<PAGE>
(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 SEPTEMBER 30, 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
November 13, 1996: Common Stock, $1.00 par value; 22,976,237
Page 1
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REALTY INCOME CORPORATION
Form 10-Q
September 30, 1996
Table of Contents
-----------------
PART I. FINANCIAL INFORMATION Pages
============================== -----
Item 1: Financial Statements
Consolidated Balance Sheets........................ 3-4
Consolidated Statements of Income.................. 5-6
Consolidated Statements of Cash Flows.............. 7-8
Notes to Consolidated Financial Statements......... 9-14
Item 2: Management's Discussion And Analysis Of
Financial Condition And Results Of Operations......15-32
PART II. OTHER INFORMATION
==========================
Item 6: Exhibits and Reports on Form 8-K...................32-33
SIGNATURE................................................... 34
EXHIBIT INDEX............................................... 35
EXHIBITS....................................................36-64
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PART I. FINANCIAL INFORMATION
==============================
ITEM 1. FINANCIAL STATEMENTS
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
===========================
September 30, 1996 And December 31, 1995
(dollars in thousands, except per share data)
1996 1995
(Unaudited)
=========== =========
ASSETS
Real Estate, at Cost:
Land $ 154,824 $ 147,789
Buildings and Improvements 375,254 367,637
--------- ---------
530,078 515,426
Less - Accumulated Depreciation
and Amortization (134,854) (126,062)
--------- ---------
Net Real Estate, at Cost 395,224 389,364
Cash and Cash Equivalents 1,444 1,650
Accounts Receivable 728 1,638
Due from Affiliates 493 493
Other Assets 1,671 1,927
Goodwill 21,880 22,567
--------- ---------
TOTAL ASSETS $ 421,440 $ 417,639
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Distributions Payable $ 3,561 $ 12,407
Accounts Payable and Accrued Expenses 460 673
Other Liabilities 4,723 4,541
Line of Credit Payable 36,600 6,000
Notes Payable -- 12,597
--------- ---------
TOTAL LIABILITIES 45,344 36,218
--------- ---------
Continued on next page
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(continued)
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
===========================
September 30, 1996 And December 31, 1995
(dollars in thousands, except per share data)
1996 1995
(Unaudited)
=========== =========
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 515,931 516,119
Accumulated Distributions
in Excess of Net Income (162,811) (157,674)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 376,096 381,421
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 421,440 $ 417,639
========= =========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
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REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Income
=================================
For The Three And Nine Months Ended September 30, 1996 And 1995
(dollars in thousands, except per share data)
(Unaudited)
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/96 9/30/95 9/30/96 9/30/95
========== ========== ========== ==========
REVENUE
Rental $ 13,777 $ 13,023 $ 41,106 $ 37,001
Interest 27 48 77 204
Other 36 31 71 68
---------- ---------- ---------- ----------
13,840 13,102 41,254 37,273
---------- ---------- ---------- ----------
EXPENSES
Depreciation
and Amorti-
zation 4,052 3,863 12,175 10,793
General and
Adminis-
trative 1,272 916 3,870 1,913
Advisor Fees -- 753 -- 3,661
Property 397 413 1,256 1,137
Interest 497 1,016 1,502 1,910
Provision for
Impairment
Losses -- -- 323 --
---------- ---------- ---------- ----------
6,218 6,961 19,126 19,414
---------- ---------- ---------- ----------
Income from
Operations 7,622 6,141 22,128 17,859
Net Gain
(Loss) on
Sales of
Properties 268 (21) 1,226 56
---------- ---------- ---------- ----------
NET INCOME $ 7,890 $ 6,120 $ 23,354 $ 17,915
========== ========== ========== ==========
Continued on next page
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(continued)
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Income
=================================
For The Three And Nine Months Ended September 30, 1996 And 1995
(dollars in thousands, except per share data)
(Unaudited)
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/96 9/30/95 9/30/96 9/30/95
========== ========== ========== ==========
Net Income
Per Share $ 0.34 $ 0.31 $ 1.02 $ 0.91
========== ========== ========== ==========
Weighted
Average
Number of
Shares
Outstanding 22,977,501 19,949,843 22,976,974 19,653,479
========== ========== ========== ==========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
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REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
=====================================
For The Nine Months Ended September 30, 1996 And 1995
(dollars in thousands)
(Unaudited)
1996 1995
========= =========
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 23,354 $ 17,915
Adjustments to Net Income:
Depreciation and Amortization 12,175 10,793
Provision for Impairment Losses 323 --
Net Gain on Sales of Properties (1,226) (56)
Change in Assets and Liabilities
(net of the Merger with
R.I.C. Advisor, Inc.):
Accounts Receivable and
Other Assets 1,060 (772)
Due to Advisor -- (32)
Accounts Payable, Accrued
Expenses and Other Liabilities (31) 520
--------- ---------
Net Cash Provided by
Operating Activities 35,655 28,368
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Properties 3,645 463
Acquisition of and Additions
to Properties (19,984) (56,107)
--------- ---------
Net Cash Used in
Investing Activities (16,339) (55,644)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of Distributions (37,337) (26,813)
Proceeds from Line of Credit 33,300 44,600
Payment of Line of Credit (2,700) --
Payment of Notes Payable (12,597) --
Stock Offering Costs (188) --
Cash Acquired from Advisor Merger -- 647
--------- ---------
Net Cash Provided By (Used in)
Financing Activities (19,522) 18,434
--------- ---------
Continued on next page
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(continued)
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
=====================================
For The Nine Months Ended September 30, 1996 And 1995
(dollars in thousands)
(Unaudited)
1996 1995
========= =========
Net Decrease in
Cash and Cash Equivalents (206) (8,842)
Cash and Cash Equivalents,
Beginning of Period 1,650 11,673
--------- ---------
Cash and Cash Equivalents,
End of Period $ 1,444 $ 2,831
========= =========
For supplemental disclosure of cash flow information, see Note 8.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
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REALTY INCOME CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
==========================================
September 30, 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" ("SFAS 121"). SFAS 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 SFAS 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. No provision was recognized in
1995.
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 9
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2. Credit Facility
- -------------------
The Company has a $130 million, three-year, revolving,
unsecured acquisition credit facility that expires in November
1998. As of September 30, 1996 and December 31, 1995, the
outstanding balance on the credit facility was $36.6 million and
$6.0 million, respectively, with an effective interest rate of
approximately 6.88% and 7.19%, respectively. A commitment fee of
0.15%, per annum, accrues on the average amount of the unused
available credit commitment. The fee can increase up to 0.35% if
the Company reaches certain debt levels.
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 nine months ended September 30, 1996 and 1995,
interest of $91,000 and $187,000, respectively, was capitalized
on properties under construction. For the three months ended
September 30, 1996 and 1995, interest of $51,000 and $29,000,
respectively, was so capitalized.
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 nine months ended
September 30, 1996 and 1995 was $217,000 and $758,000,
respectively. Interest incurred on the notes for the three
months ended September 30, 1996 and 1995 was $0 and $239,000,
respectively.
4. Properties
- --------------
At September 30, 1996, the Company owned a diversified
portfolio of 700 properties in 42 states. Of the Company's
properties, 691 are single tenant properties with the remaining
properties being multi-tenant properties. At September 30, 1996,
eight properties were vacant and available for lease. One of the
vacant properties was sold in October 1996 at a nominal gain.
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4. Properties (continued)
- --------------------------
Twenty retail properties in 11 states were acquired during
the first nine months of 1996 at an aggregate cost of
approximately $22.8 million (including the estimated unfunded
development costs on nine properties under construction totaling
$4.0 million).
Total
Invested
through
Tenant Industry City/State 09/30/96
====================== =========== ================= ===========
1ST QUARTER
- -----------
Carver's Restaurant Glendale AZ $ 1,521,000
Econo Lube N' Tune Auto Service Chula Vista CA 723,000
Econo Lube N' Tune Auto Service Broomfield CO 601,000
Econo Lube N' Tune Auto Service Dallas TX 527,000
Econo Lube N' Tune Auto Service Lewisville TX 525,000
2ND QUARTER
- -----------
Dairy Mart (1) Convenience Mt. Washington KY 491,000
Dairy Mart (1) Convenience Tipp City OH 361,000
Econo Lube N' Tune Auto Service Arvada CO 501,000
Jiffy Lube Auto Service Centerville OH 656,000
3RD QUARTER
- -----------
Best Buy Consumer
Electronics Thousand Oaks CA 8,830,000
Dairy Mart (1) Convenience Streetsboro OH 405,000
Dairy Mart (1) Convenience Wadsworth OH 271,000
Econo Lube N' Tune (1) Auto Service Arvada CO 245,000
Econo Lube N' Tune (1) Auto Service Virginia Beach VA 288,000
Econo Lube N' Tune (1) Auto Service Bremerton WA 344,000
Jiffy Lube (1) Auto Service Beavercreek OH 206,000
Jiffy Lube (1) Auto Service Huber Heights OH 286,000
Speedy Brake & Muffler Auto Service Hartford CT 731,000
Speedy Brake & Muffler Auto Service Indianapolis IN 660,000
Speedy Brake & Muffler Auto Service Milwaukee WI 628,000
-----------
Properties acquired in 1996 18,800,000
Funding in 1996 of buildings under
construction on land acquired in 1995 1,025,000
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4. Properties (continued)
- --------------------------
(continued)
Total
Invested
through
Tenant Industry City/State 09/30/96
====================== =========== ================= ===========
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 $19,984,000
===========
(1) The Company acquired these properties, which are under
construction, 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.
5. Net Gain on Sales of Properties
- -----------------------------------
For the nine months ended September 30, 1996, the Company
sold one multi-tenant property, four restaurant properties and
received compensation for granting an easement totaling $3.6
million and recognized a gain of $1.2 million. For the nine
months ended September 30, 1995, the Company sold one child care
property and one multi-tenant property for $463,000 and
recognized a net gain of $56,000.
For the three months ended September 30, 1996, the Company
sold one multi-tenant property and two restaurant properties for
$1.4 million and recognized a gain of $268,000. For the three
months ended September 30, 1995, the Company sold one multi-
tenant property for $148,000 and recognized a loss of $21,000.
Page 12
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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 Nine Months Ended September 30, 1995
Pro Forma
-----------
Revenue $37,483,000
Net Income $16,495,000
Net Income Per Share $ 0.81
7. Distributions Paid And Payable
- ----------------------------------
During the nine months ended September 30, 1996, the Company
paid a special distribution of $0.23 per share and nine monthly
distributions of $0.155 per share. The distributions for the
nine months totaled $1.625 per share.
As of September 30, 1996, distributions of $0.155 per share
were declared and payable on October 15, 1996 to stockholders of
record on October 1, 1996.
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8. Supplemental Disclosure of Cash Flow Information
- ----------------------------------------------------
Interest paid, net of interest capitalized, during the first
nine months of 1996 and 1995 was $1,214,000 and $1,563,000,
respectively.
The following non-cash investing and financing activities are
included in the accompanying financial statements:
The merger of the Advisor into the Company on August 17, 1995
resulted in the following:
Increase in:
Other Assets $ (1,143,000)
Goodwill (21,184,000)
Common Stock retired after the merger (1,230,000)
Increases/(Decrease) in:
Other Liabilities 3,029,000
Due to Advisor (2,000)
Common Stock 991,000
Capital in Excess of Par Value 20,186,000
------------
Cash Acquired from Advisor Merger $ 647,000
============
After the merger, shares acquired by the Company in the
merger were retired resulting in the following decreases:
Common Stock $ (58,000)
Capital in Excess of Par Value (1,172,000)
------------
Total $ (1,230,000)
============
In 1995, Other Assets of $1,526,000 were reclassified to
Goodwill.
Page 14
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
=======
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 September 30, 1996,
Realty Income owned a diversified portfolio of 700 properties in
42 states consisting of over 4.7 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 provide distributions to stockholders.
Additionally, the Company generally will seek to increase FFO per
share and provide 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 15
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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.
In July 1996, the Company expanded its board of directors to
seven members. The new directors are Richard J. VanDerhoff,
President and Chief Operating Officer of the Company, and Willard
H. Smith, formerly a Managing Director, Equity Capital Markets
Division, of Merrill Lynch & Co from 1983 until his recent
retirement in August 1995.
In October 1996, the Company changed transfer agents from
Chase Mellon Shareholder Services to The Bank of New York.
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
September 30, 1996, the Company had cash and cash equivalents
totaling $1.4 million.
Management believes that the Company's cash on hand, cash
provided from operating activities and borrowing capacity are
sufficient to meet its liquidity needs for the foreseeable
future.
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 ("LIBOR") and offers the
Company other interest rate options. As of October 31, 1996,
$93.4 million of borrowing capacity was available to the Company
under the acquisition credit facility. At that time, the
Page 16
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outstanding balance was $36.6 million. This credit facility was
used to payoff senior notes, and 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
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 $46.4 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
---------------------
During the first nine months of 1996, Realty Income purchased
20 retail properties in 11 states for $22.8 million (including
the estimated unfunded development costs on nine properties under
construction totaling $4.0 million). These 20 properties will
contain approximately 129,800 leasable square feet and are 100%
leased under triple-net leases, with an average initial lease
term of 16.5 years. The weighted average annual unleveraged
return on the cost of the 20 properties is estimated to be 10.7%,
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
20 properties acquired in 1996 will not differ from the foregoing
percentage.
In 1996, the Company also invested $923,000 in four
development properties originally acquired in 1995. These four
development properties have been completed and the tenants are
Page 17
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paying rent. Final construction costs of $358,000 are expected
to be funded on two of these properties in the fourth quarter of
1996. Land adjacent to an existing property in the portfolio was
acquired for $102,000 and leased to the Company's adjacent
tenant.
During 1996, the Company also invested $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, which
were then dissolved. These partnerships owned three mixed-use
light industrial business parks in San Diego, CA.
From December 1994 through September 1996, Realty Income
acquired 82 retail properties (the "New Properties") for an
aggregate cost of approximately $92.9 million (including the
estimated unfunded development costs on nine properties totaling
$4.4 million). The New Properties are located in 20 states,
contain approximately 790,600 leasable square feet and are 100%
leased under triple-net leases, with an average initial lease
term of 16.5 years. The weighted average annual unleveraged
return on the cost of the New Properties is estimated to be
11.2%. 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, 73 were occupied as of September 30,
1996 and the remaining nine 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 $18.1
million of cash on hand and $70.4 million from the acquisition
credit facility (of which, $46.4 million was repaid from the net
proceeds of the stock offering). The allocation of costs between
land, and buildings and improvements on the 73 completed and
occupied New Properties was 40.5% and 59.5%, respectively.
Page 18
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1996 ACQUISITION ACTIVITY THROUGH SEPTEMBER 30
Total
Initial Approx.
Lease Leasable
Term Square
Tenant Industry Location (Years) Feet
============== =========== ================= ======= ========
1ST QUARTER
Carver's Restaurant Glendale, AZ 19.8 8,100
Econo Lube
N' Tune Auto Service Chula Vista, CA 15.0 2,800
Econo Lube
N' Tune Auto Service Broomfield, CO 15.0 2,800
Econo Lube
N' Tune Auto Service Dallas, TX 15.0 2,600
Econo Lube
N' Tune Auto Service Lewisville, TX 15.0 2,700
2ND QUARTER
Dairy Mart (1) Convenience Mt. Washington, KY 20.0 2,800
Dairy Mart (1) Convenience Tipp City, OH 15.0 3,800
Econo Lube
N' Tune Auto Service Arvada, CO 15.0 2,800
Jiffy Lube Auto Service Centerville, OH 20.0 2,300
3RD QUARTER
Best Buy Consumer Thousand Oaks, CA 20.0 59,200
Electronics
Dairy Mart (1) Convenience Streetsboro, OH 15.0 3,800
Dairy Mart (1) Convenience Wadsworth, OH 15.0 2,700
Econo Lube
N' Tune (1) Auto Service Arvada, CO 15.0 2,500
Econo Lube
N' Tune (1) Auto Service Virginia Beach, VA 15.0 2,800
Econo Lube
N' Tune (1) Auto Service Bremerton, WA 15.0 2,800
Jiffy Lube (1) Auto Service Beavercreek, OH 20.0 2,300
Jiffy Lube (1) Auto Service Huber Heights, OH 20.0 2,300
Speedy Brake &
Muffler Auto Service Hartford, CT 15.0 10,000
Speedy Brake &
Muffler Auto Service Indianapolis, IN 15.0 5,300
Speedy Brake &
Muffler Auto Service Milwaukee, WI 15.0 5,400
------- --------
Average/Total 16.5 129,800
======= ========
Page 19
<PAGE>
(1) The Company acquired these properties, which are under
construction, 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
September 30, 1996, the total acquisition and estimated
construction costs for the nine properties under development was
$6.7 million, of which $4.0 million had not been funded.
Distributions
-------------
Cash distributions paid during the first nine months of 1996
totaled $37.3 million, including a special distribution of $5.3
million. Cash distributions paid during the comparable period in
1995 totaled $26.8 million. During the first nine months of
1996, the Company paid a special distribution of $0.23 per share
and nine monthly distributions of $0.155 per share, totaling
$1.625 per share. During the first nine months of 1995, the
Company paid seven monthly distributions of $0.15 per share and
increased its monthly distribution to $0.155 per share in August
and September. The distributions for the first nine months of
1995 totaled $1.36 per share.
In September and October 1996, the Company declared two
distributions of $0.155 per share payable on October 15, 1996 and
November 15, 1996, respectively.
Funds from Operations ("FFO")
=============================
FFO for the third quarter of 1996 was $11.7 million versus
$10.0 million during the third quarter of 1995, an increase of
$1.7 million or 16.6%. FFO for the nine months ended
September 30, 1996 was $34.6 million versus $28.7 million during
the comparable period in 1995, an increase of $5.9 million or
20.7%. Realty Income defines FFO as net income before gain
(loss) on sales of properties, plus provision for impairment
losses on properties held for sale, 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.
Management considers FFO to be an appropriate measure of the
performance of an equity REIT. FFO is used by financial analysts
Page 20
<PAGE>
in evaluating REITs and can be one measure of a REIT's ability to
make cash distribution payments. Presentation of this
information provides the reader with an additional measure to
compare the performance of different REITs.
FFO is not necessarily indicative of cash flow available to
fund cash needs and should not be considered as an alternative to
net income as an indication of the Company's performance or to
cash flows from operating, investing, and financing activities as
a measure of liquidity or ability to make cash distributions.
Below is a reconciliation of net income to FFO for the
quarter ended September 30, 1996 and 1995:
1996 1995
=========== ===========
Net Income $ 7,890,000 $ 6,120,000
Plus Depreciation and Amortization 4,052,000 3,863,000
Plus Loss on Sales of Properties -- 21,000
Less Depreciation of Furniture,
Fixtures and Equipment (14,000) (6,000)
Less Gain on Sales of Properties (268,000) --
----------- -----------
Total Funds From Operations $11,660,000 $ 9,998,000
=========== ===========
For the quarter ended September 30, 1996 and 1995, FFO
exceeded cash distributions by $976,000 and $738,000,
respectively.
Below is a reconciliation of net income to FFO for the nine
months ended September 30, 1996 and 1995:
1996 1995
=========== ===========
Net Income $23,354,000 $17,915,000
Plus Depreciation and Amortization 12,175,000 10,793,000
Plus Provision for Impairment Losses 323,000 --
Less Depreciation of Furniture,
Fixtures and Equipment (40,000) (6,000)
Less Net Gain on Sales of Properties (1,226,000) (56,000)
----------- -----------
Total Funds From Operations $34,586,000 $28,646,000
=========== ===========
For the nine months ended September 30, 1996 and 1995, FFO
exceeded cash distributions (excluding the non-recurring special
distribution) by $2.5 million and $1.8 million, respectively.
Page 21
<PAGE>
Results of Operations
=====================
The following is a comparison of the three and nine months
ended September 30, 1996 to the three and nine months ended
September 30, 1995.
Rental revenue was $13.8 million for the quarter ended
September 30, 1996 versus $13.0 million for the comparable
quarter in 1995, an increase of $754,000. The increase in rental
revenue was primarily due to the New Properties. In the quarter
ended September 30, 1996 and 1995, the New Properties generated
revenue of $2.1 million and $1.4 million, respectively, an
increase of $669,000. Percentage rent, which is included in
rental revenue, in the third quarter of 1996 and 1995 was
$247,000 and $274,000, respectively.
Rental revenue was $41.1 million for the nine months ended
September 30, 1996 versus $37.0 million for the comparable nine
months in 1995, an increase of $4.1 million. The increase in
rental revenue was primarily due to the New Properties. In the
nine months ended September 30, 1996 and 1995, the New Properties
generated revenue of $6.0 million and $2.2 million, respectively,
an increase of $3.8 million. Percentage rent for the nine months
ended September 30, 1996 and 1995 was $567,000 and $599,000,
respectively.
At September 30, 1996, 658 or 96.1% of the Company's leases,
on the 685 occupied single-tenant properties, 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 621 properties owned during both the first nine months of 1995
and 1996 increased by $384,000 or 1.1%, from $34.7 million to
$35.1 million. Rental revenue generated on 621 properties owned
during both the third quarter of 1995 and 1996 increased by
$103,000 or 0.9%, from $11.6 million to $11.7 million. When
comparing 1996 to 1995, same store revenue increased at a slower
pace during the third quarter than during the first nine months,
due to an increase in unleased properties during 1996.
Unleased properties are a factor in determining gross revenue
generated and property costs incurred by the Company. At
September 30, 1996, the Company had eight properties that were
not under lease as compared to three properties at September 30,
1995. Four of the eight unleased properties at September 30,
1996 became available for lease during the second and third
quarters of 1996. One of these properties was sold in October
1996 at a nominal gain. The remaining 692 properties were under
lease agreements with third party tenants.
Page 22
<PAGE>
The following table represents Realty Income's rental revenue
by industry for the nine months ended September 30, 1996 and
1995:
September 30, 1996 September 30, 1995
---------------------- ----------------------
Rental Percentage Rental Percentage
Industry Revenue of Total Revenue of Total
=================== =========== ========== =========== ==========
Automotive Parts $ 3,322,000 8% $ 3,296,000 9%
Automotive Service 2,774,000 7% 2,181,000 6%
Child Care 17,413,000 42% 17,125,000 46%
Consumer Electronics 10,000 0% -- --%
Convenience Stores 1,959,000 5% 698,000 2%
Home Furnishings 1,872,000 4% 847,000 2%
Restaurant 10,186,000 25% 9,320,000 25%
Other 3,570,000 9% 3,534,000 10%
----------- ---- ----------- ----
Total $41,106,000 100% $37,001,000 100%
=========== ==== =========== ====
Interest revenue decreased by $21,000 in the third quarter of
1996 to $27,000 from $48,000 in 1995 and by $127,000 in the nine
months ended September 30, 1996 to $77,000 from $204,000 in 1995.
The decrease in interest for both periods 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.
Depreciation and amortization was $4.1 million in the third
quarter of 1996 verses $3.9 million for the comparable quarter in
1995 and $12.2 million for the nine months ended September 30,
1996 verses $10.8 million for the comparable nine months in 1995.
The increase in 1996 was primarily due to the depreciation of the
New Properties and amortization of goodwill recorded in
connection with the Merger.
Total advisor fees and general and administrative expenses
decreased by $397,000 to $1.3 million in the third quarter of
1996 versus $1.7 million in 1995. General and administrative
expenses were $1.3 million in the third quarter of 1996 versus
$916,000 in 1995 and advisor fees of $753,000 in 1995. The
$356,000 increase in general and administrative expenses was due
to the Merger of the Advisor. Subsequent to the Merger, the
Company commenced paying management, accounting systems, office
facilities, professional and support personnel expenses (i.e.
costs of being self-administered). Such costs were the
responsibility of the Advisor through August 17, 1995, which
received advisor fees of $753,000 in the third quarter of 1995.
As part of the Merger, the advisory agreement was terminated.
Page 23
<PAGE>
Total advisor fees and general and administrative expenses
decreased by $1.7 million to $3.9 million in the nine months
ended September 30, 1996 versus $5.6 million in 1995. General
and administrative expenses were $3.9 million in 1996 versus $1.9
million in 1995 and advisor fees of $3.7 million in 1995. The
$2.0 million increase in general and administrative expenses was
due to the Merger of the Advisor. Subsequent to the Merger, the
Company commenced paying for management, accounting systems,
office facilities, professional and support personnel expenses
(i.e. costs of being self-administered). Such costs were the
responsibility of the Advisor through August 17, 1995, which
received advisor fees of $3.7 million in the first nine months of
1995.
During the quarter ended September 30, 1996, the Company
initiated a 401(k) plan. Costs of $32,000 associated with the
plan are included in general and administrative expenses.
Property expenses are broken down into costs associated with
multi-tenant non-triple net lease properties, unleased single-
tenant properties and general portfolio expenses. Costs related
to the multi-tenant and unleased single-tenant properties
include, but are not limited to, property taxes, maintenance,
insurance, utilities, site checks, bad debt expense and legal
fees. General portfolio costs include, but are not limited to,
insurance, legal, site checks and title search fees.
Costs incurred on the nine multi-tenant properties during the
third quarter of 1996 and ten multi-tenant properties in the
comparable period of 1995 totaled $271,000 and $297,000,
respectively. The decrease was primarily due to a decrease in
maintenance and utilities. During the second quarter of 1996
two of the multi-tenant locations became vacant, one of which was
sold in October 1996. Costs incurred on the six unleased single-
tenant properties in the third quarter of 1996 and three unleased
single-tenant properties in the third quarter of 1995 were
$58,000 and $27,000, respectively. The increase is due to
property taxes, maintenance and utilities on the additional
vacant properties. General portfolio costs in 1996 and 1995
totaled $68,000 and $89,000, respectively. The decrease in
general portfolio costs is primarily due to a decrease in
insurance costs.
Costs incurred on the nine multi-tenant properties during the
nine months ended September 30, 1996 and ten multi-tenant
properties in the comparable period of 1995 totaled $830,000 and
$790,000. The increase was primarily due to an increase in
property taxes. Costs incurred on the six unleased single-tenant
properties during the first nine months of 1996 and three
unleased single-tenant properties in the comparable period of
1995 were $149,000 and $70,000. The increase is due to property
Page 24
<PAGE>
taxes, maintenance and utilities on the additional vacant
properties. General portfolio costs in 1996 and 1995 totaled
$277,000.
Interest expense is made up of four components which include:
(i) interest on outstanding loans and notes; (ii) commitment fees
on the undrawn portion of the credit facility; (iii) amortization
of the credit facility origination costs; which are offset by:
(iv) interest capitalized on properties under development.
Interest capitalized on properties under development is included
in the cost of the completed property and amortized over the
estimated useful life of the property.
Interest expense for the third quarter of 1996 was $497,000
as compared to $1.0 million for 1995. Interest incurred in 1996
and 1995 was $454,000 and $936,000, respectively. Interest
incurred was lower in 1996 than in 1995 due to a decrease in the
average outstanding balance and lower interest rates on the
acquisition credit facility and senior notes. During the third
quarter of 1996, the average outstanding balance and interest
rate were $26.1 million and 6.92% as compared to $49.8 million
and 7.45% during the comparable period in 1995. Included in the
interest incurred in 1996 and 1995 was capitalized interest
totaling $51,000 and $30,000, respectively. Commitment fees in
1996 were $39,000 as compared to $24,000 in 1995. In 1996 and
1995, a commitment fee of 0.15% per annum was incurred on the
undrawn portion of the credit facility. Commitment fees
increased in 1996 because the borrowing capacity was increased to
$130 million from $100 million in December 1995. Amortization of
the credit facility origination fees were $55,000 in 1996 as
compared to $86,000 in 1995. The amortized credit facility
origination fees decreased in 1996 as compared to 1995, because
in December 1995 the term of the credit facility was extended one
year, which extended the period of time over which unamortized
fees are amortized.
Interest expense for the nine months ended September 30, 1996
was $1.5 million as compared to $1.9 million for 1995. Interest
incurred in 1996 and 1995 was $1.3 million and $1.7 million,
respectively. Interest incurred was lower in 1996 than in 1995
due to a decrease in the average outstanding balance and lower
interest rates on the acquisition credit facility and senior
notes. During the first nine months of 1996, the average
outstanding balance and interest rate were $25.1 million and
6.96% as compared to $30.4 million and 7.69% during the
comparable period in 1995. Included in the interest incurred in
1996 and 1995 was capitalized interest totaling $91,000 and
$187,000, respectively. Commitment fees in 1996 were $124,000 as
compared to $94,000 in 1995. In 1996 and 1995, a commitment fee
of 0.15% per annum was incurred on the undrawn portion of the
credit facility. Commitment fees increased in 1996 because the
Page 25
<PAGE>
borrowing capacity was increased to $130 million from $100
million in December 1995. Amortization of the credit facility
origination fees were $164,000 in 1996 as compared to $254,000 in
1995. The amortized credit facility origination fees decreased
in 1996 as compared to 1995, because in December 1995 the term of
the credit facility was extended one year, which extended the
period of time over which unamortized fees are amortized.
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 first quarter
of 1996, a $323,000 charge was taken to reduce the net carrying
value on two properties because they were held for sale. No
charge was recorded for an impairment loss in 1995.
The Company anticipates a small number of property sales will
occur in the normal course of business. During the third quarter
of 1996, the Company recorded a gain of $268,000 on the sale of
one multi-tenant property and two restaurant properties. These
sales generated cash proceeds of $1.4 million. During the
comparable period of 1995, the Company sold one child care
property for $148,000 and recognized a loss of $21,000.
During the first nine months 1996, the Company recorded a
gain of $1.2 million on the sale of one multi-tenant property,
four restaurant properties and the granting of an easement on
another property. During 1995, the Company recorded a net gain
of $56,000 on the sale of one child care property and one multi-
tenant property. During 1996 and 1995 cash proceeds generated
from these sales were $3.6 million and $463,000, respectively.
For the third quarter of 1996, the Company had net income of
$7.9 million versus $6.1 million in 1995. The $1.8 million
increase in net income is primarily due to an increase in rental
revenue from New Properties of $669,000 and a decrease in
interest, advisor fees, general and administrative expenses of
$916,000, offset by an increase in depreciation and amortization
expense.
For the nine months ended September 30, 1996, the Company had
net income of $23.4 million versus $17.9 million in 1995. The
$5.5 million increase in net income is primarily due to an
increase in rental revenue of $3.8 million on the New Properties
and a net decrease in interest, advisor fees, general and
administrative expenses of $2.1 million, offset by an increase in
depreciation and amortization expense.
Page 26
<PAGE>
Properties
==========
As of September 30, 1996, Realty Income owned a diversified
portfolio of 700 properties in 42 states consisting of over 4.7
million square feet of leasable space. The following table sets
forth certain geographic diversification information regarding
these properties:
Percent
Total of Total
Number Approx. Annual-
of Leasable Annualized ized
Proper- Percent Square Base Base
State ties Leased Feet Rent (1) Rent
============== ======= ======= ========= =========== ========
Alabama 4 100% 20,300 $ 160,000 0.3%
Arizona 28 93 189,200 2,335,000 4.1
California 52 96 973,200 10,068,000 17.8
Colorado 41 98 230,700 2,898,000 5.1
Connecticut 4 100 17,200 240,000 0.4
Florida 40 100 298,600 2,976,000 5.3
Georgia 36 100 177,500 2,363,000 4.2
Idaho 11 100 52,000 656,000 1.2
Illinois 22 100 153,400 1,845,000 3.3
Indiana 20 95 88,300 1,224,000 2.2
Iowa 6 100 32,600 348,000 0.6
Kansas 13 100 80,500 913,000 1.6
Kentucky 11 100 33,400 827,000 1.5
Louisiana 2 100 10,700 126,000 0.2
Maryland 6 100 34,900 504,000 0.9
Massachusetts 4 100 20,900 440,000 0.8
Michigan 5 100 26,900 347,000 0.6
Minnesota 17 100 118,400 1,699,000 3.0
Mississippi 3 100 17,300 176,000 0.3
Missouri 26 96 161,300 1,793,000 3.2
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 6,400 122,000 0.2
New Jersey 2 100 22,700 344,000 0.6
New Mexico 3 100 12,000 103,000 0.2
New York 4 100 24,300 469,000 0.8
North Carolina 18 100 77,100 1,154,000 2.1
Ohio 44 100 187,900 3,104,000 5.5
Oklahoma 9 100 60,200 542,000 1.0
Oregon 18 100 98,500 1,133,000 2.0
Pennsylvania 4 100 28,300 420,000 0.8
Page 27
<PAGE>
(continued)
Percent
Total of Total
Number Approx. Annual-
of Leasable Annualized ized
Proper- Percent Square Base Base
State ties Leased Feet Rent (1) Rent
============== ======= ======= ========= =========== ========
South Carolina 19 95 82,000 1,027,000 1.8
South Dakota 1 100 6,100 79,000 0.1
Tennessee 8 100 56,400 791,000 1.4
Texas 124 99 819,400 8,561,000 15.2
Utah 7 100 45,400 588,000 1.0
Virginia 13 100 69,800 971,000 1.7
Washington 42 100 249,700 3,016,000 5.3
West Virginia 1 100 4,600 58,000 0.1
Wisconsin 11 100 60,500 733,000 1.3
Wyoming 6 100 32,100 410,000 0.7
------- ------- --------- ----------- --------
Totals 700 99% 4,762,300 $56,493,000 100.0%
======= ======= ========= =========== ========
(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
September 30, 1996 for each of the properties by 12.
Realty Income's 700 properties consist of 148 after-market
automotive retail locations, 319 child care centers, 1 consumer
electronics store, 40 convenience stores, 4 home furnishings
stores, 174 restaurant facilities, and 14 other properties. Of
the 700 properties, 631 or 90% are leased to national or major
regional retail chain operators; 44 or 6% are leased to
franchisees of retail chain operators; 17 or 3% are leased to
other tenant types; and 8 or 1% are available for lease. The
following table sets forth certain information regarding the
Company's properties as of September 30, 1996, classified
according to the business of the respective tenants:
Page 28
<PAGE>
Approx. Realty Total
Total Income Approx. Annual-
Loca- Owned Leasable ized
Industry tions Loca- Square Base
Tenant Segment (1) tions Feet Rent (2)
============== ============ ======= ====== ========= ===========
AUTOMOTIVE
- ----------
Northern
Automotive Parts 560 79 409,100 $ 4,190,000
Discount Tire Service 290 18 103,200 1,155,000
Econo Lube
N' Tune Service 210 9 24,900 625,000
Jiffy Lube Service 1,210 27 63,900 1,669,000
Q Lube Service 460 4 7,600 180,000
R & S Strauss Service 110 2 31,200 431,000
Speedy Muffler
King Service 1,030 7 40,900 531,000
Other Miscellaneous -- 2 6,500 90,000
------ --------- -----------
TOTAL AFTER-MARKET AUTOMOTIVE 148 687,300 8,871,000
CHILD CARE
- ----------
Children's
World Learn-
ing Centers Child Care 500 134 964,000 13,612,000
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 23,399,000
CONSUMER ELECTRONICS
- --------------------
Best Buy Electronics 260 1 59,200 865,000
------ --------- -----------
CONVENIENCE STORES
- ------------------
7-ELEVEN Convenience 15,000 3 9,700 235,000
Dairy Mart Convenience 870 22 66,600 1,509,000
The Pantry Convenience 390 14 34,400 1,333,000
Other Convenience -- 1 2,100 31,000
------ --------- -----------
TOTAL CONVENIENCE STORES 40 112,800 3,108,000
Page 29
<PAGE>
(continued)
Approx. Realty Total
Total Income Approx. Annual-
Loca- Owned Leasable ized
Industry tions Loca- Square Base
Tenant Segment (1) tions Feet Rent (2)
========== ============ ======= ====== ========= ===========
HOME FURNISHINGS
- ----------------
Levitz Home Fur-
nishings 130 4 376,400 2,496,000
------ --------- -----------
RESTAURANTS
- -----------
Don Pablo's Dinner House 50 7 60,700 597,000
Carver's Dinner House 90 3 26,600 495,000
Other Dinner House -- 13 107,900 1,060,000
Golden Corral Family 450 88 517,700 6,833,000
Sizzler Family 600 7 37,600 841,000
Other Family -- 4 23,900 157,000
Hardees Fast Food 3,870 3 10,300 144,000
Taco Bell Fast Food 4,620 24 54,100 1,501,000
Whataburger Fast Food 520 9 23,000 616,000
Other Fast Food -- 16 45,200 868,000
------ --------- -----------
TOTAL RESTAURANTS 174 907,000 13,112,000
OTHER Miscellaneous 14 594,300 4,642,000
------ --------- -----------
Total 700 4,762,300 $56,493,000
====== ========= ===========
(1) Approximate total number of retail locations in operation
under this format (including both corporate 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
September 30, 1996 for each of the properties by 12.
Of the 700 properties owned at September 30, 1996, 691 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
Page 30
<PAGE>
approximately 8.8 years. The lease expirations for nine
properties under construction are based on the estimated date of
completion of such properties.
The following table sets forth certain information regarding
the timing of lease expirations on the Company's 685 triple-net
leased, single tenant retail properties:
Percent of Total
Number of Annualized Annualized
Year Leases Expiring Base Rent (2) Base Rent
======== =============== ============= =================
1996 11 $ 396,000 0.8%
1997 15 588,000 1.1
1998 4 168,000 0.3
1999 20 898,000 1.7
2000 27 1,323,000 2.5
2001 50 3,802,000 7.2
2002 73 5,860,000 11.1
2003 68 5,161,000 9.8
2004 77 6,241,000 11.8
2005 87 6,037,000 11.4
2006 30 2,520,000 4.8
2007 78 4,425,000 8.4
2008 41 3,433,000 6.5
2009 11 717,000 1.4
2010 34 2,729,000 5.2
2011 24 1,929,000 3.7
2012 1 135,000 0.2
2013 0 -- --
2014 2 265,000 0.5
2015 25 4,789,000 9.1
2016 6 1,261,000 2.4
2017 0 -- --
2018 1 39,000 0.1
--------- ------------- --------
Total 685 (1) $52,716,000 100.0%
========= ============= ========
(1) The table does not include nine multi-tenant properties (two
of which are vacant) and six vacant, unleased single-tenant
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
September 30, 1996 for each of the properties by 12.
Page 31
<PAGE>
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 revenue. 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
September 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)
10.1 Revolving Credit Agreement (filed as Exhibit
99.2 to the Company's Form 8-K dated
December 16, 1994 and incorporated herein by
reference)
10.2 First Amendment to the Revolving Credit
Agreement, filed herewith
Page 32
<PAGE>
10.3 Second Amendment to the Revolving Credit
Agreement (filed as Exhibit 99.2 to the
Company's Form 8-K dated December 19, 1995
and incorporated herein by reference)
10.4 Form of Indemnification Agreement to be
entered into between the Company and the
executive officers of the Company, filed
herewith
10.5 Form of Management Incentive Plan, filed
herewith
27 Financial Data Schedule (electronically filed
with the Securities and Exchange Commission
only)
B. A report on Form 8-K dated July 15, 1996 was filed on
July 22, 1996 reporting that Realty Income Corporation's board of
directors was expanded to seven members.
Page 33
<PAGE>
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 13, 1996 ----------------------------------
Gary M. Malino, Vice President
Chief Financial Officer (Principal
Financial and Accounting Officer)
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EXHIBIT INDEX
Exhibit No. Description Page
=========== =========== ----
10.2 First Amendment to the Revolving
Credit Agreement............................36-38
10.4 Form of Indemnification Agreement to be
entered into between the Company and the
executive officers of the Company...........39-51
10.5 Form of Management Incentive Plan...........52-63
27 Financial Data Schedule (electronically
filed with the Securities and Exchange
Commission only)............................ 64
Page 35
EXHIBIT 10.2
FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT
THIS FIRST AMENDMENT TO THE REVOLVING CREDIT AGREEMENT
("Agreement") is made as of January 26, 1995, among Realty Income
Corporation, a Delaware corporation (the "Company"), each of the
banks identified on the signature pages hereof (each a "Bank"
and, collectively, the "Banks") and The Bank of New York, as
Agent and Swing Line Bank.
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Company, the Banks, the Agent and the
Swing Line Bank entered into the Revolving Credit Agreement,
dated as of November 29, 1994 (the "Credit Agreement"); and
WHEREAS, the signatories hereto desire to amend the
Credit Agreement as set forth herein;
NOW, THEREFORE, in consideration of the premises and of
the covenants and agreements contained herein and in the Credit
Agreement, the parties hereto agree that the Credit Agreement is
hereby amended as set forth herein:
1. Capitalized terms used herein which are not
otherwise defined herein but are defined in the Credit Agreement
shall have the meanings given to such terms in the Credit
Agreement.
2. Section 7.02 of the Credit Agreement is amended by
inserting the following new Section 7.02(1) after Section 7.02(k)
of the Credit Agreement:
(1) Without the prior written consent of the
Required Banks, purchase or acquire an interest in (i)
multi-tenant office buildings, (ii) hotels, motels, bowling
alleys or mobile home parks or (iii) any individual property
(or contiguous properties) the price of which exceeds
$10,000,000.
3. Section 7.03(a) of the Credit Agreement is amended
to read in its entirety as follows:
(a) TANGIBLE STOCKHOLDERS' EQUITY. The Company
will maintain Consolidated Tangible Stockholders' Equity of
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not less than the sum of (i) $275,000,000 plus (ii) 75% of
the sum of the net proceeds received by the Company from any
offering of its equity securities.
4. The Company agrees to pay on demand all reasonable
costs and expenses of the Agent (including all reasonable fees
and expenses of counsel to the Agent) in connection with the
preparation and execution of this Amendment.
5. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK,
UNITED STATES OF AMERICA.
6. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate
counterparts and each such counterpart shall be deemed to be an
original, but all such counterparts shall together constitute but
one and the same instrument.
7. The Credit Agreement, as amended hereby, shall be
binding upon the Company, the Banks, the Agent and the Swing Line
Bank and their respective successors and assigns, and shall inure
to the benefit of the Company, the Banks, the Agent, the Swing
Line Bank and their respective successors and assigns.
8. Except as expressly provided in this Amendment, all
of the terms, covenants, conditions, restrictions and other
provisions contained in the Credit Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed as of the date first above written.
REALTY INCOME CORPORATION
By: /s/ RICHARD J. VANDERHOFF
-------------------------
Name: Richard J. VanDerhoff
Title: President
THE BANK OF NEW YORK
as Agent for the Banks
By: /s/ LISA Y. BROWN
-------------------------
Name: Lisa Y. Brown
Title: Vice President
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THE BANK OF NEW YORK
as a Bank and as the
Swing Line Bank
By: /s/ LISA Y. BROWN
-------------------------
Name: Lisa Y. Brown
Title: Vice President
SANWA BANK CALIFORNIA
By: /s/ DEL LORIMER
-------------------------
Name: Del Lorimer
Title: Vice President
SIGNET BANK VIRGINIA
By: /s/ ERIC LAWRENCE
-------------------------
Name: Eric Lawrence
Title: Vice President
BANK HAPAOLIM, B.M.,
LOS ANGELES BRANCH
By: /s/
-------------------------
Name:
Title: Senior Vice President
By: /s/
-------------------------
Name: Lori Lake
Title: Assistant Vice President
Page 38
EXHIBIT 10.4
INDEMNIFICATION AGREEMENT
This Agreement, made and entered into this 19th day of
August, 1996 (the "Agreement"), by and between Realty Income
Corporation, a Delaware corporation (the "Company"), and the
undersigned Officer of the Company (the "Indemnitee"):
WHEREAS, highly competent persons are becoming more
reluctant to serve publicly-held corporations as officers or in
other capacities unless they are provided with adequate
protection through insurance or adequate indemnification against
inordinate risks of claims and actions against them arising out
of their service to and activities on behalf of the corporation;
and
WHEREAS, the current impracticability of obtaining
adequate insurance and the uncertainties relating to
indemnification have increased the difficulty of attracting and
retaining such persons; and
WHEREAS, the Board of Directors of the Company (the
"Board of Directors") has determined that the inability to
attract and retain such persons is detrimental to the best
interests of the Company's shareholders and that the Company
should act to assure such persons that there will be increased
certainty of such protection in the future; and
WHEREAS, it is reasonable, prudent and necessary for
the Company contractually to obligate itself to indemnify such
persons to the fullest extent permitted by applicable law so that
they will serve or continue to serve the Company free from undue
concern that they will not be so indemnified; and
WHEREAS, Indemnitee is willing to serve, continue to
serve and to take an additional service for or on behalf of the
Company on the condition that he be so indemnified;
NOW, THEREFORE, in consideration of the promises and
the covenants contained herein, the Company and Indemnitee do
hereby covenant and agree as follows:
Section 1. SERVICES BY INDEMNITEE. Indemnitee agrees
to serve as an officer of the Company at the request of the
Company. Indemnitee may at any time and for any reason resign
from such position (subject to any other contractual obligation
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or any obligation imposed by operation of law). The Company
shall have no obligation under this Agreement to continue
Indemnitee in any position with the Company.
Section 2. INDEMNIFICATION--GENERAL. The Company
shall indemnify, and advance Expenses (as hereinafter defined),
to Indemnitee as provided in this Agreement and to the fullest
extent permitted by applicable law in effect on the date hereof
and to such greater extent as applicable law may thereafter from
time to time permit. The rights of Indemnitee provided under the
preceding sentence shall include, but shall not be limited to,
the rights set forth in the other Sections of this Agreement.
Section 3. PROCEEDINGS OTHER THAN PROCEEDINGS BY OR IN
THE RIGHT OF THE COMPANY. Indemnitee shall be entitled to the
rights of indemnification provided in this Section 3 if, by
reason of his Corporate Status (as hereinafter defined), he is,
or is threatened to be made, a party to any threatened, pending
or completed Proceeding (as hereinafter defined), other than a
Proceeding by or in the right of the Company. Pursuant to this
Section 3, Indemnitee shall be indemnified against Expenses,
judgments, penalties, fines and amounts paid in settlement
actually and reasonably incurred by him or on his behalf in
connection with such Proceeding or any claim, issue or matter
therein, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal Proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 4. PROCEEDINGS BY OR IN THE RIGHT OF THE
COMPANY. Indemnitee shall be entitled to the rights of
indemnification provided in this Section 4 if, by reason of his
Corporate Status, he is, or is threatened to be made, a party to
any threatened, pending or completed Proceeding brought by or in
the right of the Company to procure a judgment in its favor.
Pursuant to this Section, Indemnitee shall be indemnified against
Expenses actually and reasonably incurred by him or on his behalf
in connection with such Proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the
best interests of the Company. Notwithstanding the foregoing, no
indemnification against such Expenses shall be made in respect of
any claim, issue or matter in such Proceeding as to which
Indemnitee shall have been adjudged to be liable to the Company
if applicable law prohibits such indemnification; provided,
however, that, if applicable law so permits, indemnification
against Expenses shall nevertheless be made by the Company in
such event if and only to the extent that the Court of Chancery
of the State of Delaware, or the court in which such Proceeding
shall have been brought or is pending, shall determine.
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Section 5. INDEMNIFICATION FOR EXPENSES OF A PARTY WHO
IS WHOLLY OR PARTLY SUCCESSFUL. Notwithstanding any other
provision of this Agreement, to the extent that Indemnitee is, by
reason of his Corporate Status, a party to and is successful, on
the merits or otherwise, in any Proceeding, he shall be
indemnified against all Expenses actually and reasonably incurred
by him or on his behalf in connection therewith. If Indemnitee
is not wholly successful in such Proceeding but is successful, on
the merits or otherwise, as to one or more but less than all
claims, issues or matters in such Proceeding, the Company shall
indemnify Indemnitee against all Expenses actually and reasonably
incurred by him or on his behalf in connection with each
successfully resolved claim, issue or matter. For purposes of
this Section and without limitation, the termination of any
claim, issue or matter in such a Proceeding by dismissal, with or
without prejudice, shall be deemed to be a successful result as
to such claim, issue or matter.
Section 6. INDEMNIFICATION FOR EXPENSES OF A WITNESS.
Notwithstanding any other provision of this Agreement, to the
extent that Indemnitee is, by reason of his Corporate Status, a
witness in any Proceeding, he shall be indemnified against all
Expenses actually and reasonably incurred by him or on his behalf
in connection therewith.
Section 7. ADVANCEMENT OF EXPENSES. The Company shall
advance all reasonable Expenses incurred by or on behalf of
Indemnitee in connection with any Proceeding within twenty days
after the receipt by the Company of a statement or statements
from Indemnitee requesting such advance or advances from time to
time, whether prior to or after final disposition of such
Proceeding. Such statement or statements shall reasonably
evidence the Expenses incurred by Indemnitee and shall include or
be preceded or accompanied by an undertaking by or on behalf of
Indemnitee to repay any Expenses advanced if it shall ultimately
be determined that Indemnitee is not entitled to be indemnified
against such Expenses.
Section 8. PROCEDURE FOR DETERMINATION OF ENTITLEMENT
TO INDEMNIFICATION.
(a) To obtain indemnification under this Agreement,
Indemnitee shall submit to the Company a written request,
including therein or therewith such documentation and information
as is reasonably available to Indemnitee and is reasonably
necessary to determine whether and to what extent Indemnitee is
entitled to indemnification. The Secretary of the Company shall,
promptly upon receipt of such a request for indemnification,
advise the Board of Directors in writing that Indemnitee has
requested indemnification.
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(b) Upon written request by Indemnitee for
indemnification pursuant to the first sentence of Section 8(a)
hereof, a determination, if required by applicable law, with
respect to Indemnitee's entitlement thereto shall be made in the
specific case: (i) if a Change in Control (as hereinafter
defined) shall have occurred, by Independent Counsel (as
hereinafter defined) (unless Indemnitee shall request that such
determination be made by the Board of Directors or the
shareholders, in which case by the person or persons or in the
manner provided for in clauses (ii) or (iii) of this Section
8(b)) in a written opinion to the Board of Directors, a copy of
which shall be delivered to Indemnitee; (ii) if a Change of
Control shall not have occurred, (A) by the Board of Directors by
a majority vote of a quorum consisting of Disinterested Directors
(as hereinafter defined), or (B) if a quorum of the Board of
Directors consisting of Disinterested Directors is not obtainable
or, even if obtainable, such quorum of Disinterested Directors so
directs, by Independent Counsel in a written opinion to the Board
of Directors, a copy of which shall be delivered to Indemnitee or
(C) if directed by the Directors, by the shareholders of the
Company; or (iii) as provided in Section 9(b) of this Agreement;
and, if it is so determined that Indemnitee is entitled to
indemnification, payment to Indemnitee shall be made within ten
(10) days after such determination. Indemnitee shall cooperate
with the person, persons or entity making such determination with
respect to Indemnitee's entitlement to indemnification, including
providing to such person, persons or entity upon reasonable
advance request any documentation or information which is not
privileged or otherwise protected from disclosure and which is
reasonably available to Indemnitee and reasonably necessary to
such determination. Any costs or expenses (including attorneys'
fees and disbursements) incurred by Indemnitee in so cooperating
with the person, persons or entity making such determination
shall be borne by the Company (irrespective of the determination
as to Indemnitee's entitlement to indemnification) and the
Company hereby indemnifies and agrees to hold Indemnitee harmless
therefrom.
(c) In the event the determination of entitlement to
indemnification is to be made by Independent Counsel Pursuant to
Section 8(b) hereof, the Independent Counsel shall be selected as
provided in this Section 8(c). If a Change of Control shall not
have occurred, the Independent Counsel shall be selected by the
Board of Directors, and the Company shall give written notice to
Indemnitee advising him of the identity of the Independent
Counsel so selected. If a Change of Control shall have occurred,
the Independent Counsel shall be selected by Indemnitee (unless
Indemnitee shall request that such selection be made by the Board
of Directors, in which event the preceding sentence shall apply),
and Indemnitee shall give written notice to the Company advising
it of the identity of the Independent Counsel so selected. In
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either event, Indemnitee or the Company, as the case may be, may,
within 7 days after such written notice of selection shall have
been given, deliver to the Company or to Indemnitee, as the case
may be, a written objection to such selection. Such objection
may be asserted only on the ground that the Independent Counsel
so selected does not meet the requirements of "Independent
Counsel" as defined in Section 18 of this Agreement, and the
objection shall set forth with particularity the factual basis of
such assertion. If such written objection is made, the
Independent Counsel so selected may not serve as Independent
Counsel unless and until a court has determined that such
objection is without merit. If, within 20 days after submission
by Indemnitee of a written request for indemnification pursuant
to Section 8(a) hereof, no Independent Counsel shall have been
selected and not objected to, either the Company or Indemnitee
may petition the Court of Chancery of the State of Delaware or
other court of competent jurisdiction for resolution of any
objection which shall have been made by the Company or Indemnitee
to the other's selection of Independent Counsel and/or for the
appointment as Independent Counsel of a person selected by the
Court or by such other person as the Court shall designate, and
the person with respect to whom an objection is so resolved or
the person so appointed shall act as Independent Counsel under
Section 8(b) hereof. The Company shall pay any and all
reasonable fees and expenses of Independent Counsel incurred by
such Independent Counsel in connection with acting pursuant to
Section 8(b) hereof, and the Company shall pay all reasonable
fees and expenses incident to the procedures of this Section
8(c), regardless of the manner in which such Independent Counsel
was selected or appointed. Upon the due commencement of any
judicial proceeding or arbitration pursuant to Section 10(a)(iii)
of this Agreement, Independent Counsel shall be discharged and
relieved of any further responsibility in such capacity (subject
to the applicable standards of professional conduct then
prevailing).
Section 9. PRESUMPTIONS AND EFFECT OF CERTAIN
PROCEEDINGS.
(a) If a Change of Control shall have occurred, in
making a determination with respect to entitlement to
Indemnification hereunder, the person or persons or entity making
such determination shall presume that Indemnitee is entitled to
indemnification under this Agreement if Indemnitee has submitted
a request for indemnification in accordance with Section 8(a) of
this Agreement, and the Company shall have the burden of proof to
overcome that presumption in connection with the making by any
person, persons or entity of any determination contrary to that
presumption.
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(b) If the person, persons or entity empowered or
selected under Section 8 of this Agreement to determine whether
Indemnitee is entitled to Indemnification shall not have made a
determination within 60 days after receipt by the Company of the
request therefor, the requisite determination of entitlement to
indemnification shall be deemed to have been made and Indemnitee
shall be entitled to such indemnification, absent (i) a
misstatement by Indemnitee of a material fact, or an omission of
a material fact necessary to make Indemnitee's statement not
materially misleading, in connection with the request for
indemnification, or (ii) a prohibition of such indemnification
under applicable law; PROVIDED, HOWEVER, that such 60-day period
may be extended for a reasonable time, not to exceed an
additional 30 days, if the person, persons or entity making the
determination with respect to entitlement to indemnification in
good faith requires such additional time for the obtaining or
evaluating of documentation and/or information relating thereto;
and PROVIDED, FURTHER, that the foregoing provisions of this
Section 9(b) shall not apply (i) if the determination of
entitlement to indemnification is to be made by the shareholders
pursuant to Section 8(b) of this Agreement and if (A) within 15
days after receipt by the Company of the request for such
determination the Board of Directors has resolved to submit such
determination to the shareholders for their consideration at an
annual meeting thereof to be held within 75 days after such
receipt and such determination is made thereat, or (B) a special
meeting of shareholders is called within 15 days after such
receipt for the purpose of making such determination, such
meeting is held for such purpose within 60 days after having been
so called and such determination is made thereat, or (ii) if the
determination of entitlement to indemnification is to be made by
Independent Counsel pursuant to Section 8(b) of this Agreement.
(c) The termination of any Proceeding or of any claim,
issue or matter therein, by judgment, order, settlement or
conviction, or upon a plea of NOLO CONTENDERE or its equivalent,
shall not (except as otherwise expressly provided in this
Agreement) of itself adversely affect the right of Indemnitee to
indemnification or create a presumption that Indemnitee did not
act in good faith and in a manner which he reasonably believed to
be in or not opposed to the best interests of the Company or,
with respect to any criminal Proceeding, that Indemnitee had
reasonable cause to believe that his conduct was unlawful.
Section 10. REMEDIES OF INDEMNITEE.
(a) In the event that (i) a determination is made
pursuant to Section 8 of this Agreement that Indemnitee is not
entitled to indemnification under this Agreement, (ii)
advancement of Expenses is not timely made pursuant to Section 7
of this Agreement, (iii) the determination of entitlement to
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indemnification is to be made by Independent Counsel pursuant to
Section 8(b) of this Agreement and such determination shall not
have been made and delivered in a written opinion within 90 days
after receipt by the Company of the request for indemnification,
(iv) payment of indemnification is not made pursuant to Section 6
of this Agreement within ten (10) days after receipt by the
Company of a written request therefor, or (v) payment of
indemnification is not made within ten (10) days after a
determination has been made that Indemnitee is entitled to
indemnification or such determination is deemed to have been made
pursuant to Sections 8 and 9 of this Agreement, Indemnitee shall
be entitled to an adjudication in an appropriate court of the
State of Delaware, or in any other court of competent
jurisdiction, of his entitlement to such indemnification or
advancement of Expenses. Indemnitee shall commence such
proceeding seeking an adjudication within 180 days following the
date on which Indemnitee first has the right to commence such
proceeding pursuant to this Section 10(a). The Company shall not
oppose Indemnitee's right to seek any such adjudication.
(b) In the event that a determination shall have been
made pursuant to Section 8 of this Agreement that Indemnitee is
not entitled to indemnification, any judicial proceeding
commenced pursuant to this Section 10 shall be conducted in all
respects as a DE NOVO trial on the merits and Indemnitee shall
not be prejudiced by reason of that adverse determination. If a
Change of Control shall have occurred, in any judicial proceeding
commenced pursuant to this Section 10 the Company shall have the
burden of proving that Indemnitee is not entitled to
indemnification or advancement of Expenses, as the case may be.
(c) If a determination shall have been made or deemed
to have been made pursuant to Section 8 or 9 of this Agreement
that Indemnitee is entitled to indemnification, the Company shall
be bound by such determination in any judicial proceeding
commenced pursuant to this Section 10, absent (i) a misstatement
by Indemnitee of a material fact, or an omission of a material
fact necessary to make Indemnitee's statement not materially
misleading, in connection with the request for indemnification,
or (ii) a prohibition of such indemnification under applicable
law.
(d) The Company shall be precluded from asserting in
any judicial proceeding commenced pursuant to this Section 10
that the procedures and presumptions of this Agreement are not
valid, binding and enforceable and shall stipulate in any such
court that the Company is bound by all the provisions of this
Agreement.
(e) In the event that Indemnitee, pursuant to this
Section 10, seeks a judicial adjudication to enforce his rights
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under, or to recover damages for breach of, this Agreement,
Indemnitee shall be entitled to recover from the Company, and
shall be indemnified by the Company against, any and all expenses
(of the types described in the definition of Expenses in Section
18 of this Agreement) actually and reasonably incurred by him in
such judicial adjudication, but only if he prevails therein. If
it shall be determined in said judicial adjudication that
Indemnitee is entitled to receive part but not all of the
indemnification or advancement of expenses sought, the expenses
incurred by Indemnitee in connection with such judicial
adjudication shall be appropriately prorated.
Section 11. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS;
INSURANCE; SUBROGATION.
(a) The rights of indemnification and to receive
advancement of Expenses as provided by this Agreement shall not
be deemed exclusive of any other rights to which Indemnitee may
at any time be entitled under applicable law, the Certificate of
Incorporation, the By-Laws, any agreement, a vote of stockholders
or a resolution of directors, or otherwise. No amendment,
alteration or repeal of this Agreement or any provision hereof
shall be effective as to any Indemnitee with respect to any
action taken or omitted by such Indemnitee in his Corporate
Status prior to such amendment, alteration or repeal.
(b) To the extent that the Company maintains an
insurance policy or policies providing liability insurance for
directors, officers, employees, agents or fiduciaries of the
Company or of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise which such
person serves at the request of the Company, Indemnitee shall be
covered by such policy or policies in accordance with its or
their terms to the maximum extent of the coverage available for
any such director, officer, employee, agent or fiduciary under
such policy or policies.
(c) In the event of any payment under this Agreement,
the Company shall be subrogated to the extent of such payment to
all of the rights of recovery of Indemnitee, who shall execute
all papers required and take all action necessary to secure such
rights, including execution of such documents as are necessary to
enable the Company to bring suit to enforce such rights.
(d) The Company may, to the full extent authorized by
law, create a trust fund, grant a security interest and/or use
other means (including, without limitation, letters of credit,
surety bonds and other similar arrangements) to ensure the
payment of such amounts as may become necessary or desirable to
effect indemnification provided hereunder.
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Section 12. EXCLUSIONS. The Company shall not be
liable under this Agreement to pay any Expenses in connection
with any claim made against the Indemnitee:
(a) to the extent that payment is actually made to the
Indemnitee under a valid, enforceable and collectible insurance
policy, contract, agreement or otherwise pursuant to this
Agreement.
(b) in connection with a judicial action by or in the
right of the Company, in respect of any claim, issue or matter as
to which the Indemnitee shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the
Company, unless and only to the extent that any court in which
such action was brought shall determine upon application that,
despite the adjudication of liability but in view of all the
circumstances of the case, the Indemnitee is fairly and
reasonably entitled to indemnity for such expenses as such court
shall deem proper.
(c) if it is proved by final judgment in a court of
law or other final adjudication to have been based upon or
attributable to the Indemnitee's in fact having gained any
personal profit or advantage to which he was not legally
entitled.
(d) for a disgorgement of profits made from the
purchase and sale by the Indemnitee of securities pursuant to
Section 16(b) of the Securities Exchange Act of 1934 and
amendments thereto or similar provisions of any state statutory
law or common law.
(e) brought about or contributed to by the dishonesty
of the Indemnitee seeking payment hereunder; however,
notwithstanding the foregoing, the Indemnitee shall be protected
under this Agreement as to any claims upon which suit may be
brought against him by reason of any alleged dishonesty on his
part, unless a judgment or other final adjudication thereof
adverse to the Indemnitee shall establish that he committed (i)
acts of active and deliberate dishonesty, (ii) with actual
dishonest purpose and intent, (iii) which acts were material to
the cause of action so adjudicated.
(f) for any judgment, fine or penalty which the
Company is prohibited by applicable law from paying as indemnity
or for any other reason.
Section 13. DURATION OF AGREEMENT. This Agreement
shall continue until and terminate upon the later of: (a) 10
years after the date that Indemnitee shall have ceased to serve
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as a director, officer, employee, agent or fiduciary of the
Company or of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise which Indemnitee
served at the request of the Company; or (b) the final
termination of all pending Proceedings in respect of which
Indemnitee is granted rights of indemnification or advancement of
expenses hereunder and of any proceeding commenced by Indemnitee
pursuant to Section 10 of this Agreement relating thereto. This
Agreement shall be binding upon the Company and its successors
and assigns and shall inure to the benefit of Indemnitee and his
heirs, executors and administrators.
Section 14. SEVERABILITY. If any provision or
provisions of this Agreement shall be held to be invalid, illegal
or unenforceable for any reason whatsoever: (a) the validity,
legality and enforceability of the remaining provisions of this
Agreement (including without limitation, each portion of any
Section of this Agreement containing any such provision held to
be invalid, illegal or unenforceable, that is not itself invalid,
illegal or unenforceable) shall not in any way be affected or
impaired thereby; and (b) to the fullest extent possible, the
provisions of this Agreement (including, without limitation, each
portion of any Section of this Agreement containing any such
provision held to be invalid, illegal or unenforceable, that is
not itself invalid, illegal or unenforceable) shall be construed
so as to give effect to the intent manifested by the provision
held invalid, illegal or unenforceable.
Section 15. EXCEPTION TO RIGHT OF INDEMNIFICATION OR
ADVANCEMENT OF EXPENSES. Notwithstanding any other provision of
this Agreement, Indemnitee shall not be entitled to
indemnification or advancement of Expenses under this Agreement
with respect to any Proceeding, or any claim therein, brought or
made by him against the Company.
Section 16. IDENTICAL COUNTERPARTS. This Agreement
may be executed in one or more counterparts, each of which shall
for all purposes be deemed to be an original but all of which
together shall constitute one and the same Agreement. Only one
such counterpart signed by the party against whom enforceability
is sought needs to be produced to evidence the existence of this
Agreement.
Section 17. HEADINGS. The headings of the paragraphs
of this Agreement are inserted for convenience only and shall not
be deemed to constitute part of this Agreement or to affect the
construction thereof.
Section 18. DEFINITIONS. For purposes of this
Agreement:
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(a) "Change in Control" means a change in control of
the Company occurring after the Effective Date of a nature that
would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A (or in response to any similar
item on any similar schedule or form) promulgated under the
Securities Exchange Act of 1934 (the "Act"), whether or not the
Company is then subject to such reporting requirement; provided,
however, that, without limitation, such a Change in Control shall
be deemed to have occurred if after the Effective Date (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the
Act) is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Act), directly or indirectly, of securities of
the Company representing thirty percent (30%) or more of the
combined voting power of the Company's then outstanding
securities without the prior approval of at least two-thirds of
the members of the Board of Directors in office immediately prior
to such person attaining such percentage; (ii) the Company is a
party to a merger, consolidation, sale of assets or other
reorganization, or a proxy contest, as a consequence of which
members of the Board of Directors in office immediately prior to
such transaction or event constitute less than a majority of the
Board of Directors thereafter; or (iii) during any period of two
consecutive years, individuals who at the beginning of such
period constituted the Board of Directors (including for this
purpose any new director whose election or nomination for
election by the Company's shareholders was approved by a vote of
at least two-thirds of the directors then still in office who
were directors at the beginning of such period) cease for any
reason to constitute at least a majority of the Board of
Directors.
(b) "Corporate Status" describes the status of a
person who is or was a director, officer, employee, agent or
fiduciary of the Company or of any other corporation,
partnership, joint venture, trust, employee benefit plan or other
enterprise which such person is or was serving at the request of
the Company.
(c) "Disinterested Director" means a director of the
Company who is not and was not a party to the Proceeding in
respect of which indemnification is sought by Indemnitee.
(d) "Effective Date" means August 19, 1996.
(e) "Expenses" shall include all reasonable attorneys'
fees, retainers, court costs, transcript costs, fees of experts,
witness fees, travel expenses, duplicating costs, printing and
binding costs, telephone charges, postage, delivery service fees,
and all other disbursements or expenses of the types customarily
Page 49
<PAGE>
incurred in connection with prosecuting, defending, preparing to
prosecute or defend, investigating, or being or preparing to be a
witness in a Proceeding.
(f) "Independent Counsel" means a law firm, or a
member of a law firm, that is experienced in matters of
corporation law and neither presently is, nor in the past five
years has been, retained to represent: (i) the Company or
Indemnitee in any matter material to either such party or (ii)
any other party to the Proceeding giving rise to a claim for
indemnification hereunder. Notwithstanding the foregoing, the
term "Independent Counsel" shall not include any person who,
under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing
either the Company or Indemnitee in an action to determine
Indemnitee's rights under this Agreement.
(g) "Proceeding" includes any action, suit,
arbitration, alternate dispute resolution mechanism,
investigation, administrative hearing or any other proceeding
whether civil, criminal, administrative or investigative, whether
or not initiated prior to the Effective Date, except a proceeding
initiated by an Indemnitee pursuant to Section 10 of this
Agreement to enforce his rights under this Agreement.
Section 19. MODIFICATION AND WAIVER. No supplement,
modification or amendment of this Agreement shall be binding
unless executed in writing by both of the parties hereto. No
waiver of any of the provisions of this Agreement shall be deemed
or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a
continuing waiver.
Section 20. NOTICE BY INDEMNITEE. Indemnitee agrees
promptly to notify the Company in writing upon being served with
any summons, citation, subpoena, complaint, indictment,
information or other document relating to any Proceeding or
matter which may be subject to indemnification or advancement of
Expenses covered hereunder.
Section 21. NOTICES. All notices, requests, demands
and other communications hereunder shall be in writing and shall
be deemed to have been duly given if (i) delivered by hand and
receipted for by the party to whom said notice or other
communication shall have been directed, or (ii) mailed by
certified or registered mail with postage prepaid, on the third
business day after the date on which it is so mailed:
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<PAGE>
(a) If to Indemnitee, to: ___________________________
c/o Realty Income Corp
220 West Crest Street
Escondido, CA 92025-1707
(b) If to Company, to: Realty Income Corporation
220 West Crest Street
Escondido, CA 92025-1707
Attention: Legal Department
or to such other address as may have been furnished to Indemnitee
by the Company or to the Company by Indemnitee, as the case may
be.
Section 22. GOVERNING LAW. The parties agree that
this Agreement shall be governed by, and construed and enforced
in accordance with, the laws of the State of Delaware.
Section 23. MISCELLANEOUS. Use of the masculine
pronoun shall be deemed to include usage of the feminine pronoun
where appropriate.
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement on the day and year first above written.
ATTEST: REALTY INCOME CORPORATION,
a Delaware corporation
By:________________________
William E. Clark
Chief Executive Officer
INDEMNITEE
By:________________________
Page 51
EXHIBIT 10.5
MANAGEMENT INCENTIVE PLAN
I. Introduction
The Realty Income Corporation Management Incentive Plan is an
annual, stock-based incentive plan that is designed to ensure
that Realty Income Corporation is managed in keeping with the
best short- and long-term interests of its shareholders and
employees. In light of this objective, the plan rewards certain
executives for the achievement of key corporate and individual-
specific performance objectives. A participant's total award
shall be determined on the basis of annual performance and shall
be made in the form of restricted stock (50% of total award) and
stock options (50% of total award), which encourage executives to
focus on Realty Income Corporation's long-term success and
shareholder interests. This document sets forth all terms and
conditions of the plan as approved by the Board of Directors.
II. Definitions
For the purposes of the Plan, the following terms shall have the
meaning set forth below:
"Board" means the Board of Directors of RIC.
"Chairman" means the Chairman and Chief Executive Officer of
RIC.
"Change in Control" means the acquisition of shares of RIC
Common Stock by any person, entity or group in a transaction or
series of transactions, resulting in the beneficial ownership of
more than thirty percent of the outstanding Common Stock of RIC;
a merger, consolidation or sale of substantially all the assets
of RIC; a contested election of directors of RIC resulting in a
majority of the nominees recommended by the Board of Directors of
RIC not being elected; a change in composition within a sixty day
period of a majority of RIC's Board of Directors; or any other
event which results in a change of voting power sufficient to
elect a majority of the Board of Directors of RIC.
"Committee" means the Compensation Committee of the Board of
Directors of RIC.
"Date of Grant" means the date on which a Total Award is
made (within a reasonable period after actual performance is
determined).
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"Exercise Price" of an RIC stock option means the price at
which a share of RIC common stock can be purchased over a
specified option term.
"Funds from Operations" or "FFO" means net income excluding
gain or loss from sales of properties, plus provision for
impairment losses, plus depreciation and amortization. FFO per
share means total FFO for a Performance Period divided by the
average number of Common Shares outstanding for the Performance
Period.
"Grant Price" means the per share market value of RIC common
stock on the date a Total Award is made.
"Individual-Specific" means individual performance measures
and/or objectives that can determine a portion of a Participant's
Total Award.
"Maximum Award" means a Participant's maximum award for a
certain portion of the Plan for a Performance Period. Maximum
Award is determined by the Committee under the Plan and typically
is expressed as a percentage of a Participant's Target Award.
"Maximum Performance" means the performance objective at or
above which a Maximum Award is made for a certain portion of the
Plan.
"Minimum Award" means a Participant's minimum award for a
certain portion of the Plan for a Performance Period. Minimum
Award is determined by the Committee under the Plan and typically
is expressed as a percentage of a Participant's Target Award.
"Minimum Performance" means the performance objective at
which a Minimum Award is made for a certain portion of the Plan
and below which no award is made for that portion of the Plan.
"Participant" means any executive or key employee of RIC
selected by the Committee to participate in the Plan.
"Peer Group" means the group of peer companies used in RIC's
proxy statement performance graph.
"Performance Period" means an RIC fiscal year for which
Total Awards under the Plan are made.
"Plan" means the Realty Income Corporation Management
Incentive Plan.
"President" means the President of RIC.
"RIC" means Realty Income Corporation.
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<PAGE>
"Target Award" means a Participant's target award for a
certain portion of the Plan for a Performance Period. Target
Award for each portion of the Plan is determined on the basis of
the weight assigned to that portion of the Plan (i.e., a certain
performance measure) and a Participant's Target Total Award.
"Target Total Award" means a Participant's target Total
Award for a Performance Period, as determined by the Committee
under the Plan. Target Total Award typically is expressed as a
percentage of a Participant's base salary.
"Target Performance" means the performance objective at
which a Target Award is made for a certain portion of the Plan.
"Total Award" means a stock-based award made by the Board to
any Plan Participant for performance on FFO, TSR, and Individual-
Specific objectives for a Performance Period.
"Total Shareholder Return" or "TSR" means a shareholder's
annual percentage return on an investment in stock, including
stock appreciation and dividends. TSR is calculated by adding
RIC's stock price on the last day of a Performance Period to
total dividends for that Performance Period, dividing the
resulting value by RIC's stock price on the last day of the
preceding Performance Period, and subtracting one from the
resulting value.
III. Basic Approach
The Plan rewards Participants for the achievement of three
performance objectives:
A predetermined FFO per share objective
A predetermined measure of TSR relative to the Peer Group
Individual-Specific objectives.
The Committee shall set a Target Total Award for each Participant
that is expressed as a percentage of the Participant's base
salary. A Target Total Award is set on the basis of competitive
pay practices and the scope of a Participant's responsibilities.
Each performance objective carries a certain weight in
determining a Participant's actual Total Award. For the Chairman
and the President, FFO performance carries a weight of 75% and
TSR performance carries a weight of 25% of the Total Award. For
other Participants, FFO performance carries a weight of 60%, TSR
performance carries a weight of 20%, and Individual-Specific
performance carries a weight of 20% of the Total Award.
FFO per share performance. At the beginning of a
Performance Period, the Committee shall set Minimum Performance,
Target Performance, and Maximum Performance objectives for FFO
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<PAGE>
per share performance. In addition, the Committee shall set
corresponding Target Award levels and Minimum Award and Maximum
Award levels for FFO per share performance.
Relative TSR performance. At the beginning of a Performance
Period, the Committee shall set Minimum Performance, Target
Performance, and Maximum Performance objectives for relative TSR
performance. In addition, the Committee shall set corresponding
Target Award levels, Minimum Award levels, and Maximum Award
levels for relative TSR performance. No award shall be made to
Participants for the relative TSR portion of the Plan if actual
TSR is zero or negative, regardless of TSR performance vis-a-vis
the Peer Group for the Performance Period.
Individual-Specific performance. At the beginning of a
Performance Period, the Chairman and the President -- whose Total
Awards are not determined on the basis of any Individual-Specific
objectives -- shall work with other Participants to develop their
Individual-Specific objectives. Following the end of each
Performance Period, the Chairman and the President shall make
recommendations to the Committee on the percentage of Target
Award that should be paid to a Participant on the basis of
whether individual performance is below expectations, meets
expectations, or exceeds expectations.
An example of how performance and award levels could be set is
provided in Table 1 below.
TABLE 1
- -------
Performance Objectives and Award Levels -- Example
Performance Level
Performance Objectives --------------------------
and Award Levels Minimum Target Maximum
- -----------------------------------------------------------------
FFO Performance
===============
FFO Per Share Objective $2.05 $2.10 $2.15
Percentage of Target Award
made for FFO Performance 50% 100% 150%
TSR Performance
===============
TSR Objective (e.g., TSR Rank
relative to Peer Group) Third Second First
Percentage of Target Award
made for TSR Performance 50% 100% 150%
Page 55
<PAGE>
(continued)
TABLE 1
- -------
Performance Objectives and Award Levels - Example
Performance Level
Performance Objectives --------------------------
and Award Levels Minimum Target Maximum
- -----------------------------------------------------------------
Individual-Specific Performance
===============================
Performance on Individual-
Specific Objectives Below Meets Exceeds
Percentage of Target Award
made for Individual Performance 0% 100% 150%
After actual performance and corresponding awards for each
portion of the Plan are determined, a Participant's Total Award
shall be calculated as the sum of awards from each portion of the
Plan. Straight-line interpolation shall be used to determine
award levels for actual performance between Minimum Performance
and Target Performance, or actual performance between Target
Performance and Maximum Performance. A Participant shall receive
no award on a performance measure if actual performance for that
measure is below the Minimum Performance objective. A
Participant shall receive the Maximum Award on a performance
measure if actual performance for that measure is at or above the
Maximum Performance objective.
After a Participant's Total Award is calculated, 50% of the
Participant's Total Award shall be made in the form of restricted
stock and 50% shall be made in the form of stock options. The
number of underlying shares that is granted in the form of
restricted stock shall be determined by dividing 50% of the Total
Award by RIC's stock price (the Grant Price) on the Date of
Grant. The number of underlying shares that is granted in the
form of stock options shall be determined by dividing 50% of the
Total Award by the expected value of an RIC stock option on the
Date of Grant (using the same Grant Price). The expected value
of an RIC stock option shall be estimated by a third party using
the binomial option valuation formula, a widely accepted formula
for determining the expected value of stock options. The
Exercise Price of stock options shall equal the Grant Price.
The number of restricted stock and stock option shares granted
shall be rounded to the nearest 100. Table 2 below provides an
example of how the number of underlying shares granted in the
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<PAGE>
form of restricted stock and stock options is determined for a
Participant who earns an assumed Total Award of $40,000.
TABLE 2
- -------
How the Number of Underlying Shares for a Total Award is
Determined - Example (Assuming Total Award of $40,000)
Number of Underlying Shares Made in Restricted Stock
- -----------------------------------------------------------------
Number of
50% of Total Assumed RS Shares
Award Made in Grant Number of (rounded to
Restricted Stock Price RS Shares nearest 100)
- ---------------- ------- --------- ------------
$ 20,000 $ 22.00 909 900
=================================================================
Number of Underlying Shares Made in Stock Options
- -----------------------------------------------------------------
Assumed Number of
50% of Total Assumed Binomial Number SO Shares
Award Made in Grant Value of SO (rounded to
Stock Options Price (1) Shares nearest 100)
- ---------------- ------- -------- ------ ------------
$ 20,000 $ 22.00 $ 5.76 3,472 3,500
=================================================================
RS: restricted stock; SO: stock option
(1) Assumed binomial option value of $5.76 was using assumptions
for interest rate, stock volatility, dividend yield, and option
term.
All restricted stock and stock option grants made pursuant to the
Plan shall be made in accordance with the provisions of RIC's
Stock Incentive Plan.
IV. Assessment of Performance
Actual performance for FFO, TSR, and Individual-Specific measures
shall be determined as of the last day of a Performance Period.
Actual performance shall be assessed as soon as feasible after
the end of a Performance Period.
V. Adjustment of Performance Objectives
The Committee shall determine performance objectives for FFO per
share performance and relative TSR performance at the beginning
of each Performance Period (i.e., within the first three months
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<PAGE>
of the Performance Period). The Committee shall have the
authority to change performance objectives from one Performance
Period to another or in the event of special circumstances (e.g.,
in the event that a company is added to or omitted from the Peer
Group that is used to determine relative TSR performance).
At the beginning of each Performance Period (i.e., within the
first three months of the Performance Period), the Chairman and
the President shall work with other Participants to develop their
Individual-Specific objectives. The Chairman and the President
shall have the authority to change performance objectives from
one Performance Period to another or in the event of special
circumstances (e.g., in the event that a Participant's position
or scope of responsibilities changes).
VI. Adjustment of Awards Levels
The Committee shall set Participants' Target Total Award, Minimum
Award, Target Award, and Maximum Award levels under the Plan and
shall have the authority to adjust award levels on the basis of
competitive practices and/or RIC's business objectives.
VII. Timing of Total Award Payments
All Total Awards shall be made as soon as feasible after all
performance results for the Performance Period are available.
The number of underlying shares for restricted stock and stock
options that are granted shall be determined on the basis of
RIC's stock price (the Grant Price) on the Date of Grant.
VIII. Vesting of Total Awards
Restricted stock and stock options that comprise a Total Award
shall vest over three years, with one-third of the Total Award
vesting one year after the Date of Grant, one-third vesting two
years after the Date of Grant, and one-third vesting three years
after the Date of Grant. Dividends on the restricted stock
portion of a Total Award shall be payable from the Date of Grant.
IX. Participation
Participation in the Plan shall be limited to executives and key
employees who have a significant impact on the growth and
profitability of RIC. The Chairman shall make recommendations to
the Committee on which executives and key employees should
participate in the Plan. The Committee shall have the authority
to approve employees for participation in the Plan.
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<PAGE>
X. Separation of Employment
Payment of a Total Award under the Plan shall be conditioned on a
Participant's continued employment with RIC during the entire
Performance Period.
Separation of employment for cause. In the event that a
Participant's employment with RIC is terminated for a reason
other than death, disability, retirement, or a Change in Control,
any Total Award for the current, incomplete Performance Period
shall be forfeited.
Separation of employment without cause. If employment ends by
reason of death, disability, retirement, or a Change in Control,
a Total Award shall be paid subject to the conditions of the Plan
and Committee approval, except that the Total Award shall be
prorated on the basis of the number of months in the Performance
Period actually completed prior to said death, disability,
retirement, or Change in Control.
Timing and form of payment. If employment ends by reason of
death, disability, or retirement, such a Total Award shall be
payable in cash at the same time as those paid to Participants
who complete the Performance Period (as described in Section VII
above).
If employment ends by reason of a Change in Control, a prorated
Target Total Award shall be payable in cash immediately. The
prorated Target Total Award shall be made on the basis of the
number of months in the Performance Period actually completed
prior to the Change in Control.
Nonvested stock awards earned from preceding Performance
Periods. If employment ends by reason of death, disability,
retirement, or a Change in Control, all nonvested restricted
stock and stock options earned in preceding Performance Periods
shall vest in accordance with the provisions of RIC's Stock
Incentive Plan.
XI. Miscellaneous
(a) Term and Adoption of the Plan - The Plan, as set forth
herein, shall become effective on August 19, 1996. The Plan
shall remain in effect until it is terminated pursuant to
subsection (b) below. The adoption of this Plan or any
modification hereof does not imply any commitment to continue the
Plan, or any modification thereof, or adopt any other plan for
incentive compensation for any succeeding year. Neither the Plan
nor any Total Award made under the Plan shall create any
employment contract or relationship between RIC and any
Participant. Furthermore, no person has any rights with respect
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<PAGE>
to a Total Award until it is payable to such person after the
expiration of the applicable Performance Period and verification
of actual performance on FFO, TSR, and applicable Individual-
Specific measures.
(b) Right to Amend or Terminate the Plan - The Board can amend,
suspend, or terminate the Plan at any time and for any reason,
except that the provisions of the Plan pertaining to the amount
and timing of a Total Award shall not be amended more than once
in any 12-month period.
(c) Liens on Company Assets - No Participant shall hold a lien
on any assets of RIC by reason of any Total Award made under the
Plan.
(d) Payment of Awards - Payment of Total Awards under the Plan
for a particular Performance Period shall be made as soon as
feasible following the end of that Performance Period. All Total
Awards shall be made in the form of restricted stock (50% of
Total Award) and stock options (50% of Total Award).
(e) Deductions - RIC retains the right to deduct from all
amounts paid in restricted stock and stock options any taxes
required by law to be withheld from such payments.
(f) Plan Agreement - Each Participant must sign the Realty
Income Corporation Management Incentive Plan Agreement
(Attachment 1) to confirm his or her participation in the Plan
under the terms and conditions set forth herein. A new agreement
must be signed within the first four months of each Performance
Period.
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<PAGE>
ATTACHMENT 1
MANAGEMENT INCENTIVE PLAN AGREEMENT
This document shall constitute the agreement between Realty
Income Corporation (RIC) and _________________________________
(the Participant), which confirms participation in the Realty
Income Corporation Management Incentive Plan (the Plan).
Subject to the terms and conditions of the Plan, you are a
Participant in the Performance Period beginning January 1, 1996
and ending December 31, 1996. Your Target Total Award for the
Performance Period shall be __% of your base salary, or $_______,
as shown in Table 1 below.
TABLE 1
- -------
Target Total Award
Base Salary as a % of Base Salary Target Total Award
- ---------- --------------------- ------------------
$_________ _____% $_________
Your actual Total Award shall be calculated on the basis of the
achievement of the performance objectives specified pursuant to
the terms of the Plan and as described in this agreement. RIC
reserves the right to amend performance objectives and targets on
the basis of factors beyond the control of the Participant. The
performance objectives, the weight each objective carries in
determining your Total Award, and the award levels for the
Performance Period are shown in Table 2 below.
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<PAGE>
TABLE 2
- -------
1996 Performance Objectives and Award Levels
(Name of Participant)
Performance Level
Performance Objectives --------------------------
and Award Levels Minimum Target Maximum
- -----------------------------------------------------------------
FFO Performance
===============
Carries Weight of __% of Total Award
FFO Per Share Objective $2.05 $2.10 $2.15
Percentage of Target Award
made for FFO Performance 50% 100% 150%
TSR Performance
===============
Carries Weight of __% of Total Award
TSR Ranking Objective (relative
to Proxy Performance Graph
Peer Group) Third Second First
Percentage of Target Award
made for TSR Performance 50% 100% 150%
Individual-Specific Performance
===============================
Carries Weight of __% of Total Award
Performance on Individual-
Specific Objectives Below Meets Exceeds
Percentage of Target Award
made for Individual Performance 0% 100% 150%
Pursuant to the provisions of the Plan, your Total Award shall be
made in the form of restricted stock (50% of the Total Award) and
stock options (50% of the Total Award). The number of underlying
shares that is granted to you in the form of restricted stock and
stock options shall be determined on the basis of RIC's stock
price (the Grant Price) on the Date of Grant. The Exercise Price
on stock options shall equal the Grant Price. Your Total Award
shall be made as soon as feasible after the end of the
Performance Period.
Restricted stock and stock options that comprise a Total Award
shall vest over three years, with one-third of the Total Award
vesting one year after the Date of Grant, one-third vesting two
years after the Date of Grant, and one-third vesting three years
after the Date of Grant. Dividends on the restricted stock
portion of a Total Award shall be payable from the Date of Grant.
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In the event that your employment with the Company is terminated
for reasons other than death, disability, retirement, or a Change
in Control, any Total Award for the current, incomplete
Performance Period or nonvested restricted shares or stock
options from preceding Performance Periods shall be forfeited.
(See Section X of the Realty Income Corporation Management
Incentive Plan.)
Please read the Realty Income Corporation Management Incentive
Plan carefully and retain a copy of the plan document and a copy
of the plan agreement for your reference. Indicate your
acceptance of the terms of this agreement by signing in the space
provided below.
Accepted: Accepted:
Realty Income Corporation (Name of Participant)
By:_______________________ _________________________
William E. Clark
Chief Executive Officer
Date:_____________________ Date:____________________
Page 63
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
This Schedule contains summary financial information extracted
from the registrant's Balance Sheet as of September 30, 1996 and
Income Statement for the nine months ended September 30, 1996 and
is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER>1
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,444,000
<SECURITIES> 0
<RECEIVABLES> 1,221,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> <F1> 0
<PP&E> 530,078,000
<DEPRECIATION> (134,854,000)
<TOTAL-ASSETS> 421,440,000
<CURRENT-LIABILITIES> <F1> 0
<BONDS> 38,381,000
<COMMON> 22,976,000
0
0
<OTHER-SE> 353,120,000
<TOTAL-LIABILITY-AND-EQUITY> 421,440,000
<SALES> 0
<TOTAL-REVENUES> 41,254,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 17,206,000
<LOSS-PROVISION> 418,000
<INTEREST-EXPENSE> 1,502,000
<INCOME-PRETAX> 23,354,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 23,354,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,354,000
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.02
<FN>
F1 Current assets and current liabilities are not applicable to
the Company under current industry standards.
Page 64
</TABLE>
