<PAGE>
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 JUNE 30, 1997, or
==============
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
COMMISSION FILE NUMBER 1-13318
==============================
REALTY INCOME CORPORATION
=========================
(Exact name of registrant as specified in its charter)
MARYLAND
========
(State or other jurisdiction of incorporation or organization)
33-0580106
==========
(I.R.S. Employer Identification No.)
220 WEST CREST STREET, ESCONDIDO, CALIFORNIA 92025
===================================================
(Address of principal executive offices)
(760) 741-2111
==============
(Registrant's telephone number)
Indicate by checkmark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
There were 22,994,964 shares of common stock outstanding as of
August 13, 1997.
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REALTY INCOME CORPORATION
Form 10-Q
June 30, 1997
Table of Contents
-----------------
PART I. FINANCIAL INFORMATION Pages
============================== -----
Item 1: Financial Statements
Consolidated Balance Sheets........................ 3-4
Consolidated Statements of Income.................. 5
Consolidated Statements of Cash Flows.............. 6-7
Notes to Consolidated Financial Statements......... 8-12
Item 2: Management's Discussion And Analysis Of
Financial Condition And Results Of Operations......12-32
PART II. OTHER INFORMATION
==========================
Item 4: Submission of matters to a vote
of security holders................................ 32
Item 6: Exhibits and Reports on Form 8-K...................33-35
SIGNATURE................................................... 36
EXHIBIT INDEX............................................... 36
EXHIBITS.................................................... 37
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PART I. FINANCIAL INFORMATION
==============================
ITEM 1. FINANCIAL STATEMENTS
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
===========================
June 30, 1997 And December 31, 1996
(dollars in thousands, except per share data)
1997
(Unaudited) 1996
=========== =========
ASSETS
Real estate, at cost:
Land $ 182,130 $ 165,598
Buildings and improvements 434,302 398,942
--------- ---------
616,432 564,540
Less - accumulated depreciation
and amortization (144,190) (138,307)
--------- ---------
Net real estate 472,242 426,233
Cash and cash equivalents 2,852 1,559
Accounts receivable 1,317 1,905
Due from affiliates 326 383
Other assets 2,222 2,183
Goodwill, net 21,362 21,834
--------- ---------
TOTAL ASSETS $ 500,321 $ 454,097
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Distributions payable $ 3,621 $ 3,619
Accounts payable and accrued expenses 1,745 1,172
Other liabilities 3,978 5,065
Line of credit payable 12,000 70,000
Bonds payable 110,000 --
--------- ---------
TOTAL LIABILITIES 131,344 79,856
--------- ---------
Continued on next page
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(continued)
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
===========================
June 30, 1997 And December 31, 1996
(dollars in thousands, except per share data)
1997
(Unaudited) 1996
=========== =========
Stockholders' equity
Preferred stock, par value
$1.00 per share, 20,000,000 shares
authorized, no shares issued
or outstanding -- --
Common stock, par value $1.00 per
share, 100,000,000 shares
authorized, 22,988,186 and 22,979,537
shares issued and outstanding in
1997 and 1996, respectively 22,988 22,980
Capital in excess of par value 516,202 516,004
Accumulated distributions
in excess of net income (170,213) (164,743)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 368,977 374,241
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 500,321 $ 454,097
========= =========
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 six months ended June 30, 1997 and 1996
(dollars in thousands, except per share data)
(Unaudited)
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
6/30/97 6/30/96 6/30/97 6/30/96
========= ========= ========= =========
REVENUES
Rental $ 16,006 $ 13,602 $ 31,455 $ 27,330
Interest 105 27 127 50
Other 12 8 21 35
--------- --------- --------- ---------
16,123 13,637 31,603 27,415
--------- --------- --------- ---------
EXPENSES
Depreciation and
amortization 4,484 4,049 8,948 8,123
General and
administrative 1,332 1,288 2,585 2,598
Property 362 413 853 859
Interest 2,009 485 3,321 1,005
Provision for
impairment losses 70 -- 70 323
--------- --------- --------- ---------
8,257 6,235 15,777 12,908
--------- --------- --------- ---------
Income from operations 7,866 7,402 15,826 14,507
Gain on sales of
properties 202 213 427 958
--------- --------- --------- ---------
NET INCOME $ 8,068 $ 7,615 $ 16,253 $ 15,465
========== ========== ========== ==========
Net income per share $ 0.35 $ 0.33 $ 0.71 $ 0.67
========== ========== ========== ==========
Weighted average
number of shares
outstanding 22,990,592 22,976,469 22,990,163 22,976,756
========== ========== ========== ==========
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 six months ended June 30, 1997 and 1996
(dollars in thousands)
(Unaudited)
1997 1996
========= =========
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,253 $ 15,465
Adjustments to net income:
Depreciation and amortization 8,948 8,123
Provision for impairment losses 70 323
Gain on sales of properties (427) (958)
Change in assets and liabilities:
Accounts receivable and
other assets 593 797
Accounts payable, accrued
expenses and other liabilities 1,853 (424)
--------- ---------
Net cash provided by
operating activities 27,290 23,326
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of properties 2,891 2,208
Acquisition of and additions
to properties (56,943) (5,481)
--------- ---------
Net cash used in
investing activities (54,052) (3,273)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of distributions (21,722) (26,653)
Bond offering proceeds 110,000 --
Proceeds from line of credit 36,200 21,300
Payment of line of credit (94,200) (2,700)
Payments to the defined benefit
pension plan (2,223) --
Payment of notes payable -- (12,597)
Stock offering costs -- (188)
--------- ---------
Net cash provided by (used in)
financing activities 28,055 (20,838)
--------- ---------
Continued on next page
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(continued)
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
=====================================
For the six months ended June 30, 1997 And 1996
(dollars in thousands)
(Unaudited)
1997 1996
========= =========
Net increase (decrease) in
cash and cash equivalents 1,293 (785)
Cash and cash equivalents,
beginning of period 1,559 1,650
--------- ---------
Cash and cash equivalents,
end of period $ 2,852 $ 865
========= =========
Interest paid during the first six months of 1997 and 1996 was
$3.1 million and $811,000, respectively.
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
==========================================
June 30, 1997
(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, 1996, which are
included in the Company's 1996 Annual Report on Form 10-K, as
certain disclosures which would substantially duplicate those
contained in such audited financial statements have been omitted
from this report.
Effective May 13, 1997, Thomas A. Lewis succeeded William E.
Clark as Chief Executive Officer of the company. Mr. Lewis has
been an officer of the Company since 1987 and has served as the
Vice Chairman of the Board of Directors since 1994. Mr. Clark
will continue as Chairman of the Board of Directors.
In May 1997, the Company was reincorporated as a Maryland
corporation, which is also named Realty Income Corporation,
pursuant to a merger of the Company into a wholly-owned Maryland
subsidiary and the conversion of each outstanding share of Common
Stock of the Company into one share of common stock of the
surviving corporation.
2. Credit Facility
- -------------------
The Company has a $ 130 million, revolving, unsecured acquisition
credit facility that expires in November 1999. As of June 30,
1997 and December 31, 1996, the outstanding balance on the credit
facility was $12.0 million and $ 70.0 million, respectively, with
an effective interest rate of approximately 6.94% and 6.85%,
respectively. A commitment fee of 0.15%, per annum, accrues on
the average amount of the unused available credit commitment.
The Company is and has been in compliance with the various leverage
and interest coverage ratio limitations required by the credit
facility.
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For the six months ended June 30, 1997 and 1996, interest of
$82,000 and $40,000, respectively, was capitalized on properties
under construction. For the three months ended June 30, 1997 and
1996, interest of $46,000 and $26,000 was so capitalized.
3. Properties
- --------------
At June 30, 1997, the Company owned a diversified portfolio of
770 properties in 42 states. Of the Company's properties, 763
are single tenant properties with the remaining properties being
multi-tenant properties. At June 30, 1997, four properties were
vacant and available for lease.
During the first six months of 1997, 37 retail properties located
in 18 states were acquired at an aggregate cost of approximately
$54.1 million (excluding the estimated unfunded development costs
totaling $2.7 million on nine properties under construction).
The company also invested $2.8 million in 12 properties acquired
in 1996, which were under development.
Total
Invested
through
Tenant Industry City/State 6/30/97
============ =========== ============ ===========
1ST QUARTER
- -----------
Aaron Rents Home Furnishings Arlington, TX $ 1,849,000
Aaron Rents Home Furnishings Cedar Park, TX 1,080,000
Aaron Rents Home Furnishings Houston, TX 1,554,000
Barnes & Noble Book Store Tampa, FL 4,696,000
Econo Lube (1) Auto Service Durham, NC 364,000
Econo Lube Auto Service Greensboro, NC 603,000
Econo Lube (1) Auto Service Charleston, SC 383,000
Econo Lube (1) Auto Service Columbia, SC 604,000
Econo Lube (1) Auto Service Greenville, SC 288,000
Jiffy Lube Auto Service Springboro, OH 714,000
OfficeMax Office Supplies Lakewood, CA 4,497,000
2ND QUARTER
- -----------
Aaron Rents Home Furnishings Ridgeland, MS 1,050,000
Aaron Rents Home Furnishings Memphis, TN 2,235,000
Aaron Rents Home Furnishings Webster, TX 821,000
Best Buy Consumer
Electronics Smyra, GA 4,184,000
Econo Lube (1) Auto Service Denver, CO 347,000
Econo Lube (1) Auto Service Duluth, GA 225,000
Continued on next page
Page 9
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(continued)
Total
Invested
through
Tenant Industry City/State 6/30/97
============ =========== ============ ===========
Econo Lube (1) Auto Service Garner, NC 221,000
Econo Lube (1) Auto Service Pineville, NC 375,000
Jiffy Lube(1) Auto Service Brentwood, TN 309,000
Linens 'N
Things Home Accessories Omaha, NE 5,907,000
OfficeMax Office Supplies Hutchinson, KS 1,973,000
OfficeMax Office Supplies Salina, KS 2,069,000
Petco Pet Supplies Dickson City, PA 2,538,000
Quik Trip Convenience Store Dunwoody, GA 1,269,000
Quik Trip Convenience Store Lithonia, GA 1,162,000
Quik Trip Convenience Store Mableton, GA 846,000
Quik Trip Convenience Store Norcross, GA 1,035,000
Quik Trip Convenience Store Stone Mountain, GA 1,061,000
Quik Trip Convenience Store Godfrey, IL 1,107,000
Quik Trip Convenience Store Granite City, IL 1,099,000
Quik Trip Convenience Store Madison, IL 798,000
Quik Trip Convenience Store Tulsa, OK 634,000
Speedy Brake Auto Service Billerica, MA 861,000
Speedy Brake Auto Service Southington, CT 897,000
Staples Office Supply Helena, MT 2,066,000
Staples Office Supply New Philadelphia, OH 2,376,000
----------
Properties acquired in 1997 54,097,000
Funding in 1997 of buildings under
development on land acquired in 1996 2,839,000
Capitalized expenditures relating
to existing properties 7,000
-----------
TOTAL INVESTED $56,943,000
===========
(1) The Company acquired these properties as undeveloped land
and is funding construction and other costs relating to the
development of the properties by the tenant. The tenants have
entered into leases covering these properties and are
contractually obligated to complete construction on a timely
basis and to pay construction cost overruns to the extent they
exceed the construction budget by more than a predetermined
percentage.
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4. Gain on Sales of Properties
- -----------------------------------
For the six months ended June 30, 1997, the Company sold seven
properties (five restaurant, one multi-tenant and one child care
center) for a total of $ 2.9 million and recognized a gain of
$427,000. For the six months ended June 30, 1996, the Company
sold two restaurant properties for $2.2 million and recognized a
gain of $958,000. For the three months ended June 30, 1997, the
Company sold three restaurant properties for $1.6 million and
recognized a gain of $202,000. For the three months ended June
30, 1996, the company sold one restaurant property for $685,000
and recognized a gain of $213,000.
5. Distributions Paid And Payable
- ----------------------------------
During the six months ended June 30, 1997, the Company paid six
monthly distributions of $0.1575 per share, totaling $0.945 per
share. For the six months ended June 30, 1996, the Company paid
six monthly distributions of $0.155 per share, totaling $0.93 per
share and a special distribution in January 1996 of $0.23 per
share. As of June 30, 1997, a distribution of $0.1575 per share
was declared and paid on July 15, 1997.
6. Bonds Payable
- -----------------
On May 6, 1997 Realty Income issued $110 million of 7.75% Notes
due May 2007 (the "Notes"). The Notes were sold at 99.929
percent of par for a yield to the investors of 7.76%. After
taking into effect the $1.1 million gain realized on the treasury
interest rate lock agreement (see note 7), the effective interest
rate to the Company on the Notes is 7.62%. The net proceeds from
the sale of the Notes were used to repay $93.7 million of
outstanding borrowings under the Company's credit facility and
for other corporate purposes. Interest on the Notes is payable
semiannually each May and November, commencing November 1997.
Currently, there is no formal trading market for the Notes and
the Company has not and does not intend to list the Notes on any
security exchange.
7. Derivative Financial Instrument
- -----------------------------------
In December 1996, the Company entered into a treasury interest
rate lock agreement to hedge against rising interest rates
applicable to its debt offering, see note 6. Under the interest
rate lock agreement, the Company was to receive or make a payment
based on the differential between a specified interest rate
(6.537%) and the actual 10-year treasury interest rate on
notional principal amount of $90 million, at the end of six
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months. Based on the 10-year treasury interest rate at
May 1, 1997, the Company realized a $1.1 million gain on the
agreement, which was received in June 1997. The gain on the
agreement is being amortized over 10 years (the life of the
Notes) as an offset to interest expense.
The Company had limited involvement with a derivative financial
instrument and did not use it for trading purposes. The
derivative financial instrument was used to manage a well-defined
interest rate risk.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
When used in this Form 10-Q Report, the words estimated, anticipated
and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially.
In particular, among the factors that could cause actual results to
differ materially are continued qualification as a real estate
investment trust, general business and economic conditions,
competition, interest rates, accessibility of debt and equity capital
markets and other risks inherent in the real estate business including
tenant defaults, potential liability relating to environmental matters
and illiquidity of real estate investments. For further description
and detail of other factors please see "Business -- Other Items" in
Form 10K for the year ended December 31, 1996. Readers are cautioned
not to place undue reliance on forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
GENERAL
=======
Realty Income Corporation ("Realty Income" or the "Company") is a
fully integrated, self-administered and self-managed real estate
investment trust ("REIT") which management believes is the
nation's largest publicly-traded owner of freestanding, single-
tenant, retail properties diversified geographically and by
industry and operated under net lease agreements. As of
July 1, 1997, the Company owned a diversified portfolio of 770
properties located in 42 states with over 5.7 million square feet
of leasable space. Over 99% of the Company's 770 properties were
leased as of July 1, 1997.
Realty Income adheres to a focused strategy of acquiring
freestanding, single-tenant, retail properties leased to national
and regional retail chains under long-term, net lease agreements.
The Company typically acquires and then leases back, retail store
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locations from retail chain store operators, providing capital to
the operators for continued expansion and other purposes. The
Company's net lease agreements generally are for initial terms of
10 to 20 years, require the tenant to pay a minimum monthly rent
and property operating expenses (taxes, insurance and
maintenance), and provide for future rent increases (typically
subject to ceilings) based on increases in the consumer price
index or additional rent calculated as a percentage of tenant's
gross sales above a specific level.
Since 1970 and through December 31, 1996, Realty Income has
acquired and leased back to national and regional retail chains
over 700 properties (including 25 properties that have been sold)
and has collected in excess of 98% of the original contractual
rent obligation on these properties. Realty Income believes that
the long-term ownership of an actively managed, diversified
portfolio of retail properties leased under long-term, net lease
agreements can produce consistent, predictable income and the
potential for long-term capital appreciation. Management
believes that long-term leases, coupled with tenants assuming
responsibility for property expenses under the net lease
structure, generally produce a more predictable income stream
than many other types of real estate portfolios. As of
July 1, 1997, the Company's single-tenant properties were leased
pursuant to leases with an average remaining term (excluding
extension options) of approximately 8.4 years.
The Company is a fully integrated real estate company with in-
house acquisition, leasing, legal, financial underwriting,
portfolio management and capital markets expertise. The five
officers of the Company, who have each managed the Company's
properties and operations for between six and 12 years, owned
approximately 1.0% of the Company's outstanding common stock, as
of August 8, 1997. The directors and officers of the Company, as
a group, owned approximately 3.5% of the Company's outstanding
common stock, as of August 8, 1997. Realty Income had 44
employees as of August 8, 1997.
The Company's primary business objective is to generate a
consistent and predictable level of funds from operations ("FFO")
per share and distributions to stockholders. Additionally, the
Company generally will seek to increase FFO per share and
distributions to stockholders through both active portfolio
management and the acquisition of additional properties. The
Company also seeks to lower the ratio of distributions to
stockholders as a percentage of FFO in order to allow internal
cash flow to be used to fund additional acquisitions and for
other corporate purposes.
The Company's portfolio management focus includes (i) contractual
rent increases on existing leases; (ii) rental increases at the
termination of existing leases when market conditions permit; and
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(iii) the active management of the Company's property portfolio,
including selective sales of properties. The Company generally
pursues the acquisition of additional properties under long-term,
net lease agreement with initial contractual base rent which, at
the time of acquisition and as a percentage of acquisition costs,
is in excess of the Company's estimated cost of capital.
Other Information
-----------------
Thomas A. Lewis succeeded William E. Clark as Chief Executive
Officer of the Company effective May 13, 1997. Mr. Lewis has
been an officer of the Company since 1987 and has served as the
Vice Chairman of the Board of Directors since 1994. Mr. Clark
will continue as Chairman of the Board of Directors.
In May 1997, the Company was reincorporated as a Maryland
corporation, which is also named Realty Income Corporation,
pursuant to a merger of the Company into a wholly-owned Maryland
subsidiary and the conversion of each outstanding share of Common
Stock of the Company into one share of common stock of the
surviving corporation.
The Company's common stock is listed on the New York Stock
Exchange under the symbol "O" and its central index key ("CIK")
number is 726728.
LIQUIDITY AND CAPITAL RESOURCES
===============================
Cash Reserves
-------------
Realty Income was organized for the purpose of operating as an
equity REIT which acquires and leases properties and distributes
to stockholders, in the form of monthly cash distributions, a
substantial portion of its net cash flow generated from lease
revenue. The Company intends to retain an appropriate amount of
cash as working capital reserves. At June 30, 1997, the Company
had cash and cash equivalents totaling $2.9 million.
Management believes that the Company's cash and cash equivalents
on hand, cash provided from operating activities and borrowing
capacity are sufficient to meet its liquidity needs for the
foreseeable future.
Capital Funding
---------------
On May 6, 1997, Realty Income issued $110 million of 7.75% notes
due May 2007 (the "Notes"). The Notes were sold at 99.929
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percent of par for a yield to the investors of 7.76%. After
taking into effect the gain of $1.1 million realized on the
treasury interest rate lock agreement, which is described in the
next paragraph, the effective interest rate on the Notes to the
Company is 7.62%. The net proceeds from the sale of the Notes
were used to repay $93.7 million of outstanding borrowings under
the Company's credit facility and to acquire properties.
Interest on the Notes is payable semiannually each May and
November, commencing November 1997. Currently, there is no
formal trading market for the Notes and the Company has not
listed and does not intend to list the Notes on any securities
exchange.
In December 1996, the Company entered into a treasury interest
rate lock agreement to hedge against the possibility of rising
interest rates. Under the interest rate lock agreement, the
Company was to receive or make a payment based on the
differential between a specified interest rate, 6.537%, and the
actual 10-year treasury interest rate on notional principal of
$90 million, at the end of six months. Based on the 10-year
treasury interest rate at May 1, 1997, the Company realized a
$1.1 million gain on the agreement, which was received in
June 1997. The gain on the agreement is being amortized over 10
years (the life of the Notes) as an offset to interest expense.
During the fourth quarter of 1996, the Company received an
investment grade senior unsecured debt rating from Duff & Phelps
Rating Company, Moody's Investor Services, Inc. and Standard and
Poor's Credit Rating Group, of BBB, Baa3, and BBB-, respectively.
These ratings are subject to change based upon, among other
things, the Company's results of operations and financial
condition.
Realty Income has a $130 million, revolving, unsecured
acquisition credit facility that expires in November 1999. The
credit facility currently bears interest at 1.25% over the London
Interbank Offered Rate ("LIBOR") and offers the Company other
interest rate options. As of August 8, 1997, $118.6 million of
borrowing capacity was available to the Company under the
acquisition credit facility. At that time, the outstanding
balance was $11.4 million. On May 6, 1997, proceeds from the
Notes were used to repay outstanding borrowings under the credit
facility. This credit facility has been and is expected to be
used to acquire additional retail properties leased to national
and regional retail chains under long term lease agreements. Any
additional borrowings will increase the Company's exposure to
interest rate risk.
Realty Income expects to meet its long-term capital needs for the
acquisition of properties through the issuance of public or
private debt or equity. In August 1995, the Company filed a
universal shelf registration statement with the Securities and
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Exchange Commission covering up to $200 million in value of
common stock, preferred stock or debt securities. Approximately
$159.8 million in value of common stock and debt securities has
been issued under the universal shelf registration statement
through August 8, 1997.
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 six months of 1997, Realty Income acquired 37
retail properties located in 18 states for $54.1 million
(excluding the estimated unfunded development costs of $2.7
million on nine properties under construction at June 30, 1997)
and selectively sold seven properties, increasing the number of
properties in its portfolio to 770. The 37 properties acquired
will contain approximately 589,200 leasable square feet and are
100% leased under net leases, with an average initial lease term
of 14.3 years. The weighted average annual unleveraged return on
the cost of the 37 properties (including the estimated unfunded
development cost of the nine properties under development) is
estimated to be 10.22%, computed as estimated contractual net
operating income (which in the case of a net leased property is
equal to the base rent or, in the case of properties under
construction, the estimated base rent under the lease) for the
first year of each lease, divided by total acquisition and
estimated development costs. Since it is possible that a tenant
could default on the payment of contractual rent, no assurance
can be given that the actual return on the cost of the 37
properties acquired in 1997 will not differ from the foregoing
percentage.
Of the properties acquired during the first six months of 1997,
30 were occupied as of August 1, 1997 and the remaining seven
were pre-leased and under construction pursuant to contracts
under which the tenant has agreed to develop the properties (with
development costs funded by the Company) and to begin paying rent
when the premises open for business. All of the properties
acquired in 1997, including the properties under development, are
leased with initial terms of 10 to 20 years.
During the first six months of 1997, the Company also invested
$2.8 million in eleven development properties acquired in 1996.
During the first six months of 1997, the Company also invested
$6,700 in one existing property in its portfolio.
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1997 ACQUISITION ACTIVITY THROUGH JUNE 30
Approx.
Initial Leasable
Lease Term Square
Tenant Industry City / State (Years) Feet
- ----------- ------------ ------------ --------- -------
1st Quarter
- -----------
Aaron Rents Home Furnishings Arlington, TX 10.0 68,100
Aaron Rents Home Furnishings Cedar Park, TX 10.0 23,300
Aaron Rents Home Furnishings Houston, TX 10.0 70,300
Barnes & Noble Book Store Tampa, FL 14.2 30,000
Econo Lube Auto Service Durham, NC (1) 15.0 2,800
Econo Lube Auto Service Greensboro, NC 15.0 2,300
Econo Lube Auto Service Charleston, SC 15.0 2,800
Econo Lube Auto Service Columbia, SC 15.0 2,800
Econo Lube Auto Service Greenville, SC (1) 15.0 2,800
Jiffy Lube Auto Service Springboro, OH 20.0 2,400
OfficeMax Office Supplies Lakewood, CA 14.6 28,700
2nd Quarter
- -----------
Aaron Rents Home Furnishings Ridgeland, MS 10.0 22,300
Aaron Rents Home Furnishings Memphis, TN 10.0 51,500
Aaron Rents Home Furnishings Webster, TX 10.0 22,500
Best Buy Consumer Smyrna, GA 20.0 46,100
Electronics
Econo Lube Auto Service Denver, CO (1) 15.0 2,800
Econo Lube Auto Service Duluth, GA (1) 15.0 2,800
Econo Lube Auto Service Garner, NC (1) 15.0 2,800
Econo Lube Auto Service Pineville, NC (1) 15.0 2,800
Jiffy Lube Auto Service Brentwood, TN (1) 20.0 2,000
Linens 'N Home Accessories Omaha, NE 15.8 46,600
Things
OfficeMax Office Supplies Hutchinson, KS 15.0 23,500
OfficeMax Office Supplies Salina, KS 15.0 23,500
Petco Pet Supplies Dickson City, PA 14.7 16,000
Quik Trip Convenience Store Dunwoody, GA 11.3 3,200
Quik Trip Convenience Store Lithonia, GA 18.3 3,200
Quik Trip Convenience Store Mableton, GA 17.4 3,200
Quik Trip Convenience Store Norcoss, GA 17.4 3,200
Quik Trip Convenience Store Stone Mountain, GA 11.3 3,200
Quik Trip Convenience Store Godfrey, IL 13.3 3,200
Quik Trip Convenience Store Granite City, IL 13.3 3,200
Quik Trip Convenience Store Madison, IL 13.3 3,200
Quik Trip Convenience Store Tulsa, OK 11.3 3,200
Speedy Brake Auto Service Billerica, MA 15.0 5,000
Speedy Brake Auto Service Southington, CT 15.1 5,300
(continued on next page)
Page 17
<PAGE>
(continued) Approx.
Initial Leasable
Lease Term Square
Tenant Industry City / State (Years) Feet
- ----------- ------------ ------------ --------- -------
Staples Office Supplies Helena, MT 14.7 24,600
Staples Office Supplies New Philadel-
phia, OH 14.9 24,000
---- -------
Average / Total 14.3 589,200
==== =======
(1) The Company acquired these properties as undeveloped land
and as of August 1, 1997 was funding construction and other costs
related to the development of the properties by the tenants. The
tenants have entered into leases with the Company covering these
properties and is contractually obligated to complete
construction on a timely basis and to pay construction cost
overruns to the extent they exceed the construction budget by
more than a predetermined percentage.
Distributions
-------------
Cash distributions paid during the first six months of 1997 and
1996 were $21.7 million and $26.7 million, respectively. The
1996 cash distributions include a special distribution of $5.3
million.
During the six months ended June 30, 1997, the Company paid six
monthly distributions of $0.1575 per share, totaling $0.945 per
share. For the six months ended June 30, 1996, the Company paid
six monthly distributions of $0.155 per share totaling $0.93 per
share and a special distribution in January 1996 of $0.23 per
share.
In June and July 1997, the Company declared two distributions of
$0.1575 per share which were paid on July 15, 1997 and will be
paid on August 15, 1997, respectively.
FUNDS FROM OPERATIONS ("FFO")
=============================
FFO for the second quarter of 1997 was $12.4 million versus $11.4
million during the second quarter of 1996, an increase of
$970,000 or 8.5%. FFO for the six months ended June 30, 1997 was
$24.8 million versus $22.9 million during the comparable period
of 1996, an increase of $1.9 million or 8.3%.
Realty Income defines FFO as net income before gain on sales of
Page 18
<PAGE>
properties, plus provision for impairment losses, plus
depreciation and amortization. In accordance with the
recommendations of the National Association of Real Estate
Investment Trusts ("NAREIT"), amortization of deferred financing
costs are not added back to net income to calculate FFO.
Amortization of financing costs are included in interest expense
in the consolidated statements of income.
Below is a reconciliation of net income to FFO, distribution paid
and weighted average number of shares outstanding for the second
quarter of 1997 and 1996 (dollars in thousands):
1997 1996
========= =========
Net income $ 8,068 $ 7,615
Plus depreciation and amortization 4,484 4,049
Plus provision for impairment losses 70 --
Less depreciation of furniture,
fixtures and equipment (13) (14)
Less gain on sales of properties (202) (213)
--------- ---------
Total Funds From Operations $ 12,407 $ 11,437
========= =========
Cash Distributions Paid $ 10,861 $ 10,684
Weighted average number of shares
outstanding 22,990,592 22,976,469
During the second quarter of 1997 and 1996, FFO exceeded cash
distributions by $1,546,000 and $753,000, respectively.
Below is a reconciliation of net income to FFO, distribution paid
and weighted average number of shares outstanding for the six
months ended June 30, 1997 and 1996 (dollars in thousands):
1997 1996
========= =========
Net income $ 16,253 $ 15,465
Plus depreciation and amortization 8,948 8,123
Plus provision for impairment losses 70 323
Less depreciation of furniture,
fixtures and equipment (24) (26)
Less gain on sales of properties (427) (958)
--------- ---------
Total Funds From Operations $ 24,820 $ 22,927
========= =========
Regular Cash Distributions Paid $ 21,722 $ 21,368
Special Cash Distributions Paid $ -- $ 5,285
Weighted average number of shares
outstanding 22,990,163 22,976,756
During the six months ended June 30, 1997 and 1996, FFO exceeded
cash distributions, excluding the non-recurring special
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<PAGE>
distribution of $5.3 million in 1996 (pertaining to the merger
with R.I.C. Advisor, Inc.) by $3.1 million and $1.6 million,
respectively.
Management considers FFO to be an appropriate measure of the
performance of an equity REIT. FFO is used by financial analysts
in evaluating REITs and can be one measure of a REIT's ability to
make cash distribution payments. Presentation of this
information provides the reader with an additional measure to
compare the performance of different REITs, although it should be
noted that not all REITs calculate FFO the same way so
comparisons with such REITs may not be meaningful.
FFO is not necessarily indicative of cash flow available to fund
cash needs and should not be considered as an alternative to net
income as an indication of the Company's performance or to cash
flows from operating, investing, and financing activities as a
measure of liquidity or ability to make cash distributions or to
pay debt service.
RESULTS OF OPERATIONS
=====================
The following is a comparison of the three and six months ended
June 30, 1997 to the three and six months ended June 30, 1996.
Rental revenue was $16.0 million for the quarter ended
June 30, 1997 versus $13.6 million for the comparable quarter in
1996, an increase of $2.4 million. The increase in rental
revenue was primarily due to the acquisition of 62 properties
during 1996 and 37 during the first six months of 1997 (the "New
Properties".)
The New Properties generated revenue in the second quarter of
1997 and 1996 of $2.2 million and $55,000, respectively, an
increase of $2.1 million. Annualized contractual lease payments
on the New Properties are approximately $11.5 million (excluding
estimated rent from seven properties under development at
August 1, 1997 and any percentage rents).
Rental revenue was $31.4 million for the six months ended
June 30, 1997 versus $27.3 million for the comparable six months
in 1996, an increase of $4.1 million. The increase in rental
revenue was primarily due to the New Properties which generated
revenue of $3.8 million and $66,000 during the first six months
of 1997 and 1996, respectively, an increase of $3.7 million.
Of the 770 properties in the portfolio as of June 30, 1997, 763
are single-tenant properties with the remaining properties being
multi-tenant properties. As of June 30, 1997, 759 or over 99% of
the 763 single-tenant properties were net leased with an average
Page 20
<PAGE>
remaining lease term (excluding extension options) of
approximately 8.4 years. At June 30, 1997, 757 of the Company's
763 single tenant properties had leases which provide for
increases in rents through (i) base rent increases tied to a
consumer price index with adjustment ceilings; (ii) coverage rent
based on a percentage of the tenants' gross sales or (iii) fixed
increases. Some leases contain more than one of these clauses.
Percentage rent, which is included in rental revenue, was $76,000
during the second quarter of 1997 and $101,000 for the comparable
quarter in 1996. Percentage rent during the first six months of
1997 and 1996 was $369,000 and $320,000, respectively.
Same store rents generated on 670 properties owned during both
the second quarter of 1997 and 1996 increased by $211,000 or
1.6%, to $13.60 million from $13.39 million. Same store rents
generated on the same 670 properties owned during both the first
six months of 1997 and 1996 increased by $425,000 or 1.6%, to
$27.36 million from $26.94 million.
The following table represents Realty Income's rental revenue by
industry for the six months ended June 30, 1997 and 1996 (dollars
in thousands):
June 30, 1997 June 30, 1996
-------------------- --------------------
Rental Percentage Rental Percentage
Industry Revenue of Total Revenue of Total
=================== =========== ========== =========== ==========
Automotive Parts $ 2,319 7.4% $ 2,263 8.3%
Automotive Service 2,484 7.9 1,816 6.6
Book Stores 152 0.5 -- --
Child Care 11,779 37.4 11,536 42.2
Consumer Electronics 2,114 6.7 -- --
Convenience Stores 1,602 5.1 1,293 4.7
Home Furnishings 1,543 4.9 1,248 4.6
Office Supplies 239 0.8 -- --
Pet Supplies 8 -- -- --
Restaurants 6,768 21.5 6,779 24.8
Other 2,447 7.8 2,395 8.8
-------- ------ -------- ------
Total $ 31,455 100.0% $ 27,330 100.0%
======== ====== ======== ======
Unleased properties are a factor in determining gross revenue
generated and property costs incurred by the Company. At
June 30, 1997, the Company had four properties that were not
under lease as compared to five properties at March 31, 1997, and
eight at December 31, 1996 and June 30, 1996. At August 8, 1997,
766 of 770 properties in the portfolio were under lease
agreements with third party tenants.
Page 21
<PAGE>
Interest and other revenue during the second quarter of 1997 and
1996 totaled $117,000 and $35,000, respectively, an increase of
$82,000. Interest and other revenue for the first six months of
1997 and 1996 totaled $148,000 and $85,000, respectively, an
increase of $63,000. The increase in 1997 was primarily due to
interest earned on bond offering proceeds in excess of the $93.7
million used to payoff the credit facility in May 1997. These
proceeds were invested in new properties during May and
June 1997.
Depreciation and amortization was $4.5 million in the second
quarter of 1997 verses $4.0 million for the comparable quarter in
1996 and $8.9 million for the six months ended June 30, 1997
verses $8.1 million for the comparable six months in 1996. The
increase in 1997 was primarily due to depreciation of the New
Properties.
General and administrative expenses increased by $44,000 to $1.33
million in the second quarter of 1997 versus $1.29 million in
1996. The increase in general and administrative expenses was
due to higher personnel and printing costs. The higher personnel
costs in 1997 was primarily due to costs of a 401(k) plan
initiated by the Company during the third quarter of 1996.
General and administrative expenses decreased by $13,000 to $2.59
million in the first six months of 1997 versus $2.60 million in
1996. During the second and third quarter of 1997, the Company
increased its number of employees to 44. The increase in employees is
anticipated to increase general and administrative expenses on an
annualized basis by $250,000.
Property expenses are broken down into costs associated
with multi-tenant non-net leased properties, unleased single-
tenant properties and general portfolio expenses. Expenses
related to the multi-tenant and unleased single-tenant properties
include, but are not limited to, property taxes, maintenance,
insurance, utilities, 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. At
June 30, 1997, four single-tenant properties were available for lease
as compared to nine at December 31, 1996 and eight at June 30, 1997.
Property expenses were $362,000 in the second quarter of 1997 and
$413,000 in the comparable quarter of 1996, a decrease of $51,000.
The decrease in property expenses during the second quarter of 1997
as compared to 1996 was primarily due to the reduction of expenses
associated with vacant properties.
Property expenses were $853,000 during the first six months of
1997 and $859,000 during the first six months of 1996, a decrease
of $6,000.
Page 22
<PAGE>
Interest expense is made up of five 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 and deferred bond financing
costs, which are offset, in part, by: (iv) amortization of the
gain on the treasury lock agreement and (v) 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 in the second quarter of 1997 increased by $1.5
million to $2.0 million, as compared to $485,000 during the
second quarter of 1996. The following is a summary of the five
components of interest expense for the second quarter of 1997 and
1996 (dollars in thousands):
1997 1996 Net Change
------ ----- ----------
Interest on outstanding loans
and notes $1,970 $ 416 $1,554
Credit facility commitment fees 35 40 (5)
Amortization of credit facility
origination costs and deferred
bond financing costs 68 55 13
Amortization of the gain on the
treasury lock agreement (18) -- (18)
Interest capitalized (46) (26) (20)
------ ---- ------
Totals $2,009 $ 485 $1,524
====== ===== ======
Interest incurred during the second quarter in 1997 on all
outstanding loans and notes was $1.6 million higher than in 1996,
due to an increase in the average outstanding balances and higher
average interest rate. The higher average interest rate was due
to interest on the Notes issued in May 1997. During the second
quarter of 1997, the average outstanding balances and interest
rate (after taking into effect amortization of the gain on the
treasury lock agreement) were $103.9 million and 7.54% as
compared to $24.6 million and 6.81% during the comparable period
in 1996. During the second quarter of 1997, the credit
facility's average outstanding balance and interest rate were
$37.4 million and 6.99%.
Interest expense in the first six months of 1997 increased by
$2.3 million to $3.3 million, as compared to $1.0 million during
the first six months of 1996. The following is a summary of the
five components of interest expense for the first six months of
1997 and 1996 (dollars in thousands):
Page 23
<PAGE>
1997 1996 Net Change
------ ----- ----------
Interest on outstanding loans
and notes $3,248 $ 851 $2,397
Credit facility commitment fees 56 85 (29)
Amortization of credit facility
origination costs and deferred
bond financing costs 117 109 8
Amortization of the gain on the
treasury lock agreement (18) -- (18)
Interest capitalized (82) (40) (42)
------ ----- ------
Totals $3,321 $1,005 $2,316
====== ====== ======
Interest incurred during the first six months of 1997 on all
outstanding loans and notes was $2.4 million higher than in 1996
due to an increase in the average outstanding balances and higher
average interest rate. The higher average interest rate was due
to interest on the Notes issued in May 1997. During the first
six months of 1997, the average outstanding balances and interest
rate (after taking into effect amortization of the gain on the
treasury lock agreement) were $90.1 million and 7.23% as compared
to $24.5 million and 6.97% during the comparable period of 1996.
During the first six months of 1997, the credit facility's
average outstanding balance and interest rate were $56.7 million
and 6.86%.
During both the second quarter and first six months of 1997 and
1996, a commitment fee of 0.15% per annum was incurred on the
undrawn portion of the credit facility. Commitment fees
decreased in the second quarter and first six months of 1997 as
compared to 1996 because the average available borrowing capacity
on the credit facility was lower in 1997. The amortization of
credit facility origination costs and deferred bond financing
costs increased in 1997 as compared to 1996 due to an increase in
deferred bond financing costs. This increase was partially
offset by reduced amortization of credit facility origination
costs, because in the first quarter of 1997 the term of the
credit facility was extended one year to November 1999, which
extended the period of time over which credit facility fees are
amortized. Amortization of credit facility origination costs and
deferred bond financing costs are estimated to be approximately
$300,000 over the next 12 months. In December 1996, the Company
entered into a treasury interest rate lock agreement to hedge
against the possibility of raising interest rates applicable to
its debt offering in May 1997. In May 1997, the Company realized a
$1.1 million gain on the agreement, which was received in June 1997.
The gain on the agreement is being amortized over 10 years, the life
of the Notes.
The Company reviews long-lived assets for impairment whenever
Page 24
<PAGE>
events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. In the second quarter
and first six months of 1997, a $70,000 charge was taken to
reduce the net carrying value on one property because it became
held for sale. In the first six months of 1996, a $323,000
charge was taken to reduce the net carrying value on two
properties because they became held for sale. No charge was
recorded for impairment losses in the second quarter of 1996.
All three of these properties have been sold.
The Company anticipates a small number of property sales will
occur in the normal course of business. During the second
quarter of 1997, the Company recorded a gain of $202,000 on the
sale of three restaurant properties. These sales generated cash
proceeds of $1.6 million. During the comparable period of 1996,
the Company sold one restaurant property for $685,000 and
recognized a gain of $213,000.
During the first six months of 1997, the Company recorded a gain
of $427,000 on the sale of seven properties (five restaurant, one
multi-tenant and one child care center). These sales generated
cash proceeds of $2.9 million. During the comparable period of
1996, the Company sold two restaurant properties for $2.2 million
and recognized a gain of $958,000.
For the second quarter of 1997, the Company had net income of
$8.1 million versus $7.6 million in 1996. The $453,000 increase
in net income is primarily due to the increase in rental revenue
from New Properties of $2.1 million and an increase in same store
rents on 670 properties owned during both periods of $211,000,
offset by an increase in depreciation and amortization and
interest expense, totaling $2.0 million.
For the first six months 1997, the Company had net income of
$16.3 million versus $15.5 million in 1996. The $788,000
increase in net income is primarily due to the increase in rental
revenue from New Properties of $3.7 million and an increase in
same store rents on 670 properties owned during both periods of
$425,000, offset by an increase in depreciation and amortization
and interest expense, totaling $3.1 million.
PROPERTIES
==========
As of July 1, 1997, Realty Income owned a diversified portfolio
of 770 properties in 42 states consisting of over 5.7 million
square feet of leasable space. The portfolio consist of 166
after-market automotive retail locations (80 automotive parts
stores and 86 automotive service locations), one book store, 318
child care centers, 37 consumer electronics stores, 51
convenience stores, 11 home furnishings stores, five office
Page 25
<PAGE>
supplies stores, one pet supplies store, 168 restaurant
facilities and 12 other properties. Of the 770 properties, 707
or 92% were leased to national or regional retail chain
operators; 43 or 5% were leased to franchisees of retail chain
operators; 16 or 2% were leased to other tenant types; and four
or less than 1% were available for lease. At July 1, 1997,
approximately 99% of the properties were under net lease
agreements. Net leases typically require the tenant to be
responsible for property operating costs including property
taxes, insurance and expenses of maintaining the property.
The Company's net leased retail properties are primarily leased
to national and regional chain store operators. At July 1, 1997,
the properties averaged approximately 7,500 square feet of
leaseable retail space on approximately 44,600 square feet of
land. Generally, buildings are single-tenant retail properties
with adequate parking on site to accommodate peak retail periods.
The properties tend to be on major thoroughfares with relatively
high traffic counts and adequate access, egress and proximity to
a sufficient population base to constitute a sufficient market or
trade area for the retailer's business.
The following table sets forth certain geographic diversification
information regarding Realty Income's portfolio at July 1, 1997:
Number Approx. Percent of
of Leasable Annualized Annualized
Proper- Percent Square Base Base
State ties Leased Feet Rent (1) Rent
========== ======= ======= ======== =========== ========
Alabama 6 100% 42,300 $ 319,000 0.5%
Arizona 26 100 178,400 2,368,000 3.6
California 53 98 1,001,900 10,601,000 16.0
Colorado 43 98 236,400 3,067,000 4.6
Connecticut 5 100 22,500 337,000 0.5
Florida 49 100 461,900 4,272,000 6.5
Georgia 44 100 252,500 3,480,000 5.3
Idaho 11 100 52,000 656,000 1.0
Illinois 28 100 192,200 2,389,000 3.6
Indiana 22 100 117,600 1,408,000 2.1
Iowa 8 100 51,700 456,000 0.7
Kansas 17 100 176,000 1,862,000 2.8
Kentucky 11 100 33,300 847,000 1.3
Louisiana 2 100 10,700 126,000 0.2
Maryland 6 100 34,900 505,000 0.8
Massachusetts 5 100 25,900 534,000 0.8
Michigan 5 100 26,900 355,000 0.5
Minnesota 17 100 118,400 1,713,000 2.6
Mississippi 12 100 128,900 901,000 1.4
Missouri 27 100 163,600 1,908,000 2.9
(Continued on next page)
Page 26
<PAGE>
(continued)
Number Approx. Percent of
of Leasable Annualized Annualized
Proper- Percent Square Base Base
State ties Leased Feet Rent (1) Rent
========== ======= ======= ======== =========== ========
Montana 2 100 30,000 276,000 0.4
Nebraska 9 100 93,700 1,071,000 1.6
Nevada 5 100 29,100 353,000 0.5
New Hampshire 1 100 6,400 122,000 0.2
New Jersey 2 100 22,700 346,000 0.5
New Mexico 3 100 12,000 103,000 0.2
New York 5 100 38,300 539,000 0.8
North Carolina 22 100 87,800 1,466,000 2.2
Ohio 49 100 234,000 3,668,000 5.6
Oklahoma 10 100 63,400 608,000 0.9
Oregon 17 100 92,400 1,062,000 1.6
Pennsylvania 5 100 44,300 676,000 1.0
South Carolina 19 100 75,000 1,152,000 1.8
South Dakota 1 100 6,100 79,000 0.1
Tennessee 12 100 132,400 1,281,000 1.9
Texas 128 99 1,003,500 9,151,000 13.9
Utah 7 100 45,400 591,000 0.9
Virginia 16 100 79,100 1,256,000 1.9
Washington 42 98 249,700 2,959,000 4.5
West Virginia 2 100 16,800 147,000 0.2
Wisconsin 11 100 60,500 738,000 1.1
Wyoming 5 100 26,900 324,000 0.5
----- ----- --------- ----------- ------
Totals 770 99% 5,777,500 $66,072,000 100.0%
===== ===== ========= =========== ======
(1) Annualized base rent is calculated by multiplying the
monthly contractual base rent as of July 1, 1997 for each of the
properties by 12, except that, for the properties under
construction, estimated contractual base rent for the first month
of the respective leases is used instead of base rent as of
July 1, 1997. The estimated contractual base rent for the
properties under construction is based upon the estimated
acquisition costs of the properties. Annualized base rent does
not include percentage rents (i.e., additional rent calculated as
a percentage of the tenant's gross sales above a specified
level), if any, that may be payable under leases covering certain
of the properties.
Page 27
<PAGE>
The following table sets forth certain information regarding the
Company's properties as of July 1, 1997, classified according to
the business of the respective tenants:
Approx. Realty
Total Income Approx. Annual-
Loca- Owned Leasable ized
Industry tions Loca- Square Base
Tenant Segment (1) tions Feet Rent (2)
========== ========= ======= ====== ======== =========
AFTER-MARKET AUTOMOTIVE
- -----------------------
CSK Auto Parts 580 79 409,200 $ 4,192,000
Discount Tire Service 310 18 103,200 1,178,000
Econo Lube Service 210 22 60,800 1,530,000
N' Tune
Jiffy Lube Service 1,400 30 70,200 1,935,000
Q Lube Service 490 4 7,600 183,000
R & S Strauss Service 110 2 31,200 431,000
Speedy Brake Service 1,080 9 51,200 722,000
Other Parts/Service -- 2 6,500 90,000
--- -------- ----------
Total After-market Automotive 166 739,900 10,261,000
BOOK STORES
- -----------
Barnes & Noble Book Stores 1,010 1 30,000 450,000
--- -------- ----------
Total Book Stores 1 30,000 450,000
CHILD CARE
- ----------
Children's Child Care 530 134 964,000 13,612,000
World Learning Center
Kinder-Care Child Care 1,150 13 79,800 1,087,000
Learning Centers
La Petite Child Care 790 170 972,700 8,853,000
Academy
Other Child Care -- 1 4,200 --
--- --------- ----------
Total Child Care 318 2,020,700 23,552,000
CONSUMER ELECTRONICS
- --------------------
Best Buy Electronics 270 3 150,900 1,738,000
Rex Stores Electronics 230 34 408,300 2,694,000
--- -------- ----------
Total Consumer Electronics 37 559,200 4,432,000
(Continued on next page )
Page 28
<PAGE>
(continued) Approx. Realty
Total Income Approx. Annual-
Loca- Owned Leasable ized
Industry tions Loca- Square Base
Tenant Segment (1) tions Feet Rent (2)
========== ========= ======= ====== ======== =========
CONVENIENCE STORES
- ------------------
7-ELEVEN Convenience 20,240 3 9,700 235,000
Dairy Mart Convenience 1,020 22 66,500 1,522,000
East Coast Oil Convenience 40 2 6,400 219,000
Quik Trip Convenience 330 9 28,800 924,000
The Pantry Convenience 400 14 34,400 1,333,000
Other Convenience -- 1 2,100 31,000
--- -------- ----------
Total Convenience Stores 51 147,900 4,264,000
HOME FURNISHINGS AND ACCESSORIES
- --------------------------------
Aaron Rents Furnishings 290 6 258,000 888,000
Levitz Furnishings 130 4 376,400 2,502,000
Linens 'N Accessories 170 1 46,600 561,000
Things
--- -------- ----------
Total Home Furnishings
and Accessories 11 681,000 3,951,000
OFFICE SUPPLIES
- ---------------
OfficeMax Supplies 560 3 75,700 854,000
Staples Supplies 560 2 48,600 456,000
--- -------- ---------
Total Office Supplies 5 124,300 1,310,000
PET SUPPLIES
- ------------
Petco Pet Supplies 340 1 16,000 253,000
--- -------- ---------
Total Pet Supplies 1 16,000 253,000
RESTAURANTS
- -----------
Carvers Dinner House 90 3 26,600 495,000
Don Pablo's Dinner House 70 7 60,700 607,000
Other Dinner House -- 11 88,100 838,000
Golden Corral Family 460 85 501,200 6,616,000
Sizzler Family 630 7 37,600 848,000
Other Family -- 5 33,600 394,000
Hardees Fast Food 3,100 3 10,300 144,000
Continued on next page
Page 29
<PAGE>
(continued) Approx. Realty
Total Income Approx. Annual-
Loca- Owned Leasable ized
Industry tions Loca- Square Base
Tenant Segment (1) tions Feet Rent (2)
========== ========= ======= ====== ======== =========
Taco Bell Fast Food 4,890 24 54,100 1,502,000
Whataburger Fast Food 520 9 23,000 616,000
Other Fast Food -- 14 39,800 778,000
--- -------- ----------
Total Restaurants 168 875,000 12,838,000
TOTAL OTHER Miscellaneous 12 583,500 4,761,000
--- -------- ----------
Totals 770 5,777,500 $66,072,000
=== ========= ==========
(1) Approximate total number of retail locations in operation
(including both corporate owned and franchised locations), based
on information provided to the Company by the respective tenants
during the first quarter of 1997.
(2) Annualized base rent is calculated by multiplying the
monthly contractual base rent as of July 1, 1997 for each of the
properties by 12, except that, for the properties under
construction, estimated contractual base rent for the first month
of the respective leases is used instead of base rent as of
July 1, 1997. The estimated contractual base rent for the
properties under construction is based upon the estimated
acquisition costs of the properties. Annualized base rent does
not include percentage rents (i.e., additional rent calculated as
a percentage of the tenant's gross sales above a specified
level), if any, that may be payable under leases covering certain
of the properties.
Of the 770 properties in the portfolio, 763 are single-tenant
properties with the remaining being multi-tenant properties. As
of July 1, 1997, 759 or over 99% of the 763 single-tenant
properties were net leased with an average remaining lease term
(excluding extension options) of approximately 8.4 years. The
following table sets forth certain information regarding the
timing of initial lease term expirations (excluding extension
options) on the Company's 759 net leased, single tenant retail
properties:
Page 30
<PAGE>
Percent of Total
Number of Annualized Annualized
Year Leases Expiring Base Rent (1) Base Rent
======== =============== ============= =================
1997 11 (2) $ 453,000 0.7%
1998 6 237,000 0.4
1999 27 1,213,000 2.0
2000 33 1,951,000 3.1
2001 53 3,967,000 6.4
2002 73 5,874,000 9.5
2003 68 5,163,000 8.3
2004 110 8,896,000 14.3
2005 86 6,049,000 9.7
2006 29 2,449,000 3.9
2007 85 5,373,000 8.6
2008 39 3,174,000 5.1
2009 12 896,000 1.4
2010 37 3,037,000 4.9
2011 31 3,538,000 5.7
2012 18 2,251,000 3.6
2013 2 627,000 1.0
2014 2 265,000 0.4
2015 25 4,795,000 7.7
2016 7 1,356,000 2.2
2017 4 618,000 1.0
2018 1 39,000 0.1
--------- ------------ -------
Totals 759 (3) $62,221,000 100.0%
========= ============ =======
(1) Annualized base rent is calculated by multiplying the
monthly contractual base rent as of July 1, 1997 for each of the
properties by 12, except that, for the properties under
construction, estimated contractual base rent for the first month
of the respective leases is used instead of base rent as of
July 1, 1997. The estimated contractual base rent for the
properties under construction is based upon the estimated
acquisition costs of the properties. Annualized base rent does
not include percentage rents (i.e., additional rent calculated as
a percentage of the tenant's gross sales above a specified
level), if any, that may be payable under leases covering certain
of the properties.
(2) In July 1997, Realty Income entered into lease extensions on
four of seven of its La Petite Academy properties that had leases
which expired on June 30, 1997. Two of the remaining properties
are scheduled to be sold in August 1997 and one was leased to a
third party. All of the La Petite Academy lease extensions as
well as the third party lease provide for fixed rental payments
plus percentage rents based upon unit sales.
Page 31
<PAGE>
(3) The table does not include seven multi-tenant properties and
four vacant, unleased single-tenant properties owned by the
Company. The lease expirations for properties under construction
are based on the estimated date of completion of such properties.
IMPACT OF INFLATION
- -------------------
Tenant leases generally provide for limited increases in rent as
a result of increases in the tenant's sales volumes and/or
increases in the consumer price index. Management expects that
inflation will cause these lease provisions to result in
increases in rent over time. However, during times when
inflation is greater than increases in rent as provided for in
the leases, rent increases may not keep up with the rate of
inflation.
Approximately 99% of the properties are leased to tenants under
net leases in which the tenant is responsible for property costs
and expenses. These features in the leases reduce the Company's
exposure to rising expenses due to inflation.
Inflation and increased costs may have an adverse impact on the
tenants if increases in the tenant's operating expenses exceed
increases in revenue.
PART II. OTHER INFORMATION
===========================
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of Realty Income Corporation
was held on May 13, 1997 and continued on May 27, 1997 for the
purpose of (i) electing a board of directors and (ii) reincor-
poration of the Company in Maryland and related changes to the
rights of stockholders. Proxies for the meeting were solicited
pursuant to Section 14(a) of the Securities Exchange Act of 1934
and there was no solicitation in opposition to management's
solicitations.
PROPOSAL 1. The reincorporation of the Company in Maryland and
related changes to the rights of stockholders.
FOR PERCENTAGE FOR AGAINST ABSTAIN
---------- -------------- --------- -------
11,592,285 50.43% 2,298,601 463,295
PROPOSAL 2. All of management's nominees for directors as listed
in the proxy statement were elected with the
following vote:
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<PAGE>
Year Term Shares Withhold
Expires Voted For Percent Authority
--------- ---------- ------- ---------
Donald R. Cameron 1999 17,673,945 76.88 194,092
William E. Clark 2000 17,672,331 76.88 195,706
Roger P. Kuppinger 1998 17,671,807 76.87 196,230
Thomas A. Lewis 2000 17,669,199 76.86 198,838
Michael D. McKee 1998 17,670,831 76.87 197,206
Willard H Smith Jr 1999 17,667,354 76.85 200,683
Richard J. VanDerhoff 2000 17,670,801 76.87 197,236
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)
2.2 Agreement and Plan of Merger dated as of
May 15, 1997 between Realty Income
Corporation, a Delaware corporation, and
Realty Income Maryland, Inc., a Maryland
Corporation (incorporated by reference to the
Company's Form 8-B12B dated July 29, 1997 and
incorporated herein by reference)
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)
3.3 Articles of Incorporation of Realty Income
Corporation (filed as Appendix B to the
Company's Proxy Statement and incorporated
herein by reference)
Page 33
<PAGE>
4.1 Form of Indenture dated as of May 6, 1997
between the Company and The Bank of New York
(filed as Exhibit 4.1 to the Company's Form
8-K dated May 5, 1997 and incorporated herein
by reference)
4.2 Pricing Committee Resolutions and Form of
7 3/4% Notes due 2007 (filed as Exhibit 4.2
to the Company's 8-K dated May 5, 1997 and
incorporated herein by reference)
4.3 First Supplemental Indenture dated as of
May 28, 1997 between the Company and The Bank
of New York (incorporated by reference to the
Company's Form 8-B12B dated July 29, 1997 and
incorporated herein by reference)
4.4 Specimen Stock Certificate for Registrant's
Common Stock (incorporated by reference to
the Company's Form 8-B12B dated July 29, 1997
and incorporated herein by reference)
10.1 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 as Exhibit 10.2 to the Company's Form 10-Q
for the quarter ended September 30, 1996 and
incorporated herein by reference)
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 Third Amendment to the Revolving Credit
Agreement (filed as Exhibit 10.4 to the
Company's Form 10-K for the year ended
December 31, 1996 and incorporated herein by
reference)
10.5 Fourth Amendment to the Revolving Credit
Agreement (filed as Exhibit 10.5 to the
Company's Form 10-Q dated March 31, 1997 and
incorporated herein by reference)
10.6 Stock Incentive Plan (filed as Exhibit 4.1 to
the Company's Registration Statement on Form
S-8 (Registration number 33-95708) and
incorporated herein by reference)
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<PAGE>
10.7 Form of Indemnification Agreement to be
entered into between the Company and the
executive officers of the Company (filed as
Exhibit 10.4 to the Company's Form 10-Q for
the quarter ended September 30, 1996 and
incorporated herein by reference)
10.8 Form of Management Incentive Plan (filed as
Exhibit 10.5 to the Company's Form 10-Q for
the quarter ended September 30, 1996 and
incorporated herein by reference)
10.9 First Amendment to the Stock Incentive Plan,
dated as of June 12, 1997 (incorporated by
reference to the Company's Form 8-B12B dated
July 29, 1997 and incorporated herein by
reference)
10.10 Form of Employment Agreement between the
Company and its Executive Officers
(incorporated by reference to the Company's
Form 8-B12B dated July 29, 1997 and
incorporated herein by reference)
27 Financial Data Schedule (electronically filed
with the Securities and Exchange Commission
only)
B. One report on Form 8-K was filed by registrant during the
quarter for which this report is filed.
A report on Form 8-K was dated and filed on May 5, 1997
in connection with the issuance of $110,000,000 principal
amount of 7.75% notes due 2007.
Page 35
<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: August 13, 1997 ----------------------------------
Gary M. Malino, Vice President
Chief Financial Officer (Principal
Financial and Accounting Officer)
EXHIBIT INDEX
Exhibit No. Description Page
=========== =========== ----
27 Financial Data Schedule (electronically
filed with the Securities and Exchange
Commission only)............................ 37
Page 36
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE>5
<LEGEND>
This Schedule contains summary financial information extracted
from the registrant's Balance Sheet as of June 30, 1997 and
Income Statement for the six ended June 30, 1997 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER>1
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,852,000
<SECURITIES> 0
<RECEIVABLES> 1,643,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> <F1> 0
<PP&E> 616,432,000
<DEPRECIATION> (141,190,000)
<TOTAL-ASSETS> 500,321,000
<CURRENT-LIABILITIES> <F1> 0
<BONDS> 123,740,000
<COMMON> 22,988,000
0
0
<OTHER-SE> 345,989,000
<TOTAL-LIABILITY-AND-EQUITY> 500,321,000
<SALES> 0
<TOTAL-REVENUES> 31,603,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,386,000
<LOSS-PROVISION> 70,000
<INTEREST-EXPENSE> 3,321,000
<INCOME-PRETAX> 16,253,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 16,253,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,253,000
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.71
<FN>
Current assets and current liabilities are not applicable to
the Company under current industry standards.
/FN
Page 37
<PAGE>
</TABLE>
