198 1,559
Accounts receivable 1,599 1,905
Due from affiliates 348 383
Other assets 2,782 2,183
Goodwill, net 21,132 21,834
--------- ---------
TOTAL ASSETS $ 558,490 $ 454,097
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Distributions payable $ 3,622 $ 3,619
Accounts payable and accrued expenses 4,250 1,172
Other liabilities 6,184 5,065
Line of credit payable 67,600 70,000
Notes payable 110,000 --
--------- ---------
TOTAL LIABILITIES 191,656 79,856
--------- ---------
Continued on next page
Page 3
(continued)
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
===========================
September 30, 1997 And December 31, 1996
(dollars in thousands, except per share data)
1997
(Unaudited) 1996
=========== =========
Stockholders' equity
Preferred stock, par value
$1.00 per share, 20,000,000 shares
authorized, no shares issued
or outstanding -- --
Common stock, par value $1.00 per
share, 100,000,000 shares
authorized, 22,998,664 and 22,979,537
shares issued and outstanding in
1997 and 1996, respectively 22,999 22,980
Capital in excess of par value 516,447 516,004
Accumulated distributions
in excess of net income (172,612) (164,743)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 366,834 374,241
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 558,490 $ 454,097
========= =========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
Page 4
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Income
=================================
For the three and nine months ended September 30, 1997 and 1996
(dollars in thousands, except per share data)
(Unaudited)
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/97 9/30/96 9/30/97 9/30/96
========= ========= ========= =========
REVENUE
Rental $ 16,801 $ 13,777 $ 48,256 $ 41,106
Interest 34 27 161 77
Other 8 36 29 71
--------- --------- --------- ---------
16,843 13,840 48,446 41,254
--------- --------- --------- ---------
EXPENSES
Depreciation and
amortization 4,706 4,052 13,654 12,175
General and
administrative 1,338 1,272 3,923 3,870
Property 409 397 1,262 1,256
Interest 2,450 497 5,771 1,502
Provision for
impairment losses 70 -- 140 323
--------- --------- --------- ---------
8,973 6,218 24,750 19,126
--------- --------- --------- ---------
Income from operations 7,870 7,622 23,696 22,128
Gain on sales of
properties 596 268 1,023 1,226
--------- --------- --------- ---------
NET INCOME $ 8,466 $ 7,890 $ 24,719 $ 23,354
========== ========== ========== ==========
Net income per share $ 0.37 $ 0.34 $ 1.08 $ 1.02
========== ========== ========== ==========
Weighted average
number of shares
outstanding 22,999,536 22,977,501 22,993,205 22,976,974
========== ========== ========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
Page 5
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
=====================================
For the nine months ended September 30, 1997 and 1996
(dollars in thousands)
(Unaudited)
1997 1996
========= =========
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24,719 $ 23,354
Adjustments to net income:
Depreciation and amortization 13,654 12,175
Provision for impairment losses 140 323
Gain on sales of properties (1,023) (1,226)
Change in assets and liabilities:
Accounts receivable and
other assets 901 1,060
Accounts payable, accrued
expenses and other liabilities 4,677 (31)
--------- ---------
Net cash provided by
operating activities 43,068 35,655
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of properties 3,858 3,645
Acquisition of and additions
to properties (114,190) (19,984)
--------- ---------
Net cash used in
investing activities (110,332) (16,339)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of distributions (32,586) (37,337)
Proceeds from notes issued 109,152 --
Increase in other assets (286) --
Proceeds from line of credit 92,400 33,300
Payment of line of credit (94,800) (2,700)
Payments to the defined benefit
pension plan (2,223) --
Payment of notes payable -- (12,597)
Proceeds from stock issued 246 --
Stock offering costs -- (188)
--------- ---------
Net cash provided by (used in)
financing activities 71,903 (19,522)
--------- ---------
(Continued on next page)
Page 6
(continued)
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
=====================================
For the nine months ended September 30, 1997 And 1996
(dollars in thousands)
(Unaudited)
1997 1996
========= =========
Net increase (decrease) in
cash and cash equivalents 4,639 (206)
Cash and cash equivalents,
beginning of period 1,559 1,650
--------- ---------
Cash and cash equivalents,
end of period $ 6,198 $ 1,444
========= =========
For supplemental disclosures, see note 8.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
Page 7
REALTY INCOME CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
==========================================
September 30, 1997
(Unaudited)
1. Management Statement and General
- ------------------------------------
The consolidated 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, 1996, which are included in the
Company's 1996 Annual Report on Form 10-K, as certain disclosures
which would substantially duplicate those contained in such audited
financial statements have been omitted from this report.
2. Credit Facility
- -------------------
The Company has a $130 million, revolving, unsecured acquisition
credit facility that expires in November 1999. As of
September 30, 1997 and December 31, 1996, the outstanding balance on
the credit facility was $67.6 million and $70.0 million, respectively,
with an effective interest rate of approximately 6.94% and 6.85%,
respectively. A commitment fee of 0.15%, per annum, accrues on the
average amount of the unused available credit commitment.
For the nine months ended September 30, 1997 and 1996, interest of
$135,000 and $91,000, respectively, was capitalized on properties
under construction. For the three months ended September 30, 1997 and
1996, interest of $53,000 and $51,000 was so capitalized.
3. Properties
- --------------
At September 30, 1997, the Company owned a diversified portfolio of
795 properties in 42 states. Of the Company's properties, 788 are
single tenant properties with the remaining properties being multi-
tenant properties. At September 30, 1997, seven properties were
vacant and available for lease.
During the first nine months of 1997, the Company acquired 64 retail
properties located in 24 states at an aggregate cost of approximately
$112.9 million (excluding the estimated unfunded development costs
totaling $2.1 million on properties under construction). The company
also invested $3.1 million in properties acquired in 1996, which were
under development.
Page 8
1997 ACQUISITION ACTIVITY THROUGH SEPTEMBER 30TH
Total
Invested
through
Tenant Industry City/State 9/30/97
============ =========== ============ ============
1ST QUARTER
- -----------
Aaron Rents Home Furnishings Arlington, TX $ 1,849,000
Aaron Rents Home Furnishings Cedar Park, TX 1,080,000
Aaron Rents Home Furnishings Houston, TX 1,554,000
Barnes & Noble Book Store Tampa, FL 4,696,000
Econo Lube Auto Service Durham, NC 624,000
Econo Lube Auto Service Greensboro, NC 603,000
Econo Lube Auto Service Charleston, SC 511,000
Econo Lube Auto Service Columbia, SC 638,000
Econo Lube Auto Service Greenville, SC 500,000
Jiffy Lube Auto Service Springboro, OH 714,000
OfficeMax Office Supplies Lakewood, CA 4,497,000
2ND QUARTER
- -----------
Aaron Rents Home Furnishings Ridgeland, MS 1,051,000
Aaron Rents Home Furnishings Memphis, TN 2,236,000
Aaron Rents Home Furnishings Webster, TX 821,000
Best Buy Consumer
Electronics Smyrna, GA 4,184,000
Econo Lube Auto Service Denver, CO 723,000
Econo Lube (1) Auto Service Duluth, GA 360,000
Econo Lube (1) Auto Service Garner, NC 354,000
Econo Lube Auto Service Pineville, NC 559,000
Jiffy Lube(1) Auto Service Brentwood, TN 317,000
Linens 'N
Things Home Accessories Omaha, NE 5,907,000
OfficeMax Office Supplies Hutchinson, KS 1,974,000
OfficeMax Office Supplies Salina, KS 2,070,000
Petco Pet Supplies Dickson City, PA 2,539,000
QuikTrip Convenience Store Dunwoody, GA 1,270,000
QuikTrip Convenience Store Lithonia, GA 1,163,000
QuikTrip Convenience Store Mableton, GA 847,000
QuikTrip Convenience Store Norcross, GA 1,035,000
QuikTrip Convenience Store Stone Mountain, GA 1,062,000
QuikTrip Convenience Store Godfrey, IL 1,108,000
QuikTrip Convenience Store Granite City, IL 1,100,000
QuikTrip Convenience Store Madison, IL 799,000
QuikTrip Convenience Store Tulsa, OK 635,000
Speedy Brake Auto Service Southington, CT 898,000
Speedy Brake Auto Service Billerica, MA 861,000
Continued on next page
Page 9
(continued) Total
Invested
through
Tenant Industry City/State 9/30/97
============ =========== ============ ============
Staples Office Supplies Helena, MT 2,067,000
Staples Office Supplies New Philadelphia, OH 2,377,000
3RD QUARTER
- -----------
Bob's Stores Apparel Store Danbury, CT 7,297,000
Bob's Stores Apparel Store Westbury, NY 10,287,000
East Coast Oil Convenience Store Midlothian, VA 627,000
Econo Lube (1) Auto Service Flagstaff, AZ 182,000
Econo Lube (1) Auto Service Midwest City, OK 129,000
Econo Lube (1) Auto Service The Village, OK 147,000
Econo Lube Auto Service Houston, TX 636,000
Hollywood Video Video Rental Birmingham, AL 1,256,000
Hollywood Video Video Rental Tulsa, OK 1,323,000
Hollywood Video Video Rental Columbia, TN 1,182,000
Hollywood Video Video Rental Jackson, TN 1,238,000
Hollywood Video Video Rental Murfreesboro, TN 1,292,000
Hollywood Video Video Rental Smyrna, TN 1,138,000
Hollywood Video Video Rental Beaumont, TX 1,126,000
Hollywood Video Video Rental Lubbock, TX 1,124,000
Jiffy Lube Auto Service Newport, KY 612,000
Jiffy Lube Auto Service Cincinnati, OH 493,000
Jiffy Lube Auto Service Fairfield, OH 558,000
Jiffy Lube Auto Service Milford, OH 623,000
Jiffy Lube Auto Service Nashville, TN 569,000
Just For Feet Shoe Store Houston, TX 3,396,000
Linens 'N
Things Home Accessories Danbury, CT 4,240,000
Linens 'N
Things Home Accessories Henderson, NV 4,371,000
Linens 'N
Things Home Accessories Spring, TX 3,596,000
OfficeMax Office Supplies Riverside, CA 3,070,000
OfficeMax Office Supplies Westbury, NY 6,170,000
Speedy Brake Auto Service Akron, OH 599,000
------------
Properties acquired in 1997 112,864,000
Funding in 1997 of buildings under
development on land acquired in 1996 3,105,000
Capitalized expenditures relating
to existing properties 22,000
------------
TOTAL INVESTED $115,991,000
============
Page 10
(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 tenant. The tenants have entered into leases
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 a
predetermined percentage.
4. Gain on Sales of Properties
- -----------------------------------
For the nine months ended September 30, 1997, the Company sold nine
properties (six restaurant, one multi-tenant and two child care
centers) for a total of $3.9 million and recognized a gain of $1.0
million. For the nine months ended September 30, 1996, the Company
sold five properties (four restaurant and one multi-tenant) for $3.6
million and recognized a gain of $1.2 million.
For the three months ended September 30, 1997, the Company sold two
properties (one child care and one restaurant) for $1.0 million and
recognized a gain of $596,000. For the three months ended
September 30, 1996, the company sold three properties (two restaurant
and one multi-tenant) for $1.4 million and recognized a gain of
$268,000.
5. Distributions Paid And Payable
- ----------------------------------
During the nine months ended September 30, 1997, the Company paid nine
monthly distributions of $0.1575 per share, totaling $1.4175 per
share. For the nine months ended September 30, 1996, the Company paid
nine monthly distributions of $0.155 per share, totaling $1.395 per
share and paid a special distribution of $0.23 per share in
January 1996. As of September 30, 1997, a distribution of $0.1575 per
share was declared and payable.
6. Notes Payable
- -----------------
On May 6, 1997 Realty Income issued $110 million of 7.75% unsecured
notes due May 2007 (the "Notes"). The Notes were sold at 99.929% of
par for a yield to the investors of 7.76%. After taking into effect
the $1.1 million gain realized on the treasury interest rate lock
agreement (see note 7), the effective interest rate to the Company on
the Notes is 7.62%. The net proceeds from the sale of the Notes were
used to repay $93.7 million of outstanding borrowings under the
Company's credit facility and to acquire properties. Interest on the
Notes is payable semiannually each May and November, commencing
November 1997. Currently, there is no formal trading market for the
Notes and the Company has not and does not intend to list the Notes on
any security exchange.
Page 11
7. Derivative Financial Instrument
- -----------------------------------
The Company had a derivative financial instrument and did not use it
for trading purposes. The derivative financial instrument was used to
manage a well-defined interest rate risk.
In December 1996, the Company entered into a treasury interest rate
lock agreement to hedge against rising interest rates applicable to
the debt offering described in note 6. Under the interest rate lock
agreement, the Company was to receive or make a payment based on the
differential between a specified interest rate (6.537%) and the actual
10-year treasury interest rate on notional principal amount of $90
million, at the end of six months. Based on the 10-year treasury
interest rate at May 1, 1997, the Company realized a $1.1 million gain
on the agreement, which was received in June 1997. The gain on the
agreement is being amortized over 10 years (the life of the Notes) as
an offset to interest expense.
8. Supplemental Disclosure of Cash Flow Information
- ----------------------------------------------------
Interest paid during the first nine months of 1997 and 1996 was $2.3
million and $1.1 million respectively.
The following non-cash investing and financing activities are included
in the accompanying financial statements:
A. In 1997, the acquisition of three properties resulted in the
following (dollars in thousands):
Increases in:
Land $1,724
Building 77
Other liabilities 1,801
B. In 1997, the Company granted shares of stock resulting in the
following (dollars in thousands):
Increases in:
Other assets $216
Common Stock 9
Capital in excess of par 207
9. Subsequent Event
- --------------------
On October 15, 1997, the Company issued 2,700,000 shares of common
stock at a price of $27.00 per share.
Page 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
When used in this Form 10-Q Report, the words estimated, anticipated
and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially.
In particular, among the factors that could cause actual results to
differ materially are continued qualification as a real estate
investment trust, general business and economic conditions,
competition, interest rates, accessibility of debt and equity capital
markets and other risks inherent in the real estate business including
tenant defaults, potential liability relating to environmental matters
and illiquidity of real estate investments. For further description
and detail of other factors please see "Business -- Other Items" in
Form 10K for the year ended December 31, 1996. Readers are cautioned
not to place undue reliance on forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
GENERAL
=======
Realty Income Corporation, a Maryland corporation (the "Company" or
"Realty Income"), is a fully integrated, self-administered and self-
managed real estate investment trust ("REIT") that acquires and
manages net leased retail properties. As of September 30, 1997, the
Company owned a diversified portfolio of 795 properties located in 42
states with over 6.1 million square feet of leasable space. Of the
795 properties in the portfolio, 788 are single-tenant properties with
the remainder being multi-tenant properties. As of
September 30, 1997, 782 or over 99% of the 788 single-tenant
properties were net leased with an average remaining lease term
(excluding extension options) of approximately 8.5 years.
Realty Income adheres to a focused strategy of acquiring freestanding,
single-tenant, retail properties leased to regional and national
retail chains under long-term, net lease agreements. The Company
typically acquires and then leases back, retail store locations from
retail chain store operators, providing capital to the operators for
continued expansion and other purposes. Realty Income's acquisition
and investment activities are concentrated in highly specific target
markets and focus on middle-market retailers providing goods and
services which satisfy basic consumer needs. The Company's net lease
agreements generally are for initial terms of 10 to 20 years, require
the tenant to pay a minimum monthly rent and property operating
expenses (taxes, insurance and maintenance), and provide for future
rent increases (typically subject to ceilings) based on increases in
Page 13
the consumer price index or additional rent calculated as a percentage
of tenant's gross sales above a specific level.
Since 1970 and through August 31, 1997, Realty Income has acquired and
leased back to regional and national retail chains 744 properties
(including 31 properties that have been sold) and has collected
approximately 98% of the original contractual rent obligation on these
properties. Realty Income believes that the long-term ownership of an
actively managed, diversified portfolio of retail properties leased
under long-term, net lease agreements can produce consistent,
predictable income and the potential for long-term capital
appreciation. Management believes that long-term leases, coupled with
tenants assuming responsibility for property expenses under the net
lease structure, generally produce a more predictable income stream
than many other types of real estate portfolios.
The Company is a fully integrated real estate company with in-house
acquisition, leasing, legal, financial underwriting, portfolio
management and capital markets expertise. The five senior officers of
the Company, who have each managed the Company's properties and
operations for between seven and 12 years, owned approximately 0.9% of
the Company's outstanding common stock, as of November 10, 1997. The
directors and five senior officers of the Company, as a group, owned
approximately 3.2% of the Company's outstanding common stock, as of
November 10, 1997. Realty Income had 44 employees as of
November 10, 1997.
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 active portfolio management and the acquisition of
additional properties. The Company also seeks 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's portfolio management focus includes: (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 the acquisition of additional properties under long-term, net
lease agreements with initial contractual base rent which, at the time
of acquisition and as a percentage of acquisition costs, is in excess
of the Company's estimated cost of capital.
Page 14
Other Information
-----------------
Thomas A. Lewis succeeded William E. Clark as Chief Executive Officer
of the Company in May 1997. Mr. Lewis has been an officer of the
Company since 1987 and has served as the Vice Chairman of the Board of
Directors since 1994. Mr. Clark has continued as Chairman of the
Board of Directors.
In May 1997, the Company was reincorporated as a Maryland corporation,
which is also named Realty Income Corporation, pursuant to a merger of
the Company into a wholly-owned Maryland subsidiary and the conversion
of each outstanding share of Common Stock of the Company into one
share of common stock of the surviving corporation.
The Company's common stock is listed on the New York Stock Exchange
under the symbol "O" and its central index key ("CIK") number is
726728.
The Company anticipates that the year 2000 date issue will not
adversely affect its current software or computers and will only
minimally impact its consolidated financial position and results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
===============================
Cash Reserves
-------------
Realty Income was organized for the purpose of operating as an equity
REIT 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 leases on its retail
properties. The Company intends to retain an appropriate amount of
cash as working capital reserves. At September 30, 1997, the Company
had cash and cash equivalents totaling $6.2 million.
Management believes that the Company's cash and cash equivalents on
hand, cash provided from operating activities and borrowing capacity
are sufficient to meet its liquidity needs for the foreseeable future.
Capital Funding
---------------
On October 15, 1997, Realty Income issued 2,700,000 shares of common
stock at a price of $27.00 per share ("the Stock Offering"). The net
proceeds were used to repay borrowings of $62.6 million under the
acquisition credit facility and to acquire properties. These
Page 15
borrowings under the acquisition credit facility were used to acquire
properties during June 1997 through September 1997.
On May 6, 1997, Realty Income issued $110 million of 7.75% notes due
May 2007 (the "Notes"). The Notes were sold at 99.929% of par for a
yield to the investors of 7.76%. After taking into effect the gain of
$1.1 million realized on the treasury interest rate lock agreement,
which is described in the next paragraph, the effective interest rate
on the Notes to the Company is 7.62%. The net proceeds from the sale
of the Notes were used to repay $93.7 million of outstanding
borrowings under the Company's credit facility and to acquire
properties. Interest on the Notes is payable semiannually each May
and November, commencing November 1997. Currently, there is no formal
trading market for the Notes and the Company has not listed and does
not intend to list the Notes on any securities exchange.
In December 1996, the Company entered into a treasury interest rate
lock agreement to hedge against the possibility of rising interest
rates. Under the interest rate lock agreement, the Company was to
receive or make a payment based on the differential between a
specified interest rate, 6.537%, and the actual 10-year treasury
interest rate on notional principal of $90 million, at the end of six
months. Based on the 10-year treasury interest rate at May 1, 1997,
the Company realized a $1.1 million gain on the agreement, which was
received in June 1997. The gain on the agreement is being amortized
over 10 years (the life of the Notes) as an offset to interest
expense.
During the fourth quarter of 1996, the Company received investment
grade senior unsecured debt ratings from Duff & Phelps Rating Company,
Moody's Investor Services, Inc. and Standard and Poor's Credit Rating
Group, of BBB, Baa3, and BBB-, respectively. These ratings are
subject to change based upon, among other things, the Company's
results of operations and financial condition.
Realty Income has a $130 million, revolving, unsecured acquisition
credit facility that expires in November 1999. The credit facility
currently bears interest at 1.25% over the London Interbank Offered
Rate ("LIBOR") and offers the Company other interest rate options. As
of November 10, 1997, the full $130 million of borrowing capacity was
available to the Company under the acquisition credit facility. On
October 15, 1997, the net proceeds from the Stock Offering were used
to repay outstanding borrowings under the credit facility. 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. Any additional borrowings
will increase the Company's exposure to interest rate risk.
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 1997, the Company filed a universal shelf
Page 16
registration statement with the Securities and Exchange Commission
covering up to $300 million in value of common stock, preferred stock
or debt securities. Approximately $72.9 million in value of common
stock and debt securities has been issued under the universal shelf
registration statement through November 10, 1997.
Property Acquisitions
---------------------
During the first nine months of 1997, Realty Income acquired 64 retail
properties located in 24 states for $112.9 million (excluding the
estimated unfunded development costs of $2.1 million on properties
under construction at September 30, 1997) and selectively sold nine
properties, increasing the number of properties in its portfolio to
795. The 64 properties acquired will contain approximately 969,700
leasable square feet and are 100% leased under net leases, with an
average initial lease term of 14.7 years. The weighted average annual
unleveraged return on the cost of the 64 properties (including the
estimated unfunded development cost of the nine properties under
development) is estimated to be 10.30%, 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 total acquisition and estimated
development costs. Since it is possible that a tenant could default
on the payment of contractual rent, no assurance can be given that the
actual return on the cost of the 64 properties acquired in 1997 will
not differ from the foregoing percentage.
Of the properties acquired during the first nine months of 1997, 58
were occupied as of November 1, 1997 and the remaining six were pre-
leased and under construction pursuant to contracts under which the
tenant has 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 properties acquired in 1997, including the
properties under development, are leased with initial terms of 10 to
20 years.
During the first nine months of 1997, the Company also invested $3.1
million in development properties acquired in 1996 and $22,000 in two
existing property in its portfolio.
Page 17
1997 ACQUISITION ACTIVITY THROUGH SEPTEMBER 30TH
Initial Approx.
Lease Leasable
Term Square
Tenant Industry City / State (Years) Feet
- ------ -------- ------------ ------- -------
1st Quarter
- -----------
Aaron Rents Home Furnishings Arlington, TX 10.0 68,100
Aaron Rents Home Furnishings Cedar Park, TX 10.0 23,300
Aaron Rents Home Furnishings Houston, TX 10.0 70,300
Barnes & Noble Book Store Tampa, FL 14.2 30,000
Econo Lube Auto Service Durham, NC 15.0 2,800
Econo Lube Auto Service Greensboro, NC 15.0 2,400
Econo Lube Auto Service Charleston, SC 15.0 2,800
Econo Lube Auto Service Columbia, SC 15.0 2,800
Econo Lube Auto Service Greenville, SC 15.0 2,800
Jiffy Lube Auto Service Springboro, OH 20.0 2,400
OfficeMax Office Supplies Lakewood, CA 14.6 28,700
2nd Quarter
- -----------
Aaron Rents Home Furnishings Ridgeland, MS 10.0 22,300
Aaron Rents Home Furnishings Memphis, TN 10.0 51,500
Aaron Rents Home Furnishings Webster, TX 10.0 22,600
Best Buy Consumer
Electronics Smyrna, GA 20.0 46,100
Econo Lube Auto Service Denver, CO 15.0 2,800
Econo Lube (1) Auto Service Duluth, GA 15.0 2,800
Econo Lube (1) Auto Service Garner, NC 15.0 2,800
Econo Lube Auto Service Pineville, NC 15.0 2,800
Jiffy Lube (1) Auto Service Brentwood, TN 20.0 2,000
Linens 'N
Things Home Accessories Omaha, NE 15.8 46,600
OfficeMax Office Supplies Hutchinson, KS 15.0 23,500
OfficeMax Office Supplies Salina, KS 15.0 23,500
Petco Pet Supplies Dickson City, PA 14.7 16,000
QuikTrip Convenience Store Dunwoody, GA 11.3 3,200
QuikTrip Convenience Store Lithonia, GA 18.3 3,200
QuikTrip Convenience Store Mableton, GA 17.4 3,200
QuikTrip Convenience Store Norcoss, GA 17.4 3,200
QuikTrip Convenience Store Stone Mountain, GA 11.3 3,200
QuikTrip Convenience Store Godfrey, IL 13.3 3,200
QuikTrip Convenience Store Granite City, IL 13.3 3,200
QuikTrip Convenience Store Madison, IL 13.3 3,200
QuikTrip Convenience Store Tulsa, OK 11.3 3,200
Speedy Brake Auto Service Southington, CT 15.1 5,300
Speedy Brake Auto Service Billerica, MA 15.0 5,000
(continued on next page)
Page 18
(continued) Initial Approx.
Lease Leasable
Term Square
Tenant Industry City / State (Years) Feet
- ------ -------- ------------ ------- -------
Staples Office Supplies Helena, MT 14.7 24,600
Staples Office Supplies New Philadel-
phia, OH 14.9 24,000
3rd Quarter
- -----------
Bob's Stores Apparel Store Danbury, CT 15.3 50,000
Bob's Stores Apparel Store Westbury, NY 19.3 48,100
East Coast Oil Convenience Store Midlothian, VA 15.0 2,400
Econo Lube (1) Auto Service Flagstaff, AZ 15.0 2,800
Econo Lube (1) Auto Service Midwest City, OK 15.0 2,800
Econo Lube (1) Auto Service The Village, OK 15.0 2,800
Econo Lube Auto Service Houston, TX 15.0 2,600
Hollywood Video Video Rental Birmingham, AL 14.7 7,500
Hollywood Video Video Rental Tulsa, OK 13.2 8,500
Hollywood Video Video Rental Columbia, TN 14.2 7,500
Hollywood Video Video Rental Jackson, TN 15.0 7,500
Hollywood Video Video Rental Murfreesboro, TN 14.6 7,500
Hollywood Video Video Rental Smyrna, TN 14.6 7,500
Hollywood Video Video Rental Beaumont, TX 13.9 7,500
Hollywood Video Video Rental Lubbock, TX 15.0 7,500
Jiffy Lube Auto Service Newport, KY 14.5 2,700
Jiffy Lube Auto Service Cincinnati, OH 14.4 2,700
Jiffy Lube Auto Service Fairfield, OH 14.5 2,800
Jiffy Lube Auto Service Milford, OH 10.6 2,200
Jiffy Lube Auto Service Nashville, TN 17.9 2,100
Just For Feet Shoe Store Houston, TX 15.0 16,000
Linens 'N
Things Home Accessories Danbury, CT 15.3 49,900
Linens 'N
Things Home Accessories Henderson, NV 19.3 37,700
Linens 'N
Things Home Accessories Spring, TX 19.3 36,000
OfficeMax Office Supplies Riverside, CA 14.2 30,000
OfficeMax Office Supplies Westbury, NY 13.6 20,200
Speedy Brake Auto Service Akron, OH 15.4 5,500
----- -------
Average / Total 14.7 969,700
===== =======
(1) The Company acquired these properties as undeveloped land and as
of November 1, 1997 was funding construction and other costs related
to the development of the properties by the tenants. The 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 a predetermined percentage.
Page 19
Distributions
-------------
Cash distributions paid during the first nine months of 1997 and 1996
were $32.6 million and $37.3 million, respectively. The 1996 cash
distributions include a special distribution of $5.3 million in
January 1996.
During the nine months ended September 30, 1997, the Company paid nine
monthly distributions of $0.1575 per share, totaling $1.4175 per
share. For the nine months ended September 30, 1996, the Company paid
nine monthly distributions of $0.155 per share totaling $1.395 per
share and a special distribution of $0.23 per share in January 1996.
In September and October 1997, the Company declared two distributions
of $0.1575 per share which were paid on October 15, 1997 and will be
paid on November 17, 1997, respectively.
FUNDS FROM OPERATIONS ("FFO")
=============================
FFO for the third quarter of 1997 was $12.6 million versus $11.7
million during the third quarter of 1996, an increase of $951,000 or
8.2%. FFO for the nine months ended September 30, 1997 was $37.4
million versus $34.6 million during the comparable period of 1996, an
increase of $2.8 million or 8.2%.
Realty Income defines FFO as net income before gain on 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 in the consolidated statements of income.
The following is a reconciliation of net income to FFO, distributions
paid and weighted average number of shares outstanding for the third
quarter of 1997 and 1996 (dollars in thousands):
1997 1996
========= =========
Net income $ 8,466 $ 7,890
Plus depreciation and amortization 4,706 4,052
Plus provision for impairment losses 70 --
Less depreciation of furniture,
fixtures and equipment and
amortization of organization costs (36) (15)
Less gain on sales of properties (596) (268)
--------- ---------
Total Funds From Operations $ 12,610 $ 11,659
========= =========
(Continued on next page)
Page 20
(continued)
Cash Distributions Paid $ 10,864 $ 10,684
FFO in excess of Cash Distributions $ 1,746 $ 975
Weighted average number of shares
outstanding 22,999,536 22,977,501
The following is a reconciliation of net income to FFO, distributions
paid and weighted average number of shares outstanding for the nine
months ended September 30, 1997 and 1996 (dollars in thousands):
1997 1996
========= =========
Net income $ 24,719 $ 23,354
Plus depreciation and amortization 13,654 12,175
Plus provision for impairment losses 140 323
Less depreciation of furniture,
fixtures and equipment and
amortization of organization costs (60) (40)
Less gain on sales of properties (1,023) (1,226)
--------- ---------
Total Funds From Operations $ 37,430 $ 34,586
========= =========
Regular Cash Distributions Paid $ 32,586 $ 32,052
FFO in excess of Regular Distributions $ 4,844 $ 2,534
Special Cash Distributions Paid -- $ 5,285
Weighted average number of shares
outstanding 22,993,205 22,976,974
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, although it should be noted that not all REITs
calculate FFO the same way so comparisons with such REITs may not be
meaningful.
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 flows from
operating, investing, and financing activities as a measure of
liquidity or ability to make cash distributions or to pay debt
service.
RESULTS OF OPERATIONS
=====================
The following is a comparison of the three and nine months ended
September 30, 1997 to the three and nine months ended
September 30, 1996.
Page 21
Rental revenue was $16.8 million for the quarter ended
September 30, 1997 versus $13.8 million for the comparable quarter in
1996, an increase of $3.0 million. The increase in rental revenue was
primarily due to the acquisition of 62 properties during 1996 and 64
properties during the first nine months of 1997 (the "New
Properties".)
The New Properties generated revenue of $3.0 million in the third
quarter of 1997 compared to $99,000 in the third quarter of 1996, an
increase of $2.9 million. At November 1, 1997 annualized contractual
lease payments on the New Properties are approximately $17.9 million
(excluding estimated rent from six properties under development and
any percentage rents).
Rental revenue was $48.3 million for the nine months ended
September 30, 1997 versus $41.1 million for the comparable nine months
in 1996, an increase of $7.2 million. The increase in rental revenue
was primarily due to the New Properties which generated revenue of
$6.8 million in the first nine months of 1997 compared to $165,000
during the first nine months of 1996, an increase of $6.7 million.
Of the 795 properties in the portfolio as of September 30, 1997, 788
are single-tenant properties with the remaining properties being
multi-tenant properties. As of September 30, 1997, 782 or over 99% of
the 788 single-tenant properties were net leased with an average
remaining lease term (excluding extension options) of approximately
8.5 years. At September 30, 1997, 781 or over 99% of the Company's
788 single tenant properties had leases which provide for increases in
rents through: (i) base rent increases tied to a consumer price index
with adjustment ceilings; (ii) overage rent based on a percentage of
the tenants' gross sales or (iii) fixed increases. Some leases
contain more than one of these clauses. Percentage rent, which is
included in rental revenue, was $216,000 during the third quarter of
1997 and $247,000 for the comparable quarter in 1996. Percentage rent
during the first nine months of 1997 and 1996 was $586,000 and
$567,000, respectively.
Same store rents generated on 668 properties owned during all of both
the third quarter of 1997 and 1996 increased by $253,000 or 1.9%, to
$13.74 million from $13.49 million. Same store rents generated on the
same 668 properties owned during all of both the first nine months of
1997 and 1996 increased by $679,000 or 1.7%, to $41.05 million from
$40.38 million.
Page 22
The following table represents Realty Income's rental revenue by
industry for the third quarter ended September 30, 1997 and 1996
(dollars in thousands):
Three Months Ended
-------------------------------------------
September 30, 1997 September 30, 1996
-------------------- --------------------
Rental Percentage Rental Percentage
Industry Revenue of Total Revenue of Total
=================== =========== ========== =========== ==========
Apparel Stores $ 14 0.1% $ -- --%
Automotive Parts 1,390 8.3 1,348 9.8
Automotive Service 1,110 6.6 669 4.9
Book Stores 121 0.7 -- --
Child Care 5,997 35.7 5,877 42.7
Consumer Electronics 1,148 6.8 10 0.1
Convenience Stores 1,048 6.2 666 4.8
Home Furnishings 986 5.9 624 4.5
Office Supplies 357 2.1 -- --
Pet Supplies 63 0.4 -- --
Restaurants 3,298 19.6 3,407 24.7
Shoe Stores 24 0.1 -- --
Video Rental 36 0.2 -- --
Other 1,209 7.3 1,176 8.5
-------- ------ -------- ------
Total $ 16,801 100.0% $ 13,777 100.0%
======== ====== ======== ======
The following table represents Realty Income's rental revenue by
industry for the nine months ended September 30, 1997 and 1996
(dollars in thousands):
Nine Months Ended
-------------------------------------------
September 30, 1997 September 30, 1996
-------------------- --------------------
Rental Percentage Rental Percentage
Industry Revenue of Total Revenue of Total
=================== =========== ========== =========== ==========
Apparel Stores $ 14 --% $ -- --%
Automotive Parts 4,295 8.9 4,186 10.2
Automotive Service 3,008 6.2 1,910 4.6
Book Stores 273 0.6 -- --
Child Care 17,776 36.8 17,413 42.4
Consumer Electronics 3,262 6.8 10 --
Convenience Stores 2,650 5.5 1,959 4.8
Home Furnishings 2,529 5.2 1,872 4.5
Office Supplies 596 1.2 -- --
Pet Supplies 71 0.1 -- --
(Continued on next page)
Page 23
(continued) Nine Months Ended
-------------------------------------------
September 30, 1997 September 30, 1996
-------------------- --------------------
Rental Percentage Rental Percentage
Industry Revenue of Total Revenue of Total
=================== =========== ========== =========== ==========
Restaurants 10,066 20.9 10,186 24.8
Shoe Stores 24 0.1 -- --
Video Rental 36 0.1 -- --
Other 3,656 7.6 3,570 8.7
-------- ------ -------- ------
Total $ 48,256 100.0% $ 41,106 100.0%
======== ====== ======== ======
Unleased properties are a factor in determining gross revenue
generated and property costs incurred by the Company. At
September 30, 1997, the Company had seven properties (one of which is
a multi-tenant property) that were not under lease as compared to
eight at September 30, 1996. At September 30, 1997, 788 or over 99%
of the 795 properties in the portfolio were under lease agreements
with third party tenants.
Interest and other revenue during the third quarter of 1997 and 1996
totaled $42,000 and $63,000, respectively. The decrease of $21,000
was due to lower average cash and cash equivalent balances in the
third quarter of 1997. Interest and other revenue for the first nine
months of 1997 and 1996 totaled $190,000 and $148,000, respectively,
an increase of $42,000. The increase in the first nine months of 1997
was primarily due to interest earned on bond offering proceeds in
excess of the $93.7 million used to payoff the credit facility in
May 1997. These proceeds were invested in new properties during May
and June 1997.
Depreciation and amortization was $4.7 million in the third quarter of
1997 versus $4.1 million for the comparable quarter in 1996 and $13.7
million for the nine months ended September 30, 1997 versus $12.2
million for the comparable nine months in 1996. The increase in 1997
was primarily due to depreciation of the New Properties.
General and administrative expenses increased by $66,000 to $1.34
million in the third quarter of 1997 versus $1.27 million in 1996.
The increase in general and administrative expenses was primarily due
to an increase in property acquisition expenses. General and
administrative expenses as a percentage of revenue decreased to 7.9%
in the third quarter of 1997 as compared to 9.2% in 1996.
General and administrative expenses increased by $53,000 to $3.92
million in the first nine months of 1997 versus $3.87 million in 1996.
The increase in general and administrative expenses was primarily due
to an increase in property acquisition expenses and employee costs.
General and administrative expenses as a percentage of revenue
Page 24
decreased to 8.1% in the first nine months of 1997 as compared to 9.4%
in 1996. During the second and third quarter of 1997, the Company
increased its number of employees to 44. The increase in employees is
anticipated to increase general and administrative expenses on an
annualized basis by $250,000 or less than one half of one percent of
FFO on an annualized basis.
Property expenses are broken down into costs associated with non-net
leased multi-tenant properties, unleased single-tenant properties
and general portfolio expenses. Expenses related to the multi-tenant
and unleased single-tenant properties include, but are not limited to,
property taxes, maintenance, insurance, utilities, property
inspections, bad debt expense and legal fees. General portfolio costs
include, but are not limited to, insurance, legal, property
inspections and title search fees. At September 30, 1997, seven
properties were available for lease as compared to eight at
September 30, 1996.
Property expenses were $409,000 in the third quarter of 1997 and
$397,000 in the comparable quarter of 1996, an increase of $12,000.
Property expenses were roughly flat at approximately $1.3 million
during the first nine months of 1997 and 1996.
Interest expense in the third quarter of 1997 increased by $2.0
million to $2.5 million, as compared to $497,000 during the third
quarter of 1996. The following is a summary of the five components of
interest expense for the third quarter of 1997 and 1996 (dollars in
thousands):
1997 1996 Net Change
------ ----- ----------
Interest on outstanding loans
and notes $2,405 $ 453 $1,952
Credit facility commitment fees 44 40 4
Amortization of credit facility
origination costs and deferred
bond financing costs 83 55 28
Amortization of the gain on the
treasury lock agreement (29) -- (29)
Interest capitalized (53) (51) (2)
------ ---- ------
Totals $2,450 $ 497 $1,953
====== ===== ======
Interest incurred during the third quarter in 1997 was $2.0 million
higher than in 1996, due to an increase in the average outstanding
balances and a higher average interest rate. The higher average
interest rate was due to interest on the Notes issued in May 1997.
During the third quarter of 1997, the average outstanding balances and
interest rate (after taking into effect amortization of the gain on
the treasury lock agreement) were $125.7 million and 7.50% as compared
to $26.1 million and 6.92% during the comparable period in 1996.
Page 25
During the third quarter of 1997, the credit facility's average interest
rate was 6.91% and average outstanding balance was $15.7 million.
Interest expense in the first nine months of 1997 increased by $4.3
million to $5.8 million, as compared to $1.5 million during the first
nine months of 1996. The following is a summary of the five
components of interest expense for the first nine months of 1997 and
1996 (dollars in thousands):
1997 1996 Net Change
------ ------ ----------
Interest on outstanding loans
and notes $5,654 $1,305 $4,349
Credit facility commitment fees 99 124 (25)
Amortization of credit facility
origination costs and deferred
bond financing costs 199 164 35
Amortization of the gain on the
treasury lock agreement (46) -- (46)
Interest capitalized (135) (91) (44)
------ ------ ------
Totals $5,771 $1,502 $4,269
====== ======= ======
Interest incurred during the first nine months of 1997 on all
outstanding loans and notes was $4.3 million higher than in 1996 due
to an increase in the average outstanding balances and higher average
interest rate. The higher average interest rate was due to interest
on the Notes issued in May 1997. During the first nine months of
1997, the average outstanding balances and interest rate (after taking
into effect amortization of the gain on the treasury lock agreement)
were $102.9 million and 7.29% as compared to $25.1 million and 6.96%
during the comparable period of 1996. During the first nine months of
1997, the credit facility's average outstanding balance and interest
rate were $43.3 million and 6.81%.
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 the third quarter of 1997, a $70,000
charge was taken to reduce the net carrying value on one property
because it became held for sale. During the first nine months of
1997, a $140,000 charge was taken on two properties. In the first
nine months of 1996, a $323,000 charge was taken to reduce the net
carrying value on two properties because they became held for sale.
No charge was recorded for impairment losses in the third quarter of
1996. Three of these four properties have been sold.
The Company anticipates a small number of property sales will occur in
the normal course of business. During the third quarter of 1997, the
Company sold two properties (one restaurant and one child care center)
for $1.0 million and recognized a gain of $596,000. During the
Page 26
comparable period of 1996, the Company sold three properties (two
restaurant and one multi-tenant) for $1.4 million and recognized a
gain of $268,000.
During the first nine months of 1997, the Company sold nine properties
(six restaurant, two child care centers and one multi-tenant location)
for a total of $3.9 million and recorded a gain of $1.0 million.
During the comparable period of 1996, the Company sold five properties
(four restaurant and one multi-tenant) for $3.6 million and recognized
a gain of $1.2 million.
For the third quarter of 1997, the Company had net income of $8.5
million versus $7.9 million in 1996. The $576,000 increase in net
income is primarily due to the increase in rental revenue from New
Properties of $2.9 million and an increase in same store rents on 668
properties owned during both periods of $253,000, which were partially
offset by an increase in depreciation and amortization and interest
expense, totaling $2.6 million.
For the first nine months 1997, the Company had net income of $24.7
million versus $23.4 million in 1996. The $1.4 million increase in
net income is primarily due to the increase in rental revenue from New
Properties of $6.7 million and an increase in same store rents on 668
properties owned during both periods of $679,000, which were partially
offset by an increase in depreciation and amortization and interest
expense, totaling $5.7 million.
PROPERTIES
==========
As of October 1, 1997, Realty Income owned a diversified portfolio of
795 properties in 42 states consisting of over 6.1 million square feet
of leasable space. The portfolio consists of two apparel stores, 98
automotive parts and accessories stores, 78 automotive service
locations, one book store, 317 child care centers, 37 consumer
electronics stores, 52 convenience stores, 14 home furnishings and
accessories stores, seven office supplies stores, one pet supplies
store, 167 restaurant facilities, one shoe store, eight video rental
locations and 12 other properties. Of the 795 properties, 731 or 92%
were leased to national or regional retail chain operators; 41 or 5%
were leased to franchisees of retail chain operators; 16 or 2% were
leased to other tenant types; and seven or less than 1% were available
for lease. At October 1, 1997, over 98% of the properties were under
net lease agreements. Net leases typically require the tenant to be
responsible for property operating costs including property taxes,
insurance and expenses of maintaining the property.
The Company's net leased retail properties are primarily leased to
national and regional chain store operators. At October 1, 1997, the
properties averaged approximately 7,700 square feet of leaseable
retail space on approximately 45,600 square feet of land. Generally,
Page 27
buildings are single-tenant retail properties with adequate parking on
site to accommodate peak retail periods. The properties tend to be on
major thoroughfares with relatively high traffic counts and adequate
access, egress and proximity to a sufficient population base to
constitute a sufficient market or trade area for the retailer's
business.
The following table sets forth certain geographic diversification
information regarding Realty Income's portfolio at October 1, 1997:
Number Approx. Percent of
of Leasable Annualized Annualized
Proper- Percent Square Base Base
State ties Leased Feet Rent (1) Rent
========== ======= ======= ======== =========== ========
Alabama 7 100% 49,800 $ 452,000 0.6%
Arizona 27 99 181,200 2,436,000 3.4
California 54 92 1,031,900 10,846,000 15.0
Colorado 43 98 236,400 3,107,000 4.3
Connecticut 7 100 122,300 1,572,000 2.2
Florida 48 100 457,300 4,231,000 5.9
Georgia 44 100 252,500 3,502,000 4.8
Idaho 11 100 52,000 659,000 0.9
Illinois 28 100 192,200 2,416,000 3.3
Indiana 22 100 117,600 1,385,000 1.9
Iowa 8 100 51,700 457,000 0.6
Kansas 17 100 176,000 1,873,000 2.6
Kentucky 12 100 36,000 914,000 1.3
Louisiana 2 100 10,700 126,000 0.2
Maryland 6 100 34,900 508,000 0.7
Massachusetts 5 100 25,900 542,000 0.8
Michigan 5 100 26,900 356,000 0.5
Minnesota 17 100 118,400 1,739,000 2.4
Mississippi 12 100 128,900 902,000 1.2
Missouri 27 100 163,600 1,924,000 2.7
Montana 2 100 30,000 276,000 0.4
Nebraska 9 100 93,700 1,091,000 1.5
Nevada 6 100 66,900 760,000 1.1
New Hampshire 1 100 6,400 125,000 0.2
New Jersey 2 100 22,700 346,000 0.5
New Mexico 3 100 12,000 103,000 0.1
New York 7 100 106,500 2,272,000 3.1
North Carolina 22 100 88,300 1,466,000 2.0
Ohio 53 100 247,100 3,937,000 5.4
Oklahoma 13 100 77,500 849,000 1.2
Oregon 17 100 92,400 1,066,000 1.5
Pennsylvania 5 100 44,300 676,000 0.9
South Carolina 19 100 75,000 1,143,000 1.6
South Dakota 1 100 6,100 79,000 0.1
Tennessee 17 100 164,400 1,852,000 2.6
Texas 133 99 1,074,700 10,173,000 14.1
(Continued on next page)
Page 28
(continued) Number Approx. Percent of
of Leasable Annualized Annualized
Proper- Percent Square Base Base
State ties Leased Feet Rent (1) Rent
========== ======= ======= ======== =========== ========
Utah 7 100 45,400 591,000 0.8
Virginia 17 100 81,500 1,339,000 1.9
Washington 42 98 249,700 2,977,000 4.1
West Virginia 2 100 16,800 147,000 0.2
Wisconsin 11 100 60,500 738,000 1.0
Wyoming 4 100 20,100 264,000 0.4
----- ----- --------- ----------- ------
Totals 795 99% 6,148,200 $72,217,000 100.0%
===== ===== ========= =========== ======
(1) Annualized base rent is calculated by multiplying the monthly
contractual base rent as of October 1, 1997 for each of the properties
by 12, except that, for the properties under construction, estimated
contractual base rent for the first month of the respective leases is
used instead of base rent as of October 1, 1997. The estimated
contractual base rent for the properties under construction is based
upon the estimated acquisition costs of the properties. Annualized
base rent 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. Percentage rent totaled $1.7 million in 1996.
The following table sets forth certain information regarding the
Company's properties as of October 1, 1997, classified according to
the business of the respective tenants:
Approx. Realty
Total Income Approx. Annual-
Loca- Owned Leasable ized
Industry tions Loca- Square Base
Tenant Segment (1) tions Feet Rent (2)
========== ========= ======= ====== ======== =========
APPAREL STORES
- --------------
Bob's Stores Apparel Store 30 2 98,000 $ 1,928,000
--- --------- ----------
AUTOMOTIVE PARTS & ACCESSORIES
- ------------------------------
CSK Auto Parts 580 79 409,200 4,223,000
Discount Tire Parts 310 18 104,900 1,178,000
Other Parts -- 1 3,400 49,000
--- --------- ----------
Total Automotive Parts
& Accessories 98 517,500 5,450,000
--- --------- ----------
(Continued on next page)
Page 29
(continued) Approx. Realty
Total Income Approx. Annual-
Loca- Owned Leasable ized
Industry tions Loca- Square Base
Tenant Segment (1) tions Feet Rent (2)
========== ========= ======= ====== ======== =========
AUTOMOTIVE SERVICE
- ------------------
Econo Lube
N' Tune Service 210 26 72,400 1,763,000
Jiffy Lube Service 1,400 35 82,700 2,257,000
Q-Lube Service 490 4 7,600 183,000
R & S Strauss Service 110 2 31,200 431,000
Speedy Brake Service 1,080 10 56,700 787,000
Other Service -- 1 3,100 42,000
--- --------- ----------
Total Automotive Service 78 253,700 5,463,000
--- --------- ----------
BOOK STORES
- -----------
Barnes & Noble Book Stores 1,010 1 30,000 450,000
--- --------- ----------
CHILD CARE
- ----------
Children's World Learning
Centers Child Care 530 134 964,000 13,916,000
Kinder-Care Learning
Centers Child Care 1,150 13 79,800 1,087,000
La Petite
Academy Child Care 790 167 959,000 8,751,000
Other Child Care -- 3 13,300 70,000
--- --------- ----------
Total Child Care 317 2,016,100 23,824,000
--- --------- ----------
CONSUMER ELECTRONICS
- --------------------
Best Buy Electronics 270 3 150,900 1,738,000
Rex Stores Electronics 230 34 408,300 2,694,000
--- --------- ----------
Total Consumer Electronics 37 559,200 4,432,000
--- --------- ----------
(Continued on next page)
Page 30
(continued) Approx. Realty
Total Income Approx. Annual-
Loca- Owned Leasable ized
Industry tions Loca- Square Base
Tenant Segment (1) tions Feet Rent (2)
========== ========= ======= ====== ======== =========
CONVENIENCE STORES
- ------------------
7-ELEVEN Convenience 20,240 3 9,700 235,000
Dairy Mart Convenience 1,020 22 66,500 1,523,000
East Coast Oil Convenience 40 3 8,800 286,000
QuikTrip Convenience 330 9 28,800 924,000
The Pantry Convenience 400 14 34,400 1,333,000
Other Convenience -- 1 2,100 0
--- --------- ----------
Total Convenience Stores 52 150,300 4,301,000
--- --------- ----------
HOME FURNISHINGS & ACCESSORIES
- ------------------------------
Aaron Rents Furnishings 290 6 258,000 888,000
Levitz Furnishings 130 4 376,400 2,502,000
Linens 'N
Things Accessories 170 4 170,100 1,753,000
--- --------- ----------
Total Home Furnishings
& Accessories 14 804,500 5,143,000
--- --------- ----------
OFFICE SUPPLIES
- ---------------
OfficeMax Office Supplies 560 5 125,900 1,759,000
Staples Office Supplies 560 2 48,600 456,000
--- --------- ----------
Total Office Supplies 7 174,500 2,215,000
--- --------- ----------
PET SUPPLIES
- ------------
Petco Pet Supplies 340 1 16,000 253,000
--- --------- ----------
RESTAURANTS
- -----------
Carvers Dinner House 90 3 26,600 495,000
Don Pablo's Dinner House 70 7 60,700 611,000
Other Dinner House -- 12 93,100 887,000
Golden Corral Family 460 85 501,200 6,616,000
Sizzler Family 630 7 37,600 848,000
Other Family -- 2 11,600 108,000
(Continued on next page)
Page 31
(continued) Approx. Realty
Total Income Approx. Annual-
Loca- Owned Leasable ized
Industry tions Loca- Square Base
Tenant Segment (1) tions Feet Rent (2)
========== ========= ======= ====== ======== =========
Hardees Fast Food 3,100 3 10,300 144,000
Taco Bell Fast Food 4,890 24 54,100 1,502,000
Whataburger Fast Food 520 9 23,000 616,000
Other Fast Food -- 15 50,000 878,000
--- --------- ----------
Total Restaurants 167 868,200 12,705,000
--- --------- ----------
SHOE STORES
- -----------
Just For Feet Shoe Stores 660 1 16,000 332,000
--- --------- ----------
VIDEO RENTAL
- ------------
Hollywood
Video Video Rental 70 8 60,700 1,008,000
--- --------- ----------
TOTAL OTHER Miscellaneous 12 583,500 4,713,000
--- --------- ----------
Totals 795 6,148,200 $72,217,000
=== ========= ===========
(1) Approximate total number of retail locations in operation
(including both corporate owned and franchised locations), based on
information provided to the Company by the respective tenants.
(2) Annualized base rent is calculated by multiplying the monthly
contractual base rent as of October 1, 1997 for each of the properties
by 12, except that, for the properties under construction, estimated
contractual base rent for the first month of the respective lease is
used instead of base rent as of October 1, 1997. The estimated
contractual base rent for the properties under construction is based
upon the estimated acquisition costs of the properties. Annualized
base rent 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. Percentage rent totaled $1.7 million in
1996.
Of the 795 properties in the portfolio, 788 are single-tenant
properties with the remaining being multi-tenant properties. As of
October 1, 1997, 782 or over 99% of the 788 single-tenant properties
were net leased with an average remaining lease term (excluding
Page 32
extension options) of approximately 8.5 years. The following table
sets forth certain information regarding the timing of initial lease
term expirations (excluding extension options) on the Company's 782
net leased, single tenant retail properties:
Percent of Total
Number of Annualized Annualized
Year Leases Expiring Base Rent (1) Base Rent
======== =============== ============= =================
1997 7 $ 282,000 0.4%
1998 7 268,000 0.4
1999 27 1,228,000 1.8
2000 30 1,528,000 2.2
2001 53 4,015,000 5.9
2002 74 5,954,000 8.7
2003 66 5,137,000 7.5
2004 109 8,906,000 13.0
2005 87 6,123,000 9.0
2006 28 2,390,000 3.5
2007 85 5,413,000 7.9
2008 43 3,611,000 5.3
2009 12 898,000 1.3
2010 38 3,176,000 4.6
2011 34 4,394,000 6.4
2012 33 3,946,000 5.7
2013 4 1,853,000 2.7
2014 4 458,000 0.7
2015 26 4,914,000 7.2
2016 7 1,357,000 2.0
2017 7 2,504,000 3.7
2018 1 39,000 0.1
--------- ------------ -------
Totals 782 (2) $68,394,000 100.0%
========= ============ =======
(1) Annualized base rent is calculated by multiplying the monthly
contractual base rent as of October 1, 1997 for each of the properties
by 12, except that, for the properties under construction, estimated
contractual base rent for the first month of the respective leases is
used instead of base rent as of October 1, 1997. The estimated
contractual base rent for the properties under construction is based
upon the estimated acquisition costs of the properties. Annualized
base rent 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. Percentage rent totaled $1.7 million in 1996.
(2) The table does not include seven multi-tenant properties (one of
which is vacant) and six vacant, unleased single-tenant properties
owned by the Company. The lease expirations for properties under
construction are based on the estimated date of completion of such
properties.
Page 33
IMPACT OF INFLATION
- -------------------
Tenant leases generally provide for limited increases in rent as a
result of increases in the tenant's sales volumes and/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, 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.
Over 98% of the properties in the portfolio are leased to tenants
under net leases in which the tenant is responsible for property costs
and expenses. These features in the leases reduce the Company's
exposure to rising property expenses due to inflation.
Inflation and increased costs may have an adverse impact on the
tenants if increases in the tenant's operating expenses exceed
increases in revenue.
PART II. OTHER INFORMATION
===========================
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
Exhibit No. Description
=========== ===========
3.1 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)
3.2 Articles of Incorporation of Realty Income
Corporation (filed as Appendix B to the
Company's Proxy Statement and incorporated
herein by reference)
4.1 Form of Indenture dated as of May 6, 1997
between the Company and The Bank of New York
(filed as Exhibit 4.1 to the Company's Form
8-K dated May 5, 1997 and incorporated herein
by reference)
4.2 Pricing Committee Resolutions and Form of
7 3/4% Notes due 2007 (filed as Exhibit 4.2
to the Company's 8-K dated May 5, 1997 and
incorporated herein by reference)
Page 34
4.3 First Supplemental Indenture dated as of
May 28, 1997 between the Company and The Bank
of New York (incorporated by reference to the
Company's Form 8-B12B dated July 29, 1997 and
incorporated herein by reference)
4.4 Specimen Stock Certificate for Registrant's
Common Stock (incorporated by reference to
the Company's Form 8-B12B dated July 29, 1997
and incorporated herein by reference)
10.1 First Amendment to the Stock Incentive Plan,
dated as of June 12, 1997 (incorporated by
reference to the Company's Form 8-B12B dated
July 29, 1997 and incorporated herein by
reference)
10.2 Form of Employment Agreement between the
Company and its Executive Officers
(incorporated by reference to the Company's
Form 8-B12B dated July 29, 1997 and
incorporated herein by reference)
27 Financial Data Schedule
B. No report on Form 8-K was filed by registrant during the
quarter for which this report is filed.
A report on Form 8-K was dated and filed on October 15, 1997
reporting the issuance of 2,700,000 shares of common stock as
a price of $27.00 per share on October 15, 1997.
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 12, 1997 ----------------------------------
Gary M. Malino, Senior Vice President
Chief Financial Officer (Principal
Financial and Accounting Officer)
Page 35
EXHIBIT INDEX
Exhibit No. Description Page
=========== =========== ----
27 Financial Data Schedule..................... 37
Page 36