<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 MARCH 31, 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)
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)
(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 22,988,237 shares of common stock outstanding as of
May 13, 1997.
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REALTY INCOME CORPORATION
Form 10-Q
March 31, 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......... 8-11
Item 2: Management's Discussion and Analysis Of
Financial Condition and Results Of Operations......12-28
PART II. OTHER INFORMATION
==========================
Item 6: Exhibits and Reports on Form 8-K...................29-30
SIGNATURE................................................... 31
EXHIBIT INDEX............................................... 32
EXHIBITS....................................................33-39
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PART I. FINANCIAL INFORMATION
==============================
ITEM 1. FINANCIAL STATEMENTS
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
===========================
March 31, 1997 and December 31, 1996
(dollars in thousands, except per share data)
1997 1996
(Unaudited)
=========== =========
ASSETS
Real estate, at cost:
Land $ 170,736 $ 165,598
Buildings and improvements 409,777 398,942
--------- ---------
580,513 564,540
Less - accumulated depreciation
and amortization (141,649) (138,307)
--------- ---------
Net real estate 438,864 426,233
Cash and cash equivalents 3,332 1,559
Accounts receivable 1,219 1,905
Due from affiliates 326 383
Other assets 2,386 2,183
Goodwill, net 21,593 21,834
--------- ---------
TOTAL ASSETS $ 467,720 $ 454,097
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Distributions payable $ 3,620 $ 3,619
Accounts payable and accrued expenses 335 1,172
Other liabilities 3,792 5,065
Line of credit payable 88,200 70,000
--------- ---------
TOTAL LIABILITIES 95,947 79,856
--------- ---------
Continued on next page
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(continued)
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
===========================
March 31, 1997 and December 31, 1996
(dollars in thousands, except per share data)
1997 1996
(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, 22,988,237 and 22,979,537
shares issued and outstanding in
1997 and 1996, respectively 22,988 22,980
Capital in excess of par value 516,204 516,004
Accumulated distributions
in excess of net income (167,419) (164,743)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 371,773 374,241
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 467,720 $ 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 months ended March 31, 1997 and 1996
(dollars in thousands, except per share data)
(Unaudited)
1997 1996
========== ==========
REVENUE
Rental $ 15,449 $ 13,728
Interest 22 23
Other 9 27
---------- ----------
15,480 13,778
---------- ----------
EXPENSES
Depreciation and amortization 4,464 4,074
General and administrative 1,253 1,310
Property 491 446
Interest 1,312 520
Provision for impairment losses -- 323
---------- ----------
7,520 6,673
---------- ----------
Income from operations 7,960 7,105
Gain on sales of properties 225 745
---------- ----------
NET INCOME $ 8,185 $ 7,850
========== ==========
Net income per share $ 0.36 $ 0.34
========== ==========
Weighted average number of shares
outstanding 22,989,728 22,976,891
========== ==========
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 three months ended March 31, 1997 and 1996
(dollars in thousands)
(Unaudited)
1997 1996
========= =========
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,185 $ 7,850
Adjustments to net income:
Depreciation and amortization 4,464 4,074
Provision for impairment losses -- 323
Gain on sales of properties (225) (745)
Change in assets and liabilities:
Accounts receivable and
other assets 657 614
Accounts payable, accrued
expenses and other liabilities (2,053) (59)
--------- ---------
Net cash provided by
operating activities 11,028 12,057
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of properties 1,339 1,523
Acquisition of and additions
to properties (17,933) (3,241)
--------- ---------
Net cash used in
investing activities (16,594) (1,718)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of distributions (10,861) (15,969)
Proceeds from line of credit 18,200 21,300
Payment of line of credit -- (2,700)
Payment of notes payable -- (12,597)
Stock offering costs -- (31)
--------- ---------
Net cash provided by (used in)
financing activities 7,339 (9,997)
--------- ---------
Continued on next page
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(continued)
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
=====================================
For the three months ended March 31, 1997 and 1996
(dollars in thousands)
(Unaudited)
1997 1996
========= =========
Net increase in
cash and cash equivalents 1,773 342
Cash and cash equivalents,
beginning of period 1,559 1,650
--------- ---------
Cash and cash equivalents,
end of period $ 3,332 $ 1,992
========= =========
Interest paid during the first three months of 1997 and 1996 was
$1.2 million and $421,000, 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
==========================================
March 31, 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.
2. Credit Facility
- -------------------
The Company has a $130 million, three year, revolving, unsecured
acquisition credit facility that expires in November 1999. As of
March 31, 1997 and December 31, 1996, the outstanding balance on
the credit facility was $88.2 million and $70.0 million,
respectively, with an effective interest rate of approximately
6.89% and 6.85%, respectively. A commitment fee of 0.15%, per
annum, accrues on the average amount of the unused available
credit commitment.
The credit facility is subject to various leverage and interest
coverage ratio limitations, all of which the Company is and has
been in compliance with.
For the three months ended March 31, 1997 and 1996, interest of
$36,000 and $13,000, respectively, was capitalized on properties
under construction.
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3. Properties
- --------------
At March 31, 1997, the Company owned a diversified portfolio of
747 properties located in 42 states. Of the Company's
properties, 740 are single tenant properties with the remaining
properties being multi-tenant properties. At March 31, 1997,
five properties were vacant and available for lease. One of the
vacant properties was sold in May 1997 at a nominal gain.
Eleven retail properties located in six states were acquired
during the first three months of 1997 at an aggregate cost of
approximately $16.0 million (excluding the estimated unfunded
development costs totaling $1.6 million on five properties under
construction). The Company also invested $2.0 million in nine
development properties acquired in 1996. No additional capital
expenditures were incurred during the first quarter of 1997.
Total
Invested
through
Tenant Industry City/State 3/31/97
==================== =========== ============ ===========
1st Quarter
Aaron Rents Home Furnishings Arlington, TX $ 1,845,000
Aaron Rents Home Furnishings Cedar Park, TX 1,079,000
Aaron Rents Home Furnishings Houston, TX 1,551,000
Barnes & Noble Book Store Tampa, FL 4,693,000
Econo Lube N' Tune(1) Auto Service Charleston, SC 218,000
Econo Lube N' Tune(1) Auto Service Columbia, SC 421,000
Econo Lube N' Tune(1) Auto Service Durham, NC 355,000
Econo Lube N' Tune(1) Auto Service Greensboro, NC 362,000
Econo Lube N' Tune(1) Auto Service Greenville, SC 222,000
Jiffy Lube Auto Service Springboro, OH 711,000
OfficeMax Office Supplies Lakewood, CA 4,495,000
-----------
Properties acquired in 1997 15,952,000
Funding in 1997 of buildings under
development on land acquired in 1996 1,981,000
-----------
Total Invested $17,933,000
===========
(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 tenant has
entered into leases 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.
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4. Gain on Sales of Properties
- -------------------------------
For the three months ended March 31, 1997, the Company sold four
properties (one multi-tenant, two restaurant and one child care
center) for a total of $1.3 million and recognized a gain of
$225,000. For the three months ended March 31, 1996, the Company
sold one restaurant property for $1.5 million and recognized a
gain of $745,000.
5. Distributions Paid and Payable
- ----------------------------------
During the three months ended March 31, 1997, the Company paid
three monthly distributions of $0.1575 per share, totaling
$0.4725 per share. As of March 31, 1997, a distribution of
$0.1575 per share had been declared (and was paid on April 15,
1997).
6. Employee Benefit Plan
- -------------------------
As a result of the merger with R.I.C. Advisor, Inc. (the
"Advisor") on August 17, 1995, (the "Merger") the Company assumed
a defined benefit pension plan (the "Plan") covering
substantially all of its employees. The Plan was terminated on
January 2, 1996 and final disbursement of the Plan's assets
occurred February 24, 1997.
At March 31, 1997 and December 31, 1996, benefit obligations in
excess of plan assets were $0 and $2.3 million, respectively, and
are included in other liabilities in the accompanying balance
sheet. In connection with the Merger, the Company assumed a
benefit obligation of $1.9 million. The Merger agreement provides
for indemnification by the former shareholders of the Advisor
with respect to increases in the benefit obligation. A
receivable from the Advisor's former shareholders has been
recorded as of March 31, 1997 and December 31, 1996 for $326,000
and $383,000, respectively, and is included as due from
affiliates in the accompanying consolidated balance sheets.
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7. Derivative Financial Instrument
- -----------------------------------
The Company has only limited involvement with a derivative
financial instrument and does not use it for trading purposes.
The derivative financial instrument is used to manage well-
defined interest rate risks.
In December 1996, the Company entered into a treasury interest
rate lock agreement to hedge against rising interest rates
applicable to its anticipated debt offering, see note 8. Under
the interest rate lock agreement, the Company receives or makes 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.
8. Subsequent Events
- ---------------------
A. 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 in
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.
B. 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.
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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, 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 April 1,
1997, the Company owned a diversified portfolio of 747 properties
located in 42 states with over 5.4 million square feet of
leasable space. Over 99% of the Company's properties were leased
as of April 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
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 April 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 six
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officers of the Company, who have each managed the Company's
properties and operations for between six and 13 years, owned
approximately 1.5% of the Company's outstanding common stock as
of May 13, 1997. The directors and officers of the Company, as a
group, owned approximately 4.0% of the Company's outstanding
common stock as of May 13, 1997. Realty Income had 35 employees
as of May 13, 1997.
The Company's primary business objective is to generate a
consistent and predictable level of funds from operations ("FFO")
per share and distributions to stockholders. Additionally, the
Company generally will seek to increase FFO per share and
distributions to stockholders through both active portfolio
management and the acquisition of additional properties. The
Company also seeks to lower the ratio of distributions to
stockholders as a percentage of FFO in order to allow internal
cash flow to be used to fund additional acquisitions and for
other corporate purposes. The Company's portfolio management
focus includes (i) contractual rent increases on existing leases;
(ii) rental increases at the termination of existing leases when
market conditions permit; and (iii) the active management of the
Company's property portfolio, including selective sales of
properties. The Company generally pursues the acquisition of
additional properties under long-term, net lease 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.
As a result of the merger with R.I.C. Advisor, Inc., (the
"Advisor") in August 1995, the Company assumed a defined benefit
pension plan (the "Plan") covering substantially all of its
employees. The Plan was terminated in January 1996 and final
disbursement of the Plan's assets occurred in February 1997. At
the time the Plan's assets were disbursed, the Company met its
obligation to the Plan of $2.2 million.
The Company's common stock is listed on the New York Stock
Exchange under the symbol "O."
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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 March 31, 1997, the Company
had cash and cash equivalents totaling $3.3 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
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 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
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 receives or makes 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.
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.
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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 three-year, 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 May 13, 1997, the full $130 million
of borrowing capacity was available to the Company under the
acquisition credit facility. On May 6, 1997, the net 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
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 May 13, 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 quarter of 1997, Realty Income acquired 11
retail properties located in six states for $16.0 million
(excluding the estimated unfunded development costs of $1.6
million on five properties under construction at March 31, 1997)
and selectively sold four properties, increasing the number of
properties in its portfolio to 747 properties. The 11 properties
acquired will contain approximately 236,200 leasable square feet
and are 100% leased under net leases, with an average initial
lease term of 14.0 years. The weighted average annual
unleveraged return on the cost of the 11 properties (including
the estimated unfunded development cost of the five properties
under development) is estimated to be 10.2%, 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
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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 11 properties acquired in 1997 will not
differ from the foregoing percentage.
Of the 11 properties acquired during the first quarter of 1997,
six were occupied as of May 1, 1997 and the remaining five 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 quarter of 1997, the Company also invested $2.0
million in nine development properties acquired in 1996 No
additional property capital expenditures were incurred during the
first quarter of 1997.
1997 ACQUISITION ACTIVITY THROUGH MARCH 31
Initial Approx.
Lease Leasable
Term Square
Tenant Industry City / State (Years) Feet
========== =============== ============= ===== =======
1st Quarter
Aaron Rents Home Furnishings Arlington, TX 10.0 68,000
Cedar Park, TX 10.0 23,300
Houston, TX 10.0 70,300
Barnes & Noble Book Store Tampa, FL 14.2 30,000
Econo Lube
N' Tune Auto Service Charleston, SC (1) 15.0 2,800
Columbia, SC (1) 15.0 2,800
Durham, NC (1) 15.0 2,800
Greensboro, NC (1) 15.0 2,300
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
---- -------
Average / Total 14.0 236,200
==== =======
(1) The Company acquired these properties as undeveloped land
and is funding construction and other costs related to the
development of the properties by the tenants. The tenant has
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
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percentage. As of March 31, 1997, the total acquisition and
estimated construction costs for the properties under development
was $3.1 million, of which $1.6 million had not been funded.
Distributions
-------------
Cash distributions paid during the first three months of 1997 and
1996 were $10.9 million and $16.0 million, respectively. The
1996 cash distributions include a special distribution of $5.3
million.
During the three months ended March 31, 1997, the Company paid
three monthly distributions of $0.1575 per share, totaling
$0.4725 per share. For the three months ended March 31, 1996,
the Company paid three monthly distributions of $0.155 per share
totaling $0.465 per share and a special distribution in January
1996 of $0.23 per share.
In March and April 1997, the Company declared two distributions
of $0.1575 per share which was paid on April 15, 1997 and will be
paid on May 15, 1997, respectively.
FUNDS FROM OPERATIONS ("FFO")
=============================
FFO for the first quarter of 1997 was $12.4 million versus $11.5
million during the first quarter of 1996, an increase of $924,000
or 8.0%. Realty Income defines FFO as net income before gain on
sales of properties, plus provision for impairment losses, plus
depreciation and amortization. In accordance with the
recommendations of the National Association of Real Estate
Investment Trusts ("NAREIT"), amortization of deferred financing
costs are not added back to net income to calculate FFO.
Amortization of financing costs are included in interest expense
in the consolidated statements of income.
Below is a reconciliation of net income to FFO for the quarters
ended March 31, 1997 and 1996 (dollars in thousands):
1997 1996
========= =========
Net income $ 8,185 $ 7,850
Plus depreciation and amortization 4,464 4,074
Plus provision for impairment losses -- 323
Less depreciation of furniture,
fixtures and equipment (11) (13)
Less gain on sales of properties (225) (745)
--------- ---------
Total Funds From Operations $ 12,413 $ 11,489
========= =========
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For the quarters ended March 31, 1997 and 1996, FFO exceeded cash
distributions, excluding the non-recurring special distribution
of $5.3 million in 1996 (pertaining to the merger with R.I.C.
Advisor, Inc.) by $1,552,000 and $805,000, 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 months ended March 31,
1997 to the three months ended March 31, 1996.
Rental revenue was $15.4 million for the quarter ended March 31,
1997 versus $13.7 million for the comparable quarter in 1996, an
increase of $1.7 million. The increase in rental revenue was
primarily due to the acquisition of 73 properties during 1996 and
the first quarter of 1997 (the "New Properties"). The New
Properties generated revenue in 1997 and 1996 of $1.6 million and
$12,000, respectively, an increase of $1.6 million. Annualized
contractual lease payments on the New Properties are
approximately $7.6 million (excluding estimated rent from five
properties under development and any percentage rents).
Of the 747 properties in the portfolio as of March 31, 1997, 740
are single-tenant properties with the remaining properties being
multi-tenant properties. As of March 31, 1997, 735 or 99% of the
single-tenant properties were net leased with an with an average
remaining lease term (excluding extension options) of
approximately 8.4 years. At March 31, 1997, 734 of the Company's
740 single tenant properties had leases which provide for
increases in rents through (i) base rent increases tied to a
consumer price index with adjustment ceilings; (ii) overage rent
based on a percentage of the tenants' gross sales or (iii) fixed
increases. Some leases contain more than one of these clauses.
Rental revenue generated on 673 properties owned during both the
first quarter of 1997 and 1996 increased by $214,000 or 1.6%,
Page 18
<PAGE>
from $13.58 million to $13.80 million. Percentage rent, which is
included in rental revenue, was $293,000 for 1997 and $220,000
for 1996.
The following table represents Realty Income's rental revenue by
industry for the three months ended March 31, 1997 and 1996
(dollars in thousands):
March 31, 1997 March 31, 1996
---------------------- ----------------------
Rental Percentage Rental Percentage
Industry Revenue of Total Revenue of Total
=================== =========== ========== =========== ==========
Automotive Parts $ 1,268 8.2% $ 1,181 8.6%
Automotive Service 1,180 7.6% 953 6.9%
Book Stores 32 0.2% -- --
Child Care 5,889 38.1% 5,768 42.0%
Consumer Electronics 1,044 6.8% -- --
Convenience Stores 786 5.1% 646 4.7%
Home Furnishings 642 4.2% 624 4.6%
Office Supplies 80 0.5% -- --
Restaurant 3,303 21.4% 3,371 24.6%
Other 1,225 7.9% 1,185 8.6%
-------- ------ -------- ------
Total $ 15,449 100.0% $ 13,728 100.0%
======== ====== ======== ======
Unleased properties are a factor in determining gross revenue
generated and property costs incurred by the Company. At March
31, 1997, the Company had five properties that were not under
lease as compared to four properties at March 31, 1996. In May
1997, one of the unleased properties was sold at a nominal gain.
The remaining 742 properties were under lease agreements with
third party tenants at March 31, 1997.
Interest and other revenue totaled $31,000 in the first quarter
of 1997 as compared to $50,000 in 1996, a decrease of $19,000.
Depreciation and amortization was $4.5 million in the first
quarter of 1997 verses $4.1 million for the comparable quarter
in. The $390,000 increase in 1997 was primarily due to the
depreciation of the New Properties.
General and administrative expenses decreased by $57,000 to $1.25
million in the first quarter of 1997 versus $1.31 million in
1996. The decrease in general and administrative expenses was
due to lower legal fees, professional fees and printing costs,
which were partially offset by higher personnel costs. The
higher personnel costs were primarily due to costs of a 401(k)
plan initiated by the Company during the third quarter of 1996.
Page 19
<PAGE>
Property expenses were $491,000 in 1997 and $446,000 in 1996, an
increase of $45,000. Property expenses are broken down into
costs associated with multi-tenant non-net lease 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.
Property expenses of $279,000 were incurred during 1997 on eight
multi-tenant properties, seven of which were owned at March 31,
1997. During the first quarter of 1997, one multi-tenant
property was sold. Property expenses of $283,000 were incurred
on ten multi-tenant properties in 1996, all of which were owned
at March 31, 1996. Expenses incurred in 1997 on eight unleased
single-tenant properties totaled $97,000 as compared to $59,000
in 1996 on six unleased single-tenant properties. At March 31,
1997, five properties were available for lease, one of which was
sold in May 1997. At March 31, 1996, four single-tenant
properties were available for lease. The $38,000 increase in
unleased single-tenant property expenses in 1997 as compared to
1996 is primarily due to an increase in property taxes on the
additional vacant properties. General portfolio expenses in 1997
and 1996 totaled $115,000 and $104,000, respectively. The
increase in general portfolio expenses is primarily due to the
cost of environmental insurance initially purchased in December
1996.
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 and bond costs; which are
offset, in part, 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.
Page 20
<PAGE>
Interest expense increased by $792,000 to $1.3 million in the
first quarter of 1997 as compared to $520,000 during the first
quarter of 1996. The following is a summary of the four
components of interest expense for the first quarter of 1997 and
1996 (dollars in thousands):
1997 1996 Net Change
------ ----- ----------
Interest on outstanding loans $1,279 $ 435 $ 844
Credit facility commitment fees 20 45 (25)
Amortization of credit facility
origination costs and
bond financing costs 49 54 (5)
Interest capitalized (36) (14) (22)
------ ---- -----
Totals $1,312 $ 520 $ 792
====== ===== =====
Interest incurred on outstanding loans was $844,000 higher in
1997 than in 1996 due to an increase in the average outstanding
balance which was partially offset by lower interest rates on the
acquisition credit facility and certain variable rate notes
(which were issued in August 1994 and redeemed in March 1996).
During the first quarter of 1997, the average outstanding balance
and interest rate were $76.2 million and 6.81% as compared to
$24.5 million and 7.15% during the comparable period in 1996.
During both periods, a commitment fee of 0.15% per annum was
incurred on the undrawn portion of the credit facility.
Commitment fees decreased in 1997 as compared to 1996 because the
average available borrowing capacity was lower in 1997. The
amortization of credit facility origination costs and bond
financing costs decreased in 1997 as compared to 1996, 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.
The Company reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. In 1996, a $323,000
charge was taken to reduce the net carrying value on two
properties because they became held for sale. No charge was
recorded for impairment losses in 1997.
The Company anticipates a small number of property sales will
occur in the normal course of business. During the first quarter
of 1997, the Company recorded a gain of $225,000 on the sale of
four properties (one multi-tenant, two restaurant and one child
care center). These sales generated cash proceeds of $1.3
million. During the comparable period of 1996, the Company sold
one restaurant property for $1.5 million and recognized a gain of
$745,000.
Page 21
<PAGE>
For the first quarter of 1997, the Company had net income of $8.2
million versus $7.9 million in 1996. The $335,000 increase in
net income is primarily due to the increase in rental revenue
from New Properties of $1.6 million, offset by an increase in
depreciation and amortization and interest expense, totaling $1.2
million.
PROPERTIES
==========
As of April 1, 1997, Realty Income owned a diversified portfolio
of 747 properties in 42 states consisting of over 5.4 million
square feet of leasable space. The portfolio consist of 159
after-market automotive retail locations (80 automotive parts
stores and 79 automotive service locations), one book store, 318
child care centers, 36 consumer electronics stores, 42
convenience stores, seven home furnishings stores, one office
supply store, 171 restaurant facilities and 12 other properties.
Of the 747 properties, 684 or 91% were leased to national or
regional retail chain operators; 42 or 6% were leased to
franchisees of retail chain operators; 16 or 2% were leased to
other tenant types; and five or less than 1% were available for
lease. At April 1, 1997, over 98% of the properties were under
net lease agreements. Net leases typically require the tenant to
be responsible for property operating costs including property
taxes, insurance and expenses of maintaining the property.
The Company's net leased retail properties are primarily leased
to national and regional chain store operators. At April 1,
1997, the properties averaged approximately 7,300 square feet of
leaseable retail space on approximately 43,500 square feet of
land. Generally, buildings are single-store 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.
Page 22
<PAGE>
The following table sets forth certain geographic diversification
information regarding Realty Income's portfolio at April 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 2,362,000 3.8
California 53 98 1,001,900 10,593,000 17.1
Colorado 42 98 233,500 2,984,000 4.8
Connecticut 4 100 17,200 240,000 0.4
Florida 49 100 461,900 4,264,000 6.9
Georgia 37 100 187,600 2,448,000 3.9
Idaho 11 100 52,000 656,000 1.1
Illinois 25 100 182,600 2,081,000 3.4
Indiana 23 100 122,800 1,438,000 2.3
Iowa 8 100 51,700 456,000 0.7
Kansas 15 100 129,000 1,441,000 2.3
Kentucky 11 100 33,300 835,000 1.3
Louisiana 2 100 10,700 126,000 0.2
Maryland 6 100 34,900 505,000 0.8
Massachusetts 4 100 20,900 440,000 0.7
Michigan 5 100 26,900 353,000 0.6
Minnesota 17 100 118,400 1,713,000 2.7
Mississippi 11 100 106,600 792,000 1.3
Missouri 27 100 163,600 1,842,000 2.9
Montana 1 100 5,400 71,000 0.1
Nebraska 8 100 47,100 509,000 0.8
Nevada 5 100 29,100 353,000 0.6
New Hampshire 1 100 6,400 122,000 0.2
New Jersey 2 100 22,700 346,000 0.6
New Mexico 3 100 12,000 103,000 0.2
New York 5 100 38,300 539,000 0.9
North Carolina 20 100 82,200 1,337,000 2.1
Ohio 48 100 210,500 3,426,000 5.5
Oklahoma 9 100 60,200 543,000 0.9
Oregon 18 100 98,500 1,133,000 1.8
Pennsylvania 4 100 28,300 420,000 0.7
South Carolina 20 95 85,000 1,152,000 1.9
South Dakota 1 100 6,100 79,000 0.1
Tennessee 10 100 78,900 963,000 1.6
Texas 127 99 980,900 9,073,000 14.6
Utah 7 100 45,400 591,000 1.0
Virginia 16 100 79,000 1,256,000 2.0
Washington 42 98 249,700 2,959,000 4.8
West Virginia 2 100 16,800 147,000 0.2
Wisconsin 11 100 60,500 738,000 1.2
Wyoming 5 100 26,900 324,000 0.5
----- ----- --------- ----------- ------
Totals 747 99% 5,446,100 $62,072,000 100.0%
===== ===== ========= =========== ======
Page 23
<PAGE>
(1) Annualized base rent is calculated by multiplying the
monthly contractual base rent as of April 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 April
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.
The following table sets forth certain information regarding the
Company's properties, 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 1,177,000
Econo Lube
N' Tune Service 210 18 49,400 1,257,000
Jiffy Lube Service 1,400 29 68,700 1,851,000
Q Lube Service 490 4 7,600 183,000
R & S Strauss Service 110 2 31,200 431,000
Speedy Muffler
King Service 1,080 7 40,900 531,000
Other Parts/Service -- 2 6,500 90,000
--- -------- ----------
Total After-market Automotive 159 716,700 9,712,000
BOOK STORES
- -----------
Barnes & Noble Book Stores 1,010 1 30,000 450,000
--- -------- ---------
Total Book Stores 1 30,000 450,000
Page 24
<PAGE>
Approx. Realty
Total Income Approx. Annual-
Loca- Owned Leasable ized
Industry tions Loca- Square Base
Tenant Segment (1) tions Feet Rent (2)
========== ========= ======= ====== ======== =========
CHILD CARE
- ----------
Children's
World Learn-
ing Centers Child Care 530 134 964,000 13,612,000
Kinder-Care
Learning
Centers Child Care 1,150 13 79,800 1,087,000
La Petite
Academy Child Care 790 170 972,700 8,853,000
Other Child Care -- 1 4,200 --
--- --------- ----------
Total Child Care 318 2,020,700 23,552,000
CONSUMER ELECTRONICS
- --------------------
Best Buy Consumer
Electronics 270 2 104,800 1,321,000
Rex Stores Consumer
Electronics 230 34 408,300 2,694,000
--- -------- ---------
Total Consumer Electronics 36 513,100 4,015,000
CONVENIENCE STORES
- ------------------
7-ELEVEN Convenience 20,240 3 9,700 235,000
Dairy Mart Convenience 1,020 22 66,500 1,513,000
East Coast Oil Convenience 40 2 6,400 219,000
The Pantry Convenience 400 14 34,400 1,333,000
Other Convenience -- 1 2,100 31,000
--- -------- ---------
Total Convenience Stores 42 119,100 3,331,000
HOME FURNISHINGS
- ----------------
Levitz Home Fur-
nishings 130 4 376,400 2,496,000
Aaron Rents Home Fur-
nishings 290 3 161,600 464,000
--- -------- ---------
Total Home Furnishings 7 538,000 2,960,000
Page 25
<PAGE>
Approx. Realty
Total Income Approx. Annual-
Loca- Owned Leasable ized
Industry tions Loca- Square Base
Tenant Segment (1) tions Feet Rent (2)
========== ========= ======= ====== ======== =========
OFFICE SUPPLIES
- ---------------
OfficeMax Office Supplies 560 1 28,700 431,000
--- -------- ---------
Total Office Supplies 1 28,700 431,000
RESTAURANTS
- -----------
Don Pablo's Dinner House 70 7 60,700 604,000
Carvers Dinner House 90 3 26,600 495,000
Other Dinner House -- 13 108,300 1,015,000
Golden Corral Family 460 87 512,500 6,747,000
Sizzler Family 630 7 37,600 841,000
Other Family -- 4 23,400 151,000
Hardees Fast Food 3,100 3 10,300 144,000
Taco Bell Fast Food 4,890 24 54,100 1,502,000
Whataburger Fast Food 520 9 23,000 616,000
Other Fast Food -- 14 39,800 747,000
--- -------- ---------
Total Restaurants 171 896,300 12,862,000
TOTAL OTHER Miscellaneous 12 583,500 4,759,000
--- -------- ---------
Total 747 5,446,100 $62,072,000
=== ========= ==========
(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 April 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 April
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 26
<PAGE>
Of the 747 properties in the portfolio at April 1, 1997, 740 are
single-tenant properties with the remaining being multi-tenant
properties. As of April 1, 1997, 735 or 99% of the 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 735 net leased, single tenant retail
properties:
Percent of Total
Number of Annualized Annualized
Year Leases Expiring Base Rent (2) Base Rent
======== =============== ============= =================
1997 25 (3) $ 1,068,000 1.8%
1998 4 168,000 0.3
1999 20 900,000 1.5
2000 27 1,335,000 2.3
2001 49 3,796,000 6.5
2002 74 5,878,000 10.1
2003 68 5,163,000 8.9
2004 110 8,896,000 15.3
2005 86 6,044,000 10.4
2006 29 2,446,000 4.2
2007 82 4,949,000 8.5
2008 39 3,174,000 5.5
2009 12 896,000 1.5
2010 34 2,729,000 4.7
2011 31 3,541,000 6.1
2012 8 714,000 1.2
2013 -- -- --
2014 2 265,000 0.5
2015 25 4,789,000 8.2
2016 7 1,351,000 2.3
2017 2 83,000 0.1
2018 1 39,000 0.1
--------- ------------ -------
Total 735 (1) $58,224,000 100.0%
========= ============ =======
(1) The table does not include seven multi-tenant properties and
five vacant, unleased properties owned by the Company. The lease
expirations for properties under construction are based on the
estimated date of completion of such properties.
Page 27
<PAGE>
(2) Annualized base rent is calculated by multiplying the
monthly contractual base rent as of April 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 April
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.
(3) In May 1997, Realty Income entered into lease extensions on
all 12 of its La Petite Academy properties that had leases which
expired on December 31, 1996 and have been leased on a month to
month basis in 1997. The new leases are for terms of one to five
years and provide for fixed rental payments equal to the base
rents and percentage rents earned in 1996, plus percentage rents
based upon unit sales.
Of the Company's 170 La Petite Academy properties, these 12
properties are the first ones to complete their initial lease
terms. The balance of the Company's leases with La Petite
Academy expire between June 1997 and April 2008. The 12
properties were acquired by the Company from La Petite Academy in
1981 and leased back under net lease agreements with an initial
lease term of 15 years.
IMPACT OF INFLATION
- -------------------
Tenant leases generally provide for limited increases in rent as
a result of increases in the tenant's sales volumes and/or
increases in the consumer price index. Management expects that
inflation will cause these lease provisions to result in
increases in rent over time. However, during times when
inflation is greater than increases in rent as provided for in
the leases, rent increases may not keep up with the rate of
inflation.
Over 98% of the properties 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.
Page 28
<PAGE>
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)
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)
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)
Page 29
<PAGE>
Exhibit No. Description
=========== ===========
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 herein
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)
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)
27 Financial Data Schedule (electronically filed
with the Securities and Exchange Commission
only)
99.1 Press release announcing that Thomas A. Lewis
has been selected to succeed William E. Clark
as Chief Executive Officer of the Company,
filed herewith.
B. No report on Form 8-K was filed by registrant during the
quarter for which this report is filed.
A report on Form 8-K was dated and filed on May 5, 1997
in connection with the issuance of $110,000,000 principal
amount of 7.75% Notes due 2007.
Page 30
<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: May 14, 1997 ----------------------------------
Gary M. Malino, Vice President
Chief Financial Officer (Principal
Financial and Accounting Officer)
Page 31
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
=========== =========== ----
10.5 Fourth Amendment to the Revolving Credit
Agreement, filed herein..................... 33
27 Financial Data Schedule (electronically
filed with the Securities and Exchange
Commission only)............................ 38
99.1 Press release announcing that Thomas A. Lewis
has been selected to succeed William E. Clark
as Chief Executive Officer of the Company... 39
Page 32
Exhibit 10.5
FOURTH AMENDMENT TO
REVOLVING CREDIT AGREEMENT
--------------------------
THIS FOURTH AMENDMENT TO THE REVOLVING CREDIT AGREEMENT
("Amendment") is made as of April 28, 1997, 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, as amended by the First amendment to the
Revolving Credit Agreement dated as of January 26, 1995, the
Second Amendment to the Revolving Credit Agreement dated as of
December 4, 1995 and the Third Amendment to the Revolving Credit
Agreement dated as of March 7, 1997 (as amended, the "Credit
Agreement"); and
WHEREAS, the signatories hereto desire to amend Section
7.02(a) of the Credit Agreement to allow the Company from time to
time to create, issue or assume debt having agreements and
covenants that, in the written determination of the Agent, are no
more restrictive on the Company than the agreements and covenants
under the Credit Agreement;
NOW, THEREFORE, in consideration of the promises 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(a) of the Credit Agreement is hereby
amended and restated in its entirety as follows:
"(a) INDEBTEDNESS. Create, incur or assume
any Indebtedness, except (i) Indebtedness
to the Agent and the Banks hereunder and
under the Notes, (ii) Indebtedness
Page 33
<PAGE>
incurred to pay dividends enabling the
Company to maintain its status as a REIT,
(iii) Indebtedness incurred to purchase
Interest Rate Protection Agreements, (iv)
Indebtedness incurred to refinance Stock-
holder Notes, and (v) Indebtedness that
would otherwise be permitted under the
Credit Documents, provided that, in each
of the aforementioned cases, (A) the agree-
ments and covenants entered into in
connection therewith would be, in the
written determination of the Agent, no
more restrictive on the Company than the
agreements and covenants hereunder, (B)
such Indebtedness is unsecured, (C) the
maturity of such Indebtedness (including
all scheduled payments of principal) is
later than the Termination Date, (D) such
Indebtedness ranks PARI PASSU or subordinate
to the Notes and (E) after giving effect to
the incurrence of such Indebtedness, the
Company's interest coverage ratio referred
to in SECTION 7.03(c) herein for the most
recent four-quarter period ending on the
ending date of the Company's last fiscal
quarter would have been greater than
2.50:1.00. The Company shall not permit
any Subsidiary to create, incur, assume or
suffer to exist any Indebtedness except to
the Company or another Subsidiary, and such
Indebtedness may not exceed $3,500,000."
3. The Company represents and warrants to the Banks
that (a) it has full power and legal right to execute and deliver
this Amendment and to perform the provisions of this Amendment;
(b) the execution, delivery and performance of this Amendment
have been authorized by all necessary action, corporate or
otherwise, and do not violate any provisions of its charter or
by-laws or any contractual obligation or requirement of law
binding on it; (c) this Amendment constitutes its legal, valid
and binding obligation, enforceable against it in accordance with
its terms; (d) the representation and warranties in Section 5.01
(other than representations and warranties that speak as of a
specific date) of the Credit Agreement are true and correct as of
the date hereof; and (e) no Default or Event of Default has
occurred and is continuing.
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.
Page 34
<PAGE>
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 difference parties hereto on separate
counterparts, each of which when so executed and delivered shall
be an original, but all such counterparts shall together
constitute one and the same instrument.
7. The Credit Agreement, as amended hereby, shall be
finding 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.
Page 35
<PAGE>
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/MICHAEL R. PFEIFFER
--------------------------------
Name: Michael R. Pfeiffer
Title: Vice President, General Counsel
and Secretary
THE BANK OF NEW YORK
as Agent for the Banks
By: /s/LISA Y. BROWN
--------------------------------
Name: Lisa Y. Brown
Title: Vice President
THE BANK OF NEW YORK
as a Bank and as of the Swing Line Bank
By: /s/LISA Y. BROWN
--------------------------------
Name: Lisa Y. Brown
Title: Vice President
SANWA BANK CALIFORNIA
By: /s/JOHN LINDER
--------------------------------
Name: John Linder
Title: Vice President
SIGNET BANK VIRGINIA
By: /s/ERIC A. LAWRENCE
--------------------------------
Name: Eric A. Lawrence
Title: Sr. Vice President
BANK HAPOALIM, B.M.,
SAN FRANCISCO BRANCH
Page 36
<PAGE>
By: /s/PAUL WATSON
--------------------------------
Name: Paul Watson
Title: Vice President
By: /s/JOHN RICE
--------------------------------
Name: John Rice
Title: Vice President
DRESDNER BANK AG, NEW YORK BRANCH
AND GRAND CAYMAN BRANCH
By: /s/CHRISTOPHER E. SARISKY
--------------------------------
Name: Christopher E. Sarisky
Title: Assistant Treasurer
By: /s/THOMAS J. NADRAMIA
--------------------------------
Name: Thomas J. Nadramia
Title: Vice President
WELLS FARGO BANK
By: /s/CHERYL L. SALGADO
--------------------------------
Name: Cheryl L. Salgado
Title: Vice President
Page 37
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
This Schedule contains summary financial information extracted
from the registrant's Balance Sheet as of March 31, 1997 and
Income Statement for the three months ended March 31, 1997 and is
qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER>1
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,332,000
<SECURITIES> 0
<RECEIVABLES> 1,545,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> <F1> 0
<PP&E> 580,513,000
<DEPRECIATION> (141,649,000)
<TOTAL-ASSETS> 467,720,000
<CURRENT-LIABILITIES> <F1> 0
<BONDS> 89,944,000
<COMMON> 22,988,000
0
0
<OTHER-SE> 348,785,000
<TOTAL-LIABILITY-AND-EQUITY> 467,720,000
<SALES> 0
<TOTAL-REVENUES> 15,480,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,208,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,312,000
<INCOME-PRETAX> 8,185,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,185,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,185,000
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
<FN>
F1 Current assets and current liabilities are not applicable to
the Company under current industry standards.
Page 38
</TABLE>
Exhibit 99.1
REALTY INCOME ANNOUNCES
APPOINTMENT OF NEW CEO
ESCONDIDO, CALIFORNIA, MAY 9, 1997...Realty Income Corporation
(Realty Income) (NYSE: O) today announced that Thomas A. Lewis
has been selected to succeed William E. Clark as Chief Executive
Officer of the Company effective Tuesday, May 13, 1997. Mr.
Clark will continue as Chairman of the Board of Directors. Mr.
Lewis has been an officer of the Company since 1987 and has
served as the Company's Vice Chairman since 1994.
William Clark, Chairman of the Board, said, "The appointment of
Mr. Lewis is in line with the Company's long-term management
succession program. Mr. Lewis brings exceptional management
talent, experience, and a clear vision for success to his new
position as CEO."
Commenting on his appointment, Tom Lewis said, "I am excited
about the opportunities and challenges which lie ahead for the
Company. The market is very dynamic and we look forward to
charting a path which leads to continued growth and success for
the Company and its shareholders."
Realty Income owns and actively manages a portfolio of 749
commercial properties in 42 states. By purchasing the
freestanding retail store locations of regional and national
chain store operators and then leasing the locations back to
them, Realty Income provides retailers with the opportunity to
free up financial resources for expansion. The Company's
acquisition and investment activities are concentrated in highly
specific target markets as the Company focuses on middle-market
retailers providing goods and services which satisfy basic
consumer needs.
Note to Editors:
Realty Income press releases are available at no charge through
PR Newswire's Company News On Call fax service. For a menu of
available Realty Income press releases or to retrieve a specific
release, call 800-758-5804, ext. 746650, or
http://www.prnewswire.com on the Internet.
Page 39
