<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 1, 1997)
$100,000,000
[LOGO]
8 1/4% MONTHLY INCOME SENIOR NOTES DUE 2008
------------------
The notes bear interest at the rate of 8 1/4% per year. Interest on the
notes is payable monthly on the 15th of each month, beginning December 15, 1998.
The notes will mature on November 15, 2008. The notes are not redeemable before
maturity and do not have the benefit of any sinking fund.
The notes are unsecured and rank equally with all of our other unsecured
senior indebtedness. The notes will be issued only in registered form in
denominations of $25.
We plan to list the notes on the New York Stock Exchange under the trading
symbol "OUI." We expect that the notes will begin trading on the New York Stock
Exchange within 30 days after they are first issued.
------------------------
<TABLE>
<CAPTION>
PER NOTE TOTAL
--------- --------------
<S> <C> <C>
Public Offering Price(1)........................................... $ 25.00 $ 100,000,000
Underwriting Discount.............................................. $ .875 $ 3,500,000
Proceeds, before expenses, to Realty Income Corporation............ $ 24.125 $ 96,500,000
</TABLE>
(1) You will also pay accrued interest, if any, from October 28, 1998.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus are truthful or complete.
Any representation to the contrary is a criminal offense.
We have granted the underwriters a 30-day option to purchase additional
notes in an aggregate principal amount up to $15,000,000 on the same terms and
conditions as these notes in order to satisfy overallotments, if any.
We expect that the notes will be ready for delivery in book-entry form only
through The Depository Trust Company, on or about October 28, 1998.
------------------------
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
DONALDSON, LUFKIN & JENRETTE EVEREN SECURITIES, INC.
SUTRO & CO. INCORPORATED WHEAT FIRST UNION
------------------
The date of this prospectus supplement is October 23, 1998.
<PAGE>
REALTY INCOME
[A map of the continental United States that reflects the number of
properties owned by Realty Income in each state. The number of properties owned
in each state corresponds to the table on page S-18.]
THE MONTHLY DIVIDEND COMPANY
Realty Income owns and actively manages a geographically diversified
portfolio of 887 properties located in 43 states.
The Company acquires retail properties under long-term lease agreements with
regional and national retail chains such as Barnes & Noble, Children's World,
Hollywood Video, Linens 'N Things, OfficeMax, Pier 1 Imports, Staples and Taco
Bell.
[A photograph collage of selected Realty Income tenants.]
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Forward-Looking Statements................................................................................. S-3
Where You Can Find More Information........................................................................ S-4
Incorporation of Information We File with the SEC.......................................................... S-4
Prospectus Supplement Summary.............................................................................. S-6
Use of Proceeds............................................................................................ S-9
Capitalization............................................................................................. S-9
Selected Financial Information............................................................................. S-10
Business and Properties.................................................................................... S-11
Management................................................................................................. S-21
Description of the Notes................................................................................... S-24
Underwriting............................................................................................... S-30
Legal Matters.............................................................................................. S-31
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Available Information................................................................. 2
Incorporation of Certain Documents by Reference....................................... 2
The Company........................................................................... 3
Use of Proceeds....................................................................... 3
Ratios of Earnings to Fixed Charges................................................... 3
Description of Debt Securities........................................................ 4
Description of Common Stock........................................................... 14
Description of Preferred Stock........................................................ 17
Restrictions on Ownership and Transfers of Capital Stock.............................. 22
Certain Federal Income Tax Considerations............................................. 25
Plan of Distribution.................................................................. 31
Experts............................................................................... 32
Legal Matters......................................................................... 32
</TABLE>
------------------------
FORWARD-LOOKING STATEMENTS
This prospectus supplement includes forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are subject to
risks, uncertainties, and assumptions about Realty Income Corporation,
including, among other things:
- Our anticipated growth strategies;
- Our intention to acquire additional properties;
- Anticipated trends in our business, including trends in the market for
long-term net leases of freestanding, single tenant retail properties; and
- Future expenditures for development projects.
Additional factors that may cause risks and uncertainties include those
discussed in "Business and Properties--Matters Pertaining to Certain Properties
and Tenants" in this prospectus supplement, in the section entitled
"Business--Other Items" in our Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (the "Annual Report") including the subheadings entitled
"Competition for
S-3
<PAGE>
Acquisition of Real Estate," "Environmental Liabilities," "Taxation of the
Company," "Effect of Distribution Requirements," "Real Estate Ownership Risks"
and "Dependence on Key Personnel," and the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report and in our Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1998 and June 30, 1998, and in our Current Report on Form 8-K dated
October 16, 1998.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events discussed
in this prospectus supplement might not occur.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not, and the Underwriters have not, authorized any other person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
Underwriters are not, making an offer to sell these notes in any jurisdiction
where the offer or sale is not permitted. You should assume that the information
appearing in this prospectus supplement and the accompanying prospectus, as well
as information we previously filed with the Securities and Exchange Commission
(the "SEC") and incorporated by reference, is accurate as of the dates on the
front cover of this prospectus supplement and the accompanying prospectus only.
Our business, financial condition, results of operations and prospects may have
changed since that date.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC. Our
SEC filings are also available over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for more information on the
public reference rooms and their copy charges. You may also inspect our SEC
reports and other information at the New York Stock Exchange, 20 Broad Street,
New York, New York 10005.
We have filed a registration statement on Form S-3 with the SEC covering the
notes. For further information on Realty Income and the notes, you should refer
to our registration statement and its exhibits. This prospectus supplement and
the accompanying prospectus summarize material provisions of contracts and other
documents that we refer you to. Since the prospectus supplement and the
accompanying prospectus may not contain all the information that you may find
important, you should review the full text of these documents. We have included
copies of these documents as exhibits to our registration statement.
INCORPORATION OF INFORMATION WE FILE WITH THE SEC
The SEC allows us to "incorporate by reference" the information we file with
them, which means:
- Incorporated documents are considered part of this prospectus supplement
and the accompanying prospectus;
- We can disclose important information to you by referring you to those
documents; and
- Information that we file with the SEC will automatically update and
supersede this prospectus supplement and the accompanying prospectus.
We incorporate by reference the documents listed below which were filed with
the SEC under the Securities Exchange Act of 1934 (the "Exchange Act"):
- Annual Report on Form 10-K for the year ended December 31, 1997;
- Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998 and
June 30, 1998;
- Information relating to executive compensation in our Definitive Proxy
Statement on Schedule 14A dated March 31, 1998;
S-4
<PAGE>
- Current Report on Form 8-K dated March 31, 1998;
- Current Report on Form 8-K dated June 29, 1998;
- Current Report on Form 8-K dated October 16, 1998;
- Registration of Preferred Share Purchase Rights on Form 8-A dated June 26,
1998; and
- Registration of Monthly Income Senior Notes due 2008 on Form 8-A dated
October 21, 1998.
We also incorporate by reference each of the following documents that we
will file with the SEC after the date of this prospectus supplement but before
the end of the notes offering:
- Reports filed under Sections 13(a) and (c) of the Exchange Act;
- Definitive proxy or information statements filed under Section 14 of the
Exchange Act in connection with any subsequent stockholders' meeting; and
- Any reports filed under Section 15(d) of the Exchange Act.
You may request a copy of any filings referred to above (excluding
exhibits), at no cost, by contacting us at the following address:
Realty Income Corporation
Attention: Investor Relations
220 West Crest Street
Escondido, CA 92025-1707
(760) 741-2111
S-5
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO
YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, INCLUDING THE FINANCIAL DATA AND RELATED NOTES, BEFORE MAKING AN
INVESTMENT DECISION. THE TERMS "REALTY INCOME," "OUR" AND "WE" AS USED IN THIS
PROSPECTUS SUPPLEMENT REFER TO REALTY INCOME CORPORATION AND ITS SUBSIDIARIES ON
A CONSOLIDATED BASIS SINCE AUGUST 15, 1994 AND TO OUR PREDECESSOR PARTNERSHIPS
FOR THE PERIOD OF TIME PRIOR TO AUGUST 15, 1994. UNLESS THIS PROSPECTUS
SUPPLEMENT INDICATES OTHERWISE, INFORMATION RELATING TO OUR PROPERTIES IS AS OF
JULY 1, 1998, AND WE ASSUME THAT THE UNDERWRITERS' OVERALLOTMENT OPTION IS NOT
EXERCISED.
REALTY INCOME
Realty Income is organized to operate as an equity real estate investment
trust ("REIT"). We are a fully integrated, self-administered real estate company
with in-house acquisition, leasing, legal, retail and real estate research,
portfolio management and capital markets expertise. As of July 1, 1998, we owned
a diversified portfolio of 887 properties located in 43 states with over 6.9
million square feet of leasable space. Over 99% of our properties were leased as
of July 1, 1998.
Realty Income's investment strategy is to acquire freestanding, single
tenant, retail properties leased to regional and national retail chains under
long-term, net lease agreements. We typically acquire, and then lease back,
retail store locations from chain store operators, providing capital to the
operators for continued expansion and other corporate purposes. Our 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, fixed increases or
additional rent calculated as a percentage of the tenant's gross sales above a
specified level.
Since 1970 and through June 30, 1998, we have acquired and leased back to
regional and national retail chains 863 properties (including 34 properties that
have been sold) and have collected in excess of 98% of the original contractual
rent obligations on those properties. We believe that the long-term ownership of
an actively managed, diversified portfolio of retail properties leased under
long-term, net lease agreements produces consistent, predictable income. We
believe that the income generated under long-term leases, coupled with the
tenant's responsibility for property expenses under the net lease structure,
generally produce a more predictable income stream than many other types of real
estate portfolios. Of the 887 properties in the portfolio as of July 1, 1998,
881 were single tenant properties and the remaining properties were
multi-tenant. As of July 1, 1998, over 99% or 878 of our 881 single tenant
properties were net leased pursuant to leases with an average remaining lease
term (excluding extension options) of approximately 8.4 years.
Our five senior officers have each managed our properties and operations for
between eight and 13 years. Our directors and five senior officers, as a group,
owned approximately 2.9% of our outstanding common stock as of September 30,
1998. Realty Income had 49 employees as of September 30, 1998.
THE OFFERING
All capitalized terms used in this section, "--The Offering," and not
defined in this section have the meanings provided in the section of this
prospectus supplement entitled "Description of the Notes." For a more complete
description of the terms of the notes specified in the following summary, see
"Description of the Notes" in this prospectus supplement and "Description of
Debt Securities" in the accompanying prospectus.
<TABLE>
<S> <C>
Aggregate Principal Amount........ $100,000,000.
Interest Rate..................... 8 1/4% per year.
Maturity Date..................... November 15, 2008.
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
Interest Calculations............. Based on 360-day year of twelve 30-day months.
Interest Payment Dates............ The 15th of each month, beginning December 15, 1998.
Ranking........................... The notes are not secured by any of our property or
assets. Accordingly, your ownership of notes means you
are one of our unsecured creditors. Although the notes
will rank equally with all of our other senior unsecured
indebtedness, the notes will be effectively subordinated
to all indebtedness and other liabilities of our
subsidiaries, and will also be effectively subordinated
to any of our senior secured indebtedness to the extent
of the collateral pledged as security for the senior
secured indebtedness.
Redemption or Sinking Fund........ None.
Form of Note...................... One global security, held in the name of the Depository
Trust Company.
Credit Rating..................... The notes will be rated BBB- by Standard & Poor's
Ratings Group, Baa3 by Moody's Investors Service, Inc.,
and BBB by Duff & Phelps Credit Rating Company.
Listing........................... We plan to list the notes on the New York Stock Exchange
under the trading symbol "OUI." We expect that the notes
will begin trading on the New York Stock Exchange within
30 days after they are first issued.
Use of Proceeds................... We estimate that the net proceeds from the offering will
be approximately $96.3 million. We intend to use these
proceeds to repay bank borrowings and for general
corporate purposes. See "Use of Proceeds."
Limitations on Incurrence of
Debt............................ The notes contain various covenants, including the
following:
(1) We will not incur any Debt if, after giving effect
to the Debt, the aggregate principal amount of all of
our Debt is greater than 60% of the sum of (i) our Total
Assets as of the end of the fiscal quarter covered by
our most recent report on Form 10-K or 10-Q, as the case
may be, and (ii) the increase in Total Assets from the
end of that quarter including any increase in Total
Assets caused by the application of the proceeds of that
additional Debt (that increase together with our Total
Assets is referred to as "Adjusted Total Assets").
(2) We will not incur any Secured Debt if, after giving
effect to the Secured Debt, the aggregate principal
amount of all of our Secured Debt is greater than 40% of
our Adjusted Total Assets.
(3) We will not incur any Debt if the ratio of
Consolidated Income Available for Debt Service to Annual
Debt Service Charge for the four consecutive fiscal
quarters most recently ended prior to the date on which
the additional Debt is to be incurred would be less than
1.5 to 1.0, calculated on a pro forma basis after giving
effect to the incurrence of that additional Debt and the
application of the proceeds from that incurrence.
(4) We will maintain Total Unencumbered Assets of not
less than 150% of the aggregate outstanding principal
amount of Unsecured Debt.
</TABLE>
S-7
<PAGE>
RECENT DEVELOPMENTS
ACQUISITION OF 66 NET LEASED, RETAIL PROPERTIES. During the first six
months of 1998, Realty Income acquired 66 retail properties located in 29 states
and invested approximately $102.0 million (excluding estimated unfunded
development costs on properties under construction at June 30, 1998). During
that period, we selectively sold five properties. The number of properties in
our portfolio increased by 7.4% to 887 at June 30, 1998 from 826 at December 31,
1997. During the first half of 1998, we added two new industries and 11 new
retailers to our real estate portfolio. We also invested $74,000 in five
existing properties in our portfolio.
The 66 properties acquired will contain approximately 657,300 leasable
square feet and are 100% leased under net leases, with an average initial lease
term of 14.8 years. The weighted average annual unleveraged return on the cost
of the 66 properties (including the estimated unfunded development cost of the
properties under development) is estimated to be 10.3%, 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 66 properties acquired in 1998
will not differ from the foregoing percentage.
TREASURY RATE LOCK AGREEMENT. In May 1998, we entered into a U.S. Treasury
interest rate lock agreement to protect us against the possibility of rising
interest rates for a future note offering. Under the U.S. Treasury interest rate
lock agreement, we receive or make a payment based on the differential between a
specified interest rate, 5.726%, and the actual 10-year treasury interest rate
on a notional principal amount of $100 million. Based on the 10-year U.S.
Treasury interest rate at October 23, 1998 of 4.624%, we will make a payment of
approximately $8.74 million which will be amortized as additional interest
expense over the 10-year term of the notes.
S-8
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the notes offered in this prospectus
supplement, after deducting the discount to the Underwriters and other estimated
expenses of this offering payable by us, are estimated to be approximately $96.3
million (approximately $110.7 million if the Underwriters' overallotment option
is exercised in full). We intend to use the net proceeds to pay down outstanding
indebtedness under the Credit Facility, which had an outstanding balance at
October 15, 1998 of $118.8 million, and for other general corporate purposes.
The "Credit Facility" is a three year, revolving, unsecured acquisition credit
facility with a borrowing capacity of $150 million. Borrowings under the Credit
Facility currently bear interest at a spread of 0.85% over the London Interbank
Offered Rate ("LIBOR"). The Credit Facility also offers our Company other
interest rate options. The maturity date on the Credit Facility is December 2000
and the effective interest rate was approximately 6.40% at October 15, 1998. We
are negotiating an extension to, and an increase in the borrowing capacity of,
the Credit Facility, but we cannot assure you that we will be successful in
obtaining either an extension or an increase in the borrowing capacity.
If the Underwriters' overallotment option to purchase notes in an additional
aggregate amount of $15,000,000 is exercised in full, the Company expects to use
the additional net proceeds to pay down outstanding indebtedness under the
Credit Facility and for other general corporate purposes.
CAPITALIZATION
The following table sets forth our historical capitalization as of June 30,
1998 and is adjusted to show the effect of this notes offering which includes
payment of borrowings under the Credit Facility as described in "Use of
Proceeds."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
------------------------
HISTORICAL AS ADJUSTED
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
DEBT
Credit Facility(1).................................................................... $ 87,900 $ --
Notes due 2007........................................................................ 110,000 110,000
Notes due 2008........................................................................ -- 100,000
Other................................................................................. 2,501 2,501
----------- -----------
Total debt.......................................................................... 200,401 212,501
----------- -----------
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, 26,836,964
shares issued and outstanding....................................................... 26,837 26,837
Paid in capital in excess of par value................................................ 610,087 610,087
Accumulated distributions in excess of net income..................................... (180,462) (180,462)
----------- -----------
Total stockholders' equity.......................................................... 456,462 456,462
----------- -----------
Total capitalization................................................................ $ 656,863 $ 668,963
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) The amount drawn on the Credit Facility was $118.8 million at October 15,
1998.
S-9
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial data for Realty Income and
the Predecessor (as defined below), as the case may be, for the six-month
periods ended June 30, 1998 and 1997 and each of the five years in the period
ended December 31, 1997. Data for the five years ended December 31, 1997 has
been derived from financial statements which have been audited by our
independent auditors, KPMG Peat Marwick LLP. Data for the six month periods
ended June 30, 1998 and 1997 is unaudited but, in our opinion, includes all
adjustments (consisting of only normal recurring accruals) necessary to fairly
present such information. Data as of and for the six months ended June 30, 1998
does not purport to be indicative of results for the fiscal year ending December
31, 1998. The information is only a summary and does not provide all of the
information contained in our financial statements, including the related notes
and Management's Discussion and Analysis of Financial Condition and Results of
Operations, which are part of our Annual Report and our Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1998 and June 30, 1998. You should
read our financial statements and other information filed with the SEC. The
following table also includes certain property data.
<TABLE>
<CAPTION>
REALTY INCOME
----------------------------------------------------------------------------
AS OF OR FOR THE SIX
MONTHS ENDED JUNE 30, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------------ --------------------------------------------------
1998 1997 1997 1996 1995 1994(1)(2)
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenue:
Rental revenue............................. $ 39,511 $ 31,455 $ 67,613 $ 56,777 $ 51,185 $ 47,905
Interest and other......................... 78 148 284 180 370 958
----------- ----------- ----------- ----------- ----------- -----------
Total revenue............................ 39,589 31,603 67,897 56,957 51,555 48,863
----------- ----------- ----------- ----------- ----------- -----------
Expenses:
Depreciation and amortization.............. 10,453 8,948 18,596 16,422 14,849 13,790
General and administrative expenses and
advisor fees............................. 3,176 2,585 5,437 5,181 6,875 7,187
Property................................... 899 853 1,785 1,640 1,607 2,095
Interest................................... 5,355 3,321 8,226 2,367 2,642 396
Provision for impairment losses............ -- 70 165 579 -- 135
Consolidation costs........................ -- -- -- -- -- 11,201
----------- ----------- ----------- ----------- ----------- -----------
Total expenses........................... 19,883 15,777 34,209 26,189 25,973 34,804
----------- ----------- ----------- ----------- ----------- -----------
Income from operations....................... 19,706 15,826 33,688 30,768 25,582 14,059
Net gain on sales of properties.............. 526 427 1,082 1,455 18 1,165
----------- ----------- ----------- ----------- ----------- -----------
Net income................................... $ 20,232 $ 16,253 $ 34,770 $ 32,223 $ 25,600 $ 15,224
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Basic and diluted net income per share(3).... $ 0.77 $ 0.71 $ 1.48 $ 1.40 $ 1.27 $ 0.78
Weighted average common shares used for basic
net income computation(3).................. 26,434,892 22,987,173 23,568,831 22,976,789 20,230,886 19,502,091
Weighted average common shares used for
diluted net income computation(3).......... 26,442,519 22,990,163 23,572,715 22,977,837 20,230,963 19,502,091
BALANCE SHEET DATA
Properties, before accumulated depreciation.. $ 798,182 $ 616,432 $ 699,797 $ 564,540 $ 515,426 $ 450,703
Total assets (book value).................... 666,021 500,321 577,021 454,097 417,639 352,768
Total liabilities............................ 209,559 131,344 143,706 79,856 36,218 17,352
Stockholders' equity......................... 456,462 368,977 433,315 374,241 381,421 335,416
OTHER DATA
FFO(4)....................................... 30,080 24,820 52,353 47,718 40,414 39,185
Capital expenditures......................... 74 7 53 37 296 222
RATIOS
Debt as a percentage of Total Assets(5)...... 24.9% 19.8% 19.2% 12.5% 3.8% 2.7%
Secured Debt as a percentage of Total
Assets(5)(6)............................... 0.1% 0.1% 0.1% 0.2% 0.2% --
Debt Service Coverage Ratio(7)............... 7x 9x 8x 25x 20x 80x
Ratio of earnings to fixed charges(8)........ 5x 6x 5x 14x 10x 39x
PORTFOLIO DATA (AT END OF PERIOD)
Number of properties......................... 887 770 826 740 685 630
Net rentable square feet..................... 6,903,000 5,777,500 6,302,300 5,226,700 4,673,700 4,064,800
<CAPTION>
PREDECESSOR(2)
--------------
1993
--------------
<S> <C>
OPERATING DATA
Revenue:
Rental revenue............................. $ 48,584
Interest and other......................... 434
--------------
Total revenue............................ 49,018
--------------
Expenses:
Depreciation and amortization.............. 14,689
General and administrative expenses and
advisor fees............................. 5,886
Property................................... 1,768
Interest................................... 5
Provision for impairment losses............ 935
Consolidation costs........................ --
--------------
Total expenses........................... 23,283
--------------
Income from operations....................... 25,735
Net gain on sales of properties.............. 3,583
--------------
Net income................................... $ 29,318
--------------
--------------
Basic and diluted net income per share(3).... $ --
Weighted average common shares used for basic
net income computation(3).................. --
Weighted average common shares used for
diluted net income computation(3).......... --
BALANCE SHEET DATA
Properties, before accumulated depreciation.. $ 451,738
Total assets (book value).................... 384,474
Total liabilities............................ 2,570
Stockholders' equity......................... 381,904
OTHER DATA
FFO(4)....................................... 41,359
Capital expenditures......................... 94
RATIOS
Debt as a percentage of Total Assets(5)...... 0.1%
Secured Debt as a percentage of Total
Assets(5)(6)............................... --
Debt Service Coverage Ratio(7)............... 8,273x
Ratio of earnings to fixed charges(8)........ 5,865x
PORTFOLIO DATA (AT END OF PERIOD)
Number of properties......................... 631
Net rentable square feet..................... 4,052,800
</TABLE>
- ------------------------------
(1) Realty Income commenced operations as a REIT on August 15, 1994 through the
merger of 25 public and private real estate limited partnerships (the
"Partnerships") with and into the Company (the "Consolidation"). The
Consolidation was
S-10
<PAGE>
accounted for as a reorganization of affiliated entities under common
control in a manner similar to a pooling-of-interests. Under this method,
the assets and liabilities of the Partnerships were carried over at their
historical book values and their operations have been recorded on a combined
historical cost basis. The pooling-of-interests method of accounting also
requires the reporting of the results of operations as though the entities
had been combined as of the beginning of the earliest period presented.
Accordingly, the results of operations for the year ended December 31, 1994
comprise those of the separate Partnerships combined from January 1, 1994
through August 15, 1994 and those of Realty Income from August 16, 1994
through December 31, 1994. Costs incurred to effect the Consolidation and
integrate the continuing operations of the separate Partnerships were
expenses of the Company in 1994, the year in which the Consolidation was
consummated.
(2) Prior to the Consolidation, we had no significant operations. Therefore, the
combined operations for the periods prior to the Consolidation represent the
operations of the Partnerships (the "Predecessor").
(3) Due to the change in the capital structure caused by the Consolidation as
described in note (1) above, share and per share information would not be
meaningful for 1993 and therefore has not been included.
(4) Funds from operations ("FFO") is calculated by adding (i) income before net
gain on sales of properties, (ii) depreciation and amortization, (iii)
provision for impairment losses and (iv) one-time Consolidation costs. We
consider 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 distributions. Presentation of this
information will provide the reader with an additional measure to compare
the performance of different REITs; however, FFO is not comparable to "funds
from operations" reported by other REITs that do not define funds from
operations in accordance with the National Association of Real Estate
Investment Trusts ("NAREIT") definition. 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 our performance or to cash
flow from operating, investing and financing activities as a measure of
liquidity or ability to make cash distributions or pay debt service.
(5) For a definition of the terms "Debt," "Secured Debt" and "Total Assets," see
"Description of the Notes--Additional Covenants of the Company."
(6) For 1998, 1997, 1996 and 1995, our sole Secured Debt was a capital lease.
For 1994 and 1993, we did not have any Secured Debt.
(7) The Debt Service Coverage Ratio is defined as Consolidated Income Available
for Debt Service divided by the Annual Debt Service Charge. See "Description
of the Notes--Additional Covenants of the Company."
(8) Ratio of earnings to fixed charges is calculated by dividing earnings by
fixed charges. For this purpose, earnings consist of net income before
extraordinary items plus fixed charges (excluding interest costs
capitalized). Fixed charges are comprised of interest expense (including
interest costs capitalized) and the amortization of debt issuance costs.
BUSINESS AND PROPERTIES
OVERVIEW
Realty Income is organized to operate as an equity real estate investment
trust ("REIT"). We are a fully integrated, self-administered real estate company
with in-house acquisition, leasing, legal, retail and real estate research,
portfolio management and capital markets expertise. As of July 1, 1998, we owned
a diversified portfolio of 887 properties located in 43 states with over 6.9
million square feet of leasable space. Over 99% of our properties were leased as
of July 1, 1998. Unless otherwise indicated, information regarding our
properties is as of July 1, 1998.
Realty Income's investment strategy is to acquire freestanding, single
tenant, retail properties leased to regional and national retail chains under
long-term, net lease agreements. We typically acquire, and then lease back,
retail store locations from chain store operators, providing capital to the
operators for continued expansion and other corporate purposes. Our 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, fixed increases or
additional rent calculated as a percentage of the tenant's gross sales above a
specified level.
Since 1970 and through June 30, 1998, we have acquired and leased back to
regional and national retail chains 863 properties (including 34 properties that
have been sold) and have collected in excess of 98% of the original contractual
rent obligations on those properties. We believe that the long-term ownership of
an actively managed, diversified portfolio of retail properties leased under
long-term, net lease agreements produces consistent, predictable income. We
believe that the income generated under long-term leases, coupled with the
tenant's responsibility for property expenses under the net lease structure,
generally produce a more predictable income stream than many other types of real
estate portfolios. Of the 887 properties in the portfolio as of July 1, 1998,
881 were single tenant properties and the remaining properties were
multi-tenant. As of July 1, 1998, over 99% or 878 of our 881 single
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tenant properties were net leased pursuant to leases with an average remaining
lease term (excluding extension options) of approximately 8.4 years.
Realty Income was formed on September 9, 1993 in the State of Delaware and
subsequently reincorporated in Maryland in May 1997. Realty Income commenced
operations as a REIT on August 15, 1994 through the merger of the Partnerships
with and into Realty Income. The Partnerships were formed between 1970 and 1989
for the purpose of acquiring and managing long-term, net leased properties.
BUSINESS OBJECTIVES AND STRATEGY
GENERAL. Our primary business objective is to generate dependable monthly
income and a consistent and predictable level of FFO per share. We generally
will seek to increase FFO per share and distributions to stockholders through
both active portfolio management and the acquisition of additional properties.
We also intend to pay distributions at a level greater than 95% of our taxable
income (determined without regard to the deduction for dividends paid and by
excluding any net capital gain) in order to meet REIT qualification requirements
and to use undistributed cash flow to fund additional property acquisitions and
for other corporate purposes. Our portfolio management focus includes:
- Contractual rent increases on existing leases;
- Rental increases at the termination of existing leases when market
conditions permit; and
- The active management of our property portfolio, including selective sales
of properties.
We generally pursue the acquisition of additional properties with the intention
to lease such properties under long-term, net lease agreements with initial
contractual base rent which, at the time of acquisition and as a percentage of
acquisition cost, is in excess of our estimated cost of capital.
INVESTMENT PHILOSOPHY. Realty Income believes that the long-term ownership
of an actively managed, diversified portfolio of retail properties under
long-term, net lease agreements produces consistent, predictable income. Under a
net lease agreement, the tenant agrees to pay a minimum monthly rent and
property operating expenses (taxes, maintenance, and insurance) plus, typically,
future rent increases (generally subject to ceilings) based on increases in the
consumer price index, fixed increases or additional rent calculated as a
percentage of the tenant's gross sales above a specified level. We believe that
long-term leases, coupled with the tenant's responsibility for property
expenses, generally produce a more predictable income stream than many other
types of real estate portfolios, while continuing to offer the opportunity for
growth in rental income.
INVESTMENT STRATEGY. In identifying new properties for acquisition, Realty
Income focuses on providing expansion capital to retail chains by acquiring,
then leasing back, their retail store locations. We classify retail tenants into
three categories: venture, middle market, and upper market. Venture companies
are those which typically offer a new retail concept in one geographic region of
the country and operate between five and 50 retail outlets. Middle market retail
chains are those which typically have 50 to 500 retail outlets, operations in
more than one geographic region, have been successful through one or more
economic cycles, have a proven, replicable concept, and an objective of further
expansion. The upper market retail chains typically consist of companies with
500 or more stores which operate nationally in a mature retail concept. Upper
market retail chains generally have strong operating histories and access to
several sources of capital.
Realty Income has historically focused on acquiring properties leased to
middle market retail chains which we believe are attractive for investment
because:
- They generally have overcome many of the operational and managerial
obstacles that tend to adversely affect venture retailers;
- They typically require capital to fund expansion but have more limited
financing options;
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- Historically, they generally have provided us with attractive
risk-adjusted returns over time, since their financial strength has in
many cases tended to improve as their businesses have matured;
- Their relatively large size allows them to spread corporate expenses among
a greater number of stores; and
- Middle market retailers typically have the critical mass to survive if a
number of locations have to be closed due to underperformance.
We recently expanded our investment focus to include upper market retail
chains. We believe upper market retail chains can be attractive for investment
because:
- They typically are of a higher credit quality;
- They are usually larger brand name, public and private retailers;
- They utilize a larger building ranging in size from 10,000 to 50,000
square feet; and
- Their ability to grow because of access to capital facilitates larger
transaction sizes.
While our investment strategy focuses primarily on acquiring properties
leased to middle and upper market retail chains, we also selectively seek
incremental investment opportunities with venture market retail chains.
Periodically, venture market opportunities arise where we feel that the real
estate used by the tenant is of high quality and can be purchased at prices that
are favorable in the marketplace. To meet our stringent investment standards,
however, venture retail companies must have a well-defined retailing concept and
strong financial prospects. These opportunities are examined on a case by case
basis and we are highly selective in making investments in this area.
CREDIT STRATEGY. Realty Income principally provides sale leaseback
financing primarily to less than investment grade retail chains. Since 1970 and
through June 30, 1998, Realty Income has acquired and leased back to regional
and national retail chains 863 properties (including 34 properties that have
been sold) and has collected in excess of 98% of the original contractual rent
obligations on those properties. We believe that within this market we can
achieve an attractive risk adjusted return on the financing that we provide to
retailers.
Realty Income believes that the primary financial obligations of most
retailers typically include their bank and other debt, payment obligations to
suppliers and real estate lease obligations. Because we own the land and
buildings on which the tenant conducts its retail business, we believe that the
risk of default on the retailers' lease obligations is less than the retailers'
unsecured general obligations. It has been our experience that since retailers
must retain their profitable retail locations in order to survive, in the event
of a Chapter 11 reorganization they are less likely to reject a lease for a
profitable location, which would terminate their right to use the property.
Thus, as the property owner, we believe we will fare better than unsecured
creditors of the same retailer in the event of a Chapter 11 reorganization. In
addition, Realty Income believes that the risk of default on the real estate
leases can be further mitigated by monitoring the performance of the retailers'
individual unit locations and selling those units that are weaker performers.
For a description of a current tenant that has filed for Chapter 11 bankruptcy,
see "--Matters Pertaining to Certain Properties and Tenants."
In order to qualify for inclusion in our portfolio, new acquisitions must
meet stringent investment and credit requirements. The properties must generate
attractive current yields, and the tenant must meet our credit standards. We
have established a three part analysis that examines each potential investment
based on:
- Industry, company, market conditions and credit profile;
- Location profitability, if profitability data is available; and
- Overall real estate characteristics, value, and comparative rental rates.
S-13
<PAGE>
Companies that have been approved for acquisitions are generally those with
fifty or more retail stores which are located in highly visible areas, with easy
access to major thoroughfares and attractive demographics.
ACQUISITION STRATEGY. Realty Income seeks to invest in industries in which
several well organized regional and national chains are capturing market share
through service, quality control, economies of scale, mass media advertising,
and selection of prime retail locations. We execute our acquisition strategy by
acting as a source of capital to regional and national retail chain stores in a
variety of industries by acquiring, then leasing back, their retail store
locations. Relying on executives from our acquisitions, retail and real estate
research, portfolio management, finance, accounting, operations, capital
markets, and legal departments, we undertake thorough research and analysis to
identify appropriate industries, tenants, and property locations for investment.
In selecting real estate for potential investment, we generally seek to acquire
properties that have the following characteristics:
- Freestanding, commercially zoned property with a single tenant;
- Properties that are important retail locations for regional and national
retail chains;
- Properties that are located within attractive demographic areas relative
to the business of their tenants, with high visibility and easy access to
major thoroughfares;
- Properties that can be purchased with the simultaneous execution or
assumption of long-term, net lease agreements, providing the opportunity
for both current income and future rent increases (typically subject to
ceilings) based on increases in the consumer price index, fixed increases
or additional rent calculated as a percentage of the tenant's gross sales
above a specified level; and
- Properties that can be acquired at or below their appraised value at
prices generally ranging from $300,000 to $10 million.
PORTFOLIO MANAGEMENT STRATEGY. The active management of the property
portfolio is an essential component of our long-term strategy. We continually
monitor our portfolio for changes that could affect the performance of the
industries, tenants, and locations in which we have invested. Realty Income's
investment committee meets weekly to review industry research, tenant research
and property due diligence, and the executive committee meets at least monthly
to discuss property operations and portfolio management. This monitoring
typically includes ongoing review and analysis of:
- The performance of various tenant industries;
- The operation, management, business planning, and financial condition of
the tenants;
- The health of the individual markets in which we own properties, from both
an economic and real estate standpoint; and
- The physical maintenance of our individual properties.
The portfolio is analyzed on an ongoing basis with a view towards optimizing
performance and returns.
While we generally intend to hold our net lease properties for long-term
investment, we actively manage our portfolio of net lease properties. We pursue
a strategy of identifying properties that may be sold at attractive prices,
particularly where we believe reinvestment of the sales proceeds can generate a
higher cash flow to us than by retaining the property. While we pursue such a
strategy, we only do so within the constraints of the income tax rules regarding
REIT status.
CAPITAL STRATEGY. We have a $150 million, three year, revolving, unsecured
acquisition Credit Facility which expires in December 2000. As of October 15,
1998, the outstanding balance on the Credit Facility
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was $118.8 million with an effective interest rate of approximately 6.40%. A
commitment fee of 0.15% per annum accrues on the total credit commitment. We are
and have been in compliance with the various leverage and interest coverage
ratio limitations required by the Credit Facility. The Credit Facility has been
and is expected to be used to acquire additional retail properties leased to
regional and national retail chains under long-term, net lease agreements.
We utilize our Credit Facility as a vehicle for the short-term financing of
the acquisition of new properties. When outstanding borrowings under the Credit
Facility reach a certain level (generally in the range of $75 to $125 million),
we intend to refinance those borrowings with the net proceeds of long-term or
permanent financing, which may include the issuance of common stock, preferred
stock or convertible preferred stock, debt securities or convertible debt
securities. However, there can be no assurance that we will be able to effect
the refinancing or that market conditions prevailing at the time of refinancing
will enable us to issue equity or debt securities upon acceptable terms. We
believe that we are best served by a conservative capital structure, with a
majority of our capital consisting of equity. As of October 15, 1998, our total
outstanding credit facility borrowings and outstanding notes was $228.8 million
or approximately 25.7% of our total capitalization (defined as shares of our
common stock outstanding multiplied by the last reported sales price of the
common stock on the NYSE on October 14, 1998 of $24.6875 per share plus the
outstanding borrowings on the Credit Facility and outstanding notes at October
15, 1998).
We believe that our cash and cash equivalents on hand, cash provided from
operating activities and borrowing capacity are sufficient to meet our liquidity
needs for the foreseeable future; however, we intend to utilize additional
sources of capital to fund property acquisitions and repay borrowings under our
Credit Facility.
We received investment grade corporate credit ratings from Duff & Phelps
Credit Rating Company, Moody's Investor Services, Inc., and Standard & Poor's
Ratings Group in December 1996. Currently, Duff & Phelps has assigned a rating
of BBB, Moody's has assigned a rating of Baa3, and Standard & Poor's has
assigned a rating of BBB- to our senior debt. These ratings could change based
upon, among other things, our results of operations and financial condition.
COMPETITIVE STRATEGY. We believe that, to utilize our investment philosophy
and strategy most successfully, we must seek to maintain the following
competitive advantages:
- SIZE AND TYPE OF INVESTMENT PROPERTIES: We believe that smaller ($300,000
to $10,000,000) retail net leased properties represent an attractive
investment opportunity in today's real estate environment. Due to the
complexities of acquiring and managing a large portfolio of relatively
small assets, we believe that these types of properties have not
experienced significant institutional participation or the corresponding
yield reduction experienced by larger income producing properties. We
believe the less intensive day to day property management required by net
lease agreements, coupled with the active management of a large portfolio
of smaller properties by us, is an effective investment strategy.
The tenants of Realty Income's freestanding retail properties generally
provide goods and services which satisfy basic human needs. In order to
grow and expand, they generally need capital. Since the acquisition of real
estate is typically the single largest capital expenditure of many of these
retailers, Realty Income's method of purchasing the property and then
leasing it back under a net lease arrangement allows the retail chain to
free up capital.
- INVESTMENT IN NEW INDUSTRIES: Though we specialize in single-tenant
properties, we will seek to further diversify our portfolio among a
variety of industries. We believe that diversification will allow us to
invest in industries that are currently growing and have characteristics
we find attractive. These characteristics include, but are not limited to,
industries dominated by local operators where regional and national chain
operators can gain market share and dominance through more efficient
operations, as well as industries taking advantage of major demographic
shifts in the population base. For example, in the early 1970s, Realty
Income targeted the fast food industry to take advantage of the country's
increasing desire to dine away from home, and in the early 1980s, we
targeted the child day care industry, responding to the need for
professional child care as more women entered the work force. During the
first six months of 1998,
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<PAGE>
two new industries were added to our portfolio. The two new industries are
Health and Fitness, and Private Education, bringing the total number of
industries in our portfolio to 15.
- DIVERSIFICATION: Diversification of the portfolio by industry type, tenant
and geographic location is key to our objective of providing predictable
investment results for our stockholders. As we expand we will seek to
further diversify our portfolio. During the first six months of 1998, 11
new retail chains and one new state were added to Realty Income's
portfolio, bringing the total number of retail chains in our portfolio to
54 and the total number of states to 43.
- MANAGEMENT SPECIALIZATION: We believe that our management's specialization
in single tenant properties operated under net lease agreements is
important to meeting our objectives. We plan to maintain this
specialization and will seek to employ and train high quality
professionals in this specialized area of real estate ownership, finance
and management.
- TECHNOLOGY: We intend to stay at the forefront of technology in our
efforts to efficiently and economically carry out our operations. We
maintain a sophisticated information system that allows us to analyze our
portfolio's performance and actively manage our investments. We believe
that technology and information based systems will play an increasingly
important role in our competitiveness as an investment manager and source
of capital to a variety of industries and tenants.
PROPERTIES
As of July 1, 1998, we owned a diversified portfolio of 887 properties
located in 43 states with over 6.9 million square feet of leasable space. At
July 1, 1998, approximately 99% of the properties were under net lease
agreements. Net leases typically require the tenant to be responsible for
minimum monthly rent and property operating expenses including property taxes,
insurance and maintenance.
Our net leased retail properties are retail locations primarily leased to
regional and national retail chain store operators. The average leasable retail
space of the 887 properties is approximately 7,800 square feet on approximately
47,000 square feet of land. Generally, buildings are single-story properties
with adequate parking on site to accommodate peak retail traffic 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.
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<PAGE>
The following table sets forth certain information regarding our properties
as of July 1, 1998, as well as historical data classified according to industry.
<TABLE>
<CAPTION>
HISTORICAL FOR THE
YEARS ENDED
APPROXIMATE PERCENT OF DECEMBER 31,
NUMBER OF LEASABLE ANNUALIZED ANNUALIZED -------------------
INDUSTRY PROPERTIES SQUARE FEET RENT(1) RENT 1997 1996 1995
- ---------------------------------------- --------- ----------- ----------- ---------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Apparel Stores.......................... 5 228,800 $ 3,927,000 4.5% 0.7% -- % -- %
Automotive Parts........................ 112 613,700 7,398,000 8.4 9.1 10.5 11.4
Automotive Service...................... 97 322,700 6,742,000 7.7 6.4 4.8 3.7
Book Stores............................. 1 30,000 450,000 0.5 0.5 -- --
Child Care.............................. 315 2,007,300 24,502,000 27.9 35.9 42.0 45.6
Consumer Electronics.................... 37 559,200 4,432,000 5.1 6.5 0.9 --
Convenience Stores...................... 61 168,200 5,301,000 6.0 5.5 4.6 2.4
Health & Fitness........................ 1 32,700 360,000 0.4 -- -- --
Home Furnishings........................ 35 1,016,100 8,065,000 9.2 5.6 4.4 2.9
Office Supplies......................... 8 198,400 2,476,000 2.8 1.7 -- --
Pet Supplies & Services................. 2 28,100 435,000 0.5 0.2 -- --
Private Education....................... 3 59,300 1,000,000 1.1 -- -- --
Restaurants............................. 170 861,200 13,902,000 15.9 19.8 24.4 24.7
Shoe Stores............................. 2 27,700 529,000 0.6 0.2 -- --
Video Rental............................ 26 194,000 3,315,000 3.8 0.6 -- --
Other................................... 12 555,600 4,895,000 5.6 7.3 8.4 9.3
--- ----------- ----------- ----- ----- ----- -----
Totals.................................. 887 6,903,000 $87,729,000 100.0% 100.0% 100.0% 100.0%
--- ----------- ----------- ----- ----- ----- -----
--- ----------- ----------- ----- ----- ----- -----
</TABLE>
- ------------------------
(1) Annualized rent is calculated by multiplying the monthly contractual base
rent as of July 1, 1998 for each of the properties by 12, and adding the
previous twelve month's historic percentage rent, which totaled $1.7 million
(I.E., additional rent calculated as a percentage of the tenant's gross
sales above a specified level). For the properties under construction, an
estimated contractual base rent is used based upon the estimated total costs
of the properties.
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The following table sets forth certain state-by-state information regarding
Realty Income's portfolio at July 1, 1998:
<TABLE>
<CAPTION>
PERCENT OF
APPROXIMATE TOTAL
NUMBER OF PERCENT LEASABLE ANNUALIZED ANNUALIZED
STATE PROPERTIES LEASED SQUARE FEET RENT(1) RENT
- --------------------------------------------------- ------------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Alabama............................................ 8 100% 56,600 $ 537,000 0.6%
Arizona............................................ 28 99 183,800 2,557,000 2.9
Arkansas........................................... 3 100 14,600 191,000 0.2
California......................................... 52 94 987,800 11,028,000 12.6
Colorado........................................... 41 100 228,500 3,208,000 3.7
Connecticut........................................ 9 100 216,300 2,825,000 3.2
Florida............................................ 56 100 564,000 5,845,000 6.7
Georgia............................................ 46 100 266,600 3,838,000 4.4
Idaho.............................................. 12 100 58,500 856,000 1.0
Illinois........................................... 29 100 202,200 2,579,000 2.9
Indiana............................................ 24 100 130,000 1,691,000 1.9
Iowa............................................... 9 100 60,300 574,000 0.7
Kansas............................................. 19 100 192,500 2,128,000 2.4
Kentucky........................................... 13 100 43,500 1,078,000 1.2
Louisiana.......................................... 5 100 39,600 508,000 0.6
Maryland........................................... 6 100 34,900 535,000 0.6
Massachusetts...................................... 6 100 37,900 731,000 0.8
Michigan........................................... 7 100 44,800 652,000 0.8
Minnesota.......................................... 18 100 126,500 1,950,000 2.2
Mississippi........................................ 14 100 143,100 1,066,000 1.2
Missouri........................................... 30 100 176,800 2,182,000 2.5
Montana............................................ 2 100 30,000 296,000 0.3
Nebraska........................................... 9 100 93,700 1,134,000 1.3
Nevada............................................. 7 100 86,400 1,333,000 1.5
New Hampshire...................................... 1 100 6,400 125,000 0.1
New Jersey......................................... 2 100 22,700 351,000 0.4
New Mexico......................................... 3 100 12,000 107,000 0.1
New York........................................... 9 100 170,600 3,596,000 4.1
North Carolina..................................... 28 100 125,800 2,228,000 2.5
Ohio............................................... 63 100 309,900 4,990,000 5.7
Oklahoma........................................... 15 100 85,800 1,020,000 1.2
Oregon............................................. 17 100 92,400 1,257,000 1.4
Pennsylvania....................................... 16 100 118,400 1,685,000 1.9
South Carolina..................................... 22 100 90,500 1,419,000 1.6
South Dakota....................................... 1 100 6,100 84,000 0.1
Tennessee.......................................... 20 100 188,400 2,235,000 2.6
Texas.............................................. 138 100 1,109,800 11,157,000 12.7
Utah............................................... 7 100 45,400 594,000 0.7
Virginia........................................... 28 100 115,400 2,447,000 2.8
Washington......................................... 43 100 252,600 3,406,000 3.9
West Virginia...................................... 2 100 16,800 147,000 0.2
Wisconsin.......................................... 15 100 95,000 1,291,000 1.5
Wyoming............................................ 4 100 20,100 268,000 0.3
--- --- ------------ ------------- -----
Totals........................................... 887 99% 6,903,000 $ 87,729,000 100.0%
--- --- ------------ ------------- -----
--- --- ------------ ------------- -----
</TABLE>
- ------------------------
(1) Annualized rent is calculated by multiplying the monthly contractual base
rent as of July 1, 1998 for each of the properties by 12, and adding the
previous twelve month's historic percentage rent, which totaled $1.7 million
(I.E., additional rent calculated as a percentage of the tenant's gross
sales above a specific level). For properties under construction, an
estimated contractual base rent is used based upon the estimated total costs
of each property.
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<PAGE>
Of the 887 properties in the portfolio as of July 1, 1998, 881 were
single-tenant properties and the remaining properties were multi-tenant
properties. As of July 1, 1998, over 99%, or 878 of our 881 single tenant
properties, were leased pursuant to leases 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 our 878 net leased, single tenant
retail properties:
<TABLE>
<CAPTION>
NUMBER OF ANNUALIZED PERCENT OF
LEASES BASE ANNUALIZED
YEAR EXPIRING RENT(1)(2) BASE RENT
- ------------------------------------------------------------------------ ------------- -------------- -------------
<S> <C> <C> <C>
1998.................................................................... 2 $ 96,000 0.1%
1999.................................................................... 30 1,248,000 1.5
2000.................................................................... 38 1,969,000 2.4
2001.................................................................... 48 4,076,000 5.0
2002.................................................................... 79 6,346,000 7.7
2003.................................................................... 66 5,147,000 6.3
2004.................................................................... 111 9,056,000 11.0
2005.................................................................... 84 6,036,000 7.4
2006.................................................................... 29 2,473,000 3.0
2007.................................................................... 91 5,793,000 7.1
2008.................................................................... 53 4,356,000 5.3
2009.................................................................... 16 1,144,000 1.4
2010.................................................................... 39 3,706,000 4.5
2011.................................................................... 36 4,669,000 5.7
2012.................................................................... 52 5,854,000 7.1
2013.................................................................... 48 8,401,000 10.2
2014.................................................................... 6 749,000 0.9
2015.................................................................... 27 4,976,000 6.1
2016.................................................................... 10 1,640,000 2.0
2017.................................................................... 11 4,092,000 5.0
2018.................................................................... 2 221,000 0.3
--- -------------- -----
Totals................................................................ 878 $ 82,048,000 100.0%
--- -------------- -----
--- -------------- -----
</TABLE>
- ------------------------
(1) Annualized base rent is calculated by multiplying the monthly contractual
base rent as of July 1, 1998 for each of the properties by 12. For
properties under construction, an estimated contractual base rent is used
based upon the estimated total costs of each property. Annualized base rent
does not include percentage rents (I.E., additional rent calculated as a
percentage of the tenant's gross sales above a specified level), if any,
that may be payable under leases covering certain of the properties.
Percentage rent for the previous twelve months totaled $1.7 million.
(2) The table does not include six multi-tenant properties and three vacant,
unleased properties owned by Realty Income. The lease expirations for
properties under construction are based on the estimated date of completion
of such properties.
DESCRIPTION OF LEASING STRUCTURE. At July 1, 1998, approximately 99% of our
properties were leased pursuant to net leases. In most cases, the leases are for
initial terms of from 10 to 20 years and the tenant has an option to extend the
initial term. The leases generally provide for a minimum base rent plus future
rent increases (typically subject to ceilings) based on increases in the
consumer price index, fixed increases or additional rent calculated as a
percentage of the tenant's gross sales above a specified level. Where leases
provide for rent increases based on increases in the consumer price index,
typically these increases permanently become part of the base rent. Where leases
provide for percentage rent, this additional rent is typically payable only if
the tenant's gross sales for a given period (usually one year) exceed a
specified level, and then is typically calculated as a percentage of only the
amount of
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<PAGE>
gross sales in excess of that level. In general, the leases require the tenant
to pay property taxes, insurance, and expenses of maintaining the property.
MATTERS PERTAINING TO CERTAIN PROPERTIES AND TENANTS. Our two largest
tenants are Children's World Learning Centers and La Petite Academy which
accounted for approximately 16.0% and 10.6%, respectively, of our annualized
rental revenue as of July 1, 1998. In general, a downturn in the industry
represented by these tenants, whether nationwide or limited to specific sectors
of the United States, could adversely affect tenants in this industry, which in
turn could materially adversely affect our financial position and results of
operations and our ability to make distributions to stockholders and debt
service payments. In addition, a substantial number of our properties are leased
to middle market retail chains which generally have more limited financial and
other resources than certain upper market retail chains and therefore are more
likely to be adversely affected by a downturn in their respective businesses or
in the regional or national economy generally.
Three of our properties were vacant as of July 1, 1998 and available for
lease. One of the vacant properties was previously leased to a restaurant
operator, one to a convenience store operator and one to an automotive parts
store operator. As of July 1, 1998, 28 of our properties, which were under
lease, were vacant and available for sublease by the tenant. All of these
tenants were current with their rent and other lease obligations.
On September 5, 1997, Levitz Furniture filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code. Levitz Furniture
occupies four of our properties: two in California, one in Texas and one in
Florida. As of July 1, 1998, the monthly base rent multiplied by 12 from the
four stores leased to Levitz Furniture was approximately $2.5 million, or
approximately 2.9% of our total annualized base rent at that date. The four
Levitz stores owned by Realty Income are currently open and operating. Levitz
continues to be current on its rental obligations to us. In court filings,
Levitz has indicated that it intends to close two of the four locations. The two
locations represent 1.5% of our annualized rent. We believe that the demand in
the markets for these two properties will allow us to find suitable replacement
tenants.
DEVELOPMENT OF CERTAIN PROPERTIES. Of the 66 properties we acquired during
the first six months of 1998, 64 were occupied as of October 1, 1998 and the
remaining two were pre-leased and under construction pursuant to contracts under
which the tenants have agreed to develop the properties (with development costs
funded by us) and to begin paying rent when the premises open for business. In
the case of development properties, we typically enter into an agreement with a
tenant pursuant to which the tenant retains a contractor to construct the
property and we fund the costs of the development. The tenant is contractually
obligated to complete the construction on a timely basis, generally within eight
months after we purchase the land, and to pay construction cost overruns to the
extent they exceed the construction budget by more than a predetermined amount.
We also enter into a lease with the tenant at the time we purchase the land,
which generally requires that the tenant begin paying base rent, calculated as a
percentage of our acquisition cost for the property, including construction cost
and capitalized interest, when the premises opens for business. During the first
six months of 1998, we acquired 10 development properties, eight of which have
been completed and were operating and paying rent as of October 1, 1998. We will
continue to seek to acquire land for development under similar arrangements.
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<PAGE>
MANAGEMENT
The following table sets forth the senior officers and members of the Board
of Directors of Realty Income:
<TABLE>
<CAPTION>
NAME AGE TITLE AND BUSINESS EXPERIENCE
- ------------------------------ --- ----------------------------------------------------------------------------
<S> <C> <C>
Thomas A. Lewis............... 45 CHIEF EXECUTIVE OFFICER, DIRECTOR AND VICE CHAIRMAN OF THE BOARD
Chief Executive Officer (May 1997 - present).
Vice Chairman of the Board of Directors, and a Director of the Company
(September 1993 - present).
Vice President, Capital Markets (September 1993 - May 1997).
With R.I.C. Advisor, Inc. ("R.I.C. Advisor") from 1987 until the merger of
R.I.C. Advisor with the Company on August 17, 1995 (the "Merger").
Senior Vice President with Johnstown Capital, a real estate management and
syndication company (1982 - 1987); Investment Specialist with Sutro & Co.
Inc. a member of the New York Stock Exchange (1979 - 1982); Procter &
Gamble Company (1974 - 1979).
Richard J. VanDerhoff......... 45 PRESIDENT, CHIEF OPERATING OFFICER AND DIRECTOR
President and Chief Operating Officer (November 1994 - present).
Director (July 1996 - present).
General Counsel (August 1994 - November 1994).
With R.I.C. Advisor from 1987 until the Merger.
Vice President, General Counsel and Secretary of FNCO Corporation, an owner
and operator of community newspaper companies located throughout the
midwest United States (1984 - 1987).
Private law practice specializing in real property and business law (1980 -
1984).
Gary M. Malino................ 40 SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER
Senior Vice President (August 1997 - present).
Treasurer of the Company (August 1995 - present).
Chief Financial Officer (August 1994 - present).
Vice President of the Company (August 1995 - August 1997).
With R.I.C. Advisor from May 1985 until the Merger.
Certified Public Accountant with Kendall & Forman, an accountancy
corporation (1981 - 1985).
Assistant Controller with McMillin Development Company, a real estate
development company (1979 - 1981).
Michael R. Pfeiffer........... 38 SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
Senior Vice President (August 1997 - present).
General Counsel and Secretary (August 1995 - present).
Vice President (August 1995 - August 1997).
With R.I.C. Advisor from 1990 until the Merger.
Private practice specializing in real estate transactional law (1987 -
1990).
Associate Counsel with First American Title Insurance Company (1986 - 1987).
He is a licensed attorney and member of the State Bar of California and the
State Bar of Florida.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME AGE TITLE AND BUSINESS EXPERIENCE
- ------------------------------ --- ----------------------------------------------------------------------------
<S> <C> <C>
Richard G. Collins............ 50 SENIOR VICE PRESIDENT, PORTFOLIO ACQUISITIONS
Senior Vice President, Portfolio Acquisitions (August 1997 - present).
Vice President, Portfolio Acquisitions (June 1997 - August 1997).
Vice President, Portfolio Management (August 1995 - June 1997).
With R.I.C. Advisor from 1990 until the Merger.
Principal in the acquisition and sale of land and commercial real estate and
a general partner for land and commercial real estate partnerships (1979 -
1990).
Leasing and sales specialist in the Office Properties Division for Grubb &
Ellis Commercial Real Estate Services (1974 - 1979).
William E. Clark.............. 61 CHAIRMAN OF THE BOARD
Chairman of the Board of Directors and a Director (September 1993 -
present).
Chief Executive Officer (September 1993 - May 1997).
Co-founder and a director and an officer of R.I.C. Advisor from 1969 until
the Merger.
A principal in commercial real estate acquisition, development, management
and sales for over 30 years. His involvement includes land acquisition,
tenant lease negotiations, construction and sales of prime commercial
properties for regional and national fast-food restaurant, automotive and
retail chain store operations throughout the United States.
Member of the Audit Committee, the Compensation Committee and the Corporate
Governance Committee.
Donald R. Cameron............. 58 DIRECTOR
Director (August 1994 - present).
Co-founder and President of Cameron, Murphy & Spangler, Inc., a securities
broker-dealer firm located in Pasadena, California.
Worked at the securities brokerage firm of Glore Forgan Staats, Inc. and its
successors (1969 - 1975).
Chairman of the Compensation Committee, a member of the Audit Committee, the
Special Committee and the Corporate Governance Committee.
Currently a director of Ayr United Football and Athletic Club, Ltd.
Roger P. Kuppinger............ 57 DIRECTOR
Director (August 1994 - present).
Self-employed investment banker and financial advisor and an active investor
in both private and public companies.
Managing Director at the investment banking firm Sutro & Co. Inc from 1969
to March 1994.
Prior to joining Sutro & Co. Inc. in 1969, he worked at First Interstate
Bank, formerly named United California Bank (1964 - 1969).
He has served on over ten boards of directors for both public and private
companies, and currently serves on the board of directors of BRE
Properties, Inc.
Chairman of the Audit Committee, and member of the Compensation Committee,
the Special Committee and the Corporate Governance Committee.
</TABLE>
S-22
<PAGE>
<TABLE>
<CAPTION>
NAME AGE TITLE AND BUSINESS EXPERIENCE
- ------------------------------ --- ----------------------------------------------------------------------------
<S> <C> <C>
Michael D. McKee.............. 52 DIRECTOR
Director (August 1994 - present).
Executive Vice President of The Irvine Company (March 1994 - present).
Chief Financial Officer of The Irvine Company (January 1997 - present).
Former partner in the law firm of Latham & Watkins (1987-1994).
His business and legal experience includes numerous acquisition and
disposition transactions, as well as a variety of public and private
offerings of equity and debt securities.
Currently a member of the board of directors of The Irvine Company, Health
Care Property Investors, Inc., Circus Circus Enterprises, Inc. and Irvine
Apartment Communities, Inc.
Chairman of the Special Committee and member of the Compensation Committee,
the Audit Committee and the Corporate Governance Committee.
Willard H. Smith Jr........... 61 DIRECTOR
Director (July 1996 - present).
Managing Director, Equity Capital Markets Division, of Merrill Lynch & Co.
(1983 - 1996).
F. Eberstadt & Co. (1971 - 1979).
Serves on the board of directors of five investment companies: Cohen &
Steers Realty Shares; Cohen & Steers Realty Income Fund; Cohen & Steers
Total Return Realty Fund; and Cohen & Steers Special Equity Fund, Inc. and
Cohen & Steers Equity Income Fund.
Member of the board of directors of Essex Property Trust and Highwoods
Property Trust, two NYSE listed real estate investment trusts, and Willis
Lease Finance Corporation, a Nasdaq-listed company.
Chairman of the Corporate Governance Committee and a member of the Audit
Committee, the Special Committee and the Compensation Committee.
</TABLE>
S-23
<PAGE>
DESCRIPTION OF THE NOTES
The following description of the particular terms of the notes offered in
this prospectus supplement augments and, to the extent inconsistent with the
accompanying prospectus, replaces the description of the general terms and
provisions of the Debt Securities set forth in the accompanying prospectus. The
following statements relating to the notes and the Indenture (as defined below)
are summaries of provisions contained in the notes and the Indenture and do not
purport to be complete. These statements are qualified by reference to the
provisions of the notes and the Indenture, including the definitions in the
notes and Indenture of certain terms. Unless otherwise expressly stated or the
context otherwise requires, all references to the "Company" appearing under this
caption "Description of the Notes" and under the caption "Description of Debt
Securities" in the accompanying prospectus will mean Realty Income Corporation
excluding its consolidated subsidiaries. Other capitalized terms used under this
caption, "Description of the Notes" but not otherwise defined will have the
meanings given to them in the accompanying prospectus.
The notes constitute Debt Securities (which are more fully described in the
accompanying prospectus), to be issued pursuant to an indenture (the
"Indenture") between the Company and The Bank of New York, as trustee (the
"Trustee"). The terms of the notes include those provisions contained in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "TIA"). The notes are subject to all
those terms, and investors are referred to the Indenture and the TIA for a
statement of those terms.
GENERAL
The notes will be a separate series of Debt Securities under the Indenture,
limited in aggregate principal amount to $115 million. This series may not be
reopened for the issuance of additional Debt Securities of this series. The
notes will be direct, senior unsecured obligations of the Company and will rank
equally with all other senior unsecured indebtedness of the Company from time to
time outstanding. The notes will be effectively subordinated to all indebtedness
and other liabilities (including guarantees) of the Company's subsidiaries and
will also be effectively subordinated to any senior secured indebtedness of the
Company to the extent of any collateral pledged as security therefor. As of June
30, 1998, subsidiary indebtedness (not including guarantees of borrowings under
the Credit Facility) and other liabilities (primarily rents received in advance)
aggregated approximately $206,000 and the Company (excluding its subsidiaries)
had unsecured senior indebtedness aggregating approximately $208.6 million and
senior secured indebtedness aggregating approximately $788,000. See "Use of
Proceeds" and "Capitalization." Subject to certain limitations set forth in the
Indenture and as described below under "--Additional Covenants of the Company,"
the Indenture will permit the Company and its subsidiaries to incur additional
secured and unsecured indebtedness.
The notes will be issued only in fully registered form without coupons, in
denominations of $25 and integral multiples thereof. The notes will be evidenced
by a global note (the "Global Note") in book-entry form, except under the
limited circumstances described below under "--Book Entry System." Notices or
demands to or upon the Company in respect of the notes and the Indenture may be
served and, if notes are issued in definitive certificated form, notes may be
surrendered for payment, registration of transfer or exchange, at the office or
agency of the Company maintained for this purpose in the Borough of Manhattan,
The City of New York, which will initially be the corporate trust office of the
Trustee, which on the date of this prospectus supplement is located at
Attention: Corporate Trust Administration, 101 Barclay Street, 21st Floor, New
York, New York 10286.
Reference is made to the section titled "Description of Debt
Securities--Certain Covenants" in the accompanying prospectus and "--Additional
Covenants of the Company" below for a description of certain covenants
applicable to the notes. Compliance with these covenants generally may not be
waived unless the holders of a majority in principal amount of the outstanding
notes consent to the waiver. In addition, the defeasance and covenant defeasance
provisions of the Indenture described under "Description of Debt
Securities--Discharge, Defeasance and Covenant Defeasance" in the accompanying
prospectus will apply to the notes; covenant defeasance will be applicable with
respect to
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<PAGE>
the covenants described in the accompanying prospectus under "Description of
Debt Securities--Certain Covenants" (except the covenant requiring the Company
to preserve and keep in full force and effect its corporate existence) and the
covenants described below under "--Additional Covenants of the Company."
Except as described under "Description of Debt Securities--Merger,
Consolidation or Sale of Assets" in the accompanying prospectus or "--Additional
Covenants of the Company" below, the Indenture does not contain any provisions
that would afford holders of the notes protection in the event of (i) a highly
leveraged or similar transaction involving the Company, (ii) a change of control
or the management of the Company, or (iii) a reorganization, restructuring,
merger or similar transaction involving the Company that may adversely affect
the holders of the notes. In addition, subject to the limitations set forth
under "Description of Debt Securities--Merger, Consolidation or Sale of Assets"
in the accompanying prospectus, the Company may, in the future, enter into
certain transactions such as the sale of all or substantially all of its assets
or the merger or consolidation of the Company with another entity that would
increase the amount of the Company's indebtedness or substantially reduce or
eliminate the Company's assets, which may have an adverse affect on the
Company's ability to service its indebtedness, including the notes.
The Company has no present intention of engaging in a highly leveraged or
similar transaction involving the Company. In addition, certain restrictions on
ownership and transfers of the Company's capital stock designed to preserve its
status as a REIT may act to prevent or hinder any such transaction or change of
control.
INTEREST AND MATURITY
The notes will mature on November 15, 2008 (the "Maturity Date"). The notes
are not subject to any sinking fund. The notes are not subject to redemption at
the Company's option and are not subject to repayment or repurchase by the
Company at the option of the Holders (as defined below).
The notes will bear interest at the rate per annum set forth on the cover
page of this prospectus supplement from the date of issuance or from the
immediately preceding Interest Payment Date (as defined below) to which interest
has been paid, payable in arrears on the 15th of each month (the "Interest
Payment Dates"), commencing December 15, 1998, to the persons (the "Holders") in
whose names the notes are registered in the security register applicable to the
notes at the close of business on the 1st of each month (the "Regular Record
Dates"), as the case may be, immediately before the Interest Payment Dates
regardless of whether the Regular Record Date is a Business Day. Interest on the
notes will be computed on the basis of a 360-day year of twelve 30-day months.
If any Interest Payment Date, the Maturity Date, or any other day on which
the principal of, premium, if any, or interest on a note becomes due and payable
falls on a day that is not a Business Day, the required payment will be made on
the next Business Day as if it were made on the date the payment was due and no
interest will accrue on the amount so payable for the period from and after the
Interest Payment Date, Maturity Date or other date, as the case may be.
ADDITIONAL COVENANTS OF THE COMPANY
Reference is made to the section titled "Description of Debt Securities" in
the accompanying prospectus for a description of certain covenants applicable to
the notes. In addition to the foregoing, the following covenants of the Company
will apply to the notes for the benefit of the Holders of the notes:
LIMITATION ON INCURRENCE OF TOTAL DEBT. The Company will not, and will not
permit any Subsidiary to, incur any Debt, other than Intercompany Debt if,
immediately after giving effect to the incurrence of this additional Debt and
the application of the proceeds therefrom on a pro forma basis, the aggregate
principal amount of all outstanding Debt of the Company and its Subsidiaries on
a consolidated basis determined in accordance with GAAP is greater than 60% of
the sum of (i) the Company's Total Assets as of the end of the latest fiscal
quarter covered in the Company's Annual Report on Form 10-K or Quarterly Report
on Form 10-Q, as the case may be, most recently filed with the Commission (or,
if this filing is not required under the Exchange Act, with the Trustee) before
the
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<PAGE>
incurrence of this additional Debt and (ii) the increase, if any, in Total
Assets from the end of such quarter including, without limitation, any increase
in Total Assets caused by the application of the proceeds of the additional Debt
(this increase together with the Company's Total Assets is referred to as the
"Adjusted Total Assets").
LIMITATION ON INCURRENCE OF SECURED DEBT. The Company will not, and will
not permit any Subsidiary to, incur any Secured Debt other than Intercompany
Debt if, immediately after giving effect to the incurrence of this additional
Secured Debt and the application of the proceeds therefrom on a pro forma basis,
the aggregate principal amount of all outstanding Secured Debt of the Company
and its Subsidiaries on a consolidated basis determined in accordance with GAAP
is greater than 40% of the Company's Adjusted Total Assets.
DEBT SERVICE COVERAGE. The Company will not, and will not permit any
Subsidiary to, incur any Debt, other than Intercompany Debt, if the ratio of
Consolidated Income Available for Debt Service to the Annual Debt Service Charge
for the period consisting of the four consecutive fiscal quarters most recently
ended before the date on which the additional Debt is to be incurred is less
than 1.5 to 1.0, on a pro forma basis after giving effect to the incurrence of
this Debt and the application of the proceeds therefrom, and calculated on the
assumption that (i) this Debt and any other Debt incurred by the Company or any
of its Subsidiaries since the first day of the four-quarter period and the
application of the proceeds therefrom (including to refinance other Debt since
the first day of the four-quarter period) had occurred on the first day of the
period, (ii) the repayment or retirement of any other Debt of the Company or any
of its Subsidiaries since the first day of the four-quarter period had occurred
on the first day of the period (except that, in making the computation, the
amount of Debt under any revolving credit facility, line of credit or similar
facility will be computed based upon the average daily balance of the Debt
during the period), and (iii) in the case of any acquisition or disposition by
the Company or any Subsidiary of any asset or group of assets since the first
day of the four-quarter period, including, without limitation, by merger, stock
purchase or sale, or asset purchase or sale, the acquisition or disposition had
occurred on the first day of the period with the appropriate adjustments with
respect to the acquisition or disposition being included in the pro forma
calculation. If the Debt giving rise to the need to make the foregoing
calculation or any other Debt incurred after the first day of the relevant
four-quarter period bears interest at a floating rate then, for purposes of
calculating the Annual Debt Service Charge, the interest rate on the Debt will
be computed on a pro forma basis as if the average interest rate which would
have been in effect during the entire four-quarter period had been the
applicable rate for the entire period.
MAINTENANCE OF TOTAL UNENCUMBERED ASSETS. The Company will maintain at all
times Total Unencumbered Assets of not less than 150% of the aggregate
outstanding principal amount of the Unsecured Debt of the Company and its
Subsidiaries, computed on a consolidated basis in accordance with GAAP.
As used herein:
"ANNUAL DEBT SERVICE CHARGE" as of any date means the amount which is
expensed in any 12-month period for interest on Debt of the Company and its
Subsidiaries.
"CONSOLIDATED INCOME AVAILABLE FOR DEBT SERVICE" for any period means
Consolidated Net Income plus, without duplication, amounts which have been
deducted in determining Consolidated Net Income during the period for (i)
Consolidated Interest Expense, (ii) provision for taxes of the Company and
its Subsidiaries based on income, (iii) amortization (other than
amortization of debt discount) and depreciation, (iv) provisions for losses
from sales or joint ventures, (v) provision for impairment losses, (vi)
increases in deferred taxes and other non-cash charges, (vii) charges
resulting from a change in accounting principles, and (viii) charges for
early extinguishment of debt, and less, without duplication, amounts which
have been added in determining Consolidated Net Income during the period for
(a) provisions for gains from sales or joint ventures, and (b) decreases in
deferred taxes and other non-cash items.
"CONSOLIDATED INTEREST EXPENSE" for any period, and without duplication,
means all interest (including the interest component of rentals on
capitalized leases, letter of credit fees, commitment
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<PAGE>
fees and other like financial charges) and all amortization of debt discount
on all Debt (including, without limitation, payment-in-kind, zero coupon and
other like securities) but excluding legal fees, title insurance charges,
other out-of-pocket fees and expenses incurred in connection with the
issuance of Debt and the amortization of any debt issuance costs that are
capitalized, all determined for the Company and its Subsidiaries on a
consolidated basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" for any period means the amount of
consolidated net income (or loss) of the Company and its Subsidiaries for
the period determined on a consolidated basis in accordance with GAAP.
"DEBT" means any indebtedness of the Company or any Subsidiary, whether
or not contingent, in respect of (i) money borrowed or evidenced by bonds,
notes, debentures or similar instruments, (ii) indebtedness secured by any
mortgage, pledge, lien, charge, encumbrance, trust deed, deed of trust, deed
to secure debt, security agreement or any security interest existing on
property owned by the Company or any Subsidiary, (iii) letters of credit or
amounts representing the balance deferred and unpaid of the purchase price
of any property except any balance that constitutes an accrued expense or
trade payable or (iv) any lease of property by the Company or any Subsidiary
as lessee that is reflected on the Company's consolidated balance sheet as a
capitalized lease in accordance with GAAP, in the case of items of
indebtedness under (i) through (iii) above to the extent that any items
(other than letters of credit) would appear as liabilities on the Company's
consolidated balance sheet in accordance with GAAP, and also includes, to
the extent not otherwise included, any obligation of the Company or any
Subsidiary to be liable for, or to pay, as obligor, guarantor or otherwise
(other than for purposes of collection in the ordinary course of business),
indebtedness of another person (other than the Company or any Subsidiary) of
the type referred to in (i), (ii), (iii) or (iv) above (it being understood
that Debt will be deemed to be incurred by the Company or any Subsidiary
whenever the Company or Subsidiary will create, assume, guarantee or
otherwise become liable in respect thereof).
"EXECUTIVE GROUP" means, collectively, those individuals holding the
offices of Chairman, Vice Chairman, Chief Executive Officer, President,
Chief Operating Officer, or any Vice President of the Company.
"GAAP" means generally accepted accounting principles, as in effect from
time to time, as used in the United States applied on a consistent basis.
"INTERCOMPANY DEBT" means indebtedness owed by the Company or any
Subsidiary solely to the Company or any Subsidiary.
"SECURED DEBT" means Debt secured by any mortgage, lien, charge,
encumbrance, trust deed, deed of trust, deed to secure debt, security
agreement, pledge, conditional sale or other title retention agreement,
capitalized lease, or other security interest or agreement granting or
conveying security title to or a security interest in real property or other
tangible assets.
"SUBSIDIARY" means (i) any corporation, partnership, joint venture,
limited liability company or other entity the majority of the shares, if
any, of the non-voting capital stock or other equivalent ownership interests
of which (except directors' qualifying shares) are at the time directly or
indirectly owned by the Company, and the majority of the shares of the
voting capital stock or other equivalent ownership interests of which
(except for directors' qualifying shares) are at the time directly or
indirectly owned by the Company, any other Subsidiary or Subsidiaries,
and/or one or more individuals of the Executive Group (or, in the event of
death or disability of any of the individuals, his/her respective legal
representative(s), or the individuals' successors in office as an officer of
the Company), and (ii) any other entity the accounts of which are
consolidated with the accounts of the Company. The foregoing definition of
"Subsidiary" will only be applicable with respect to the covenants and other
definitions set forth herein under "--Additional Covenants of the Company"
and, insofar as the provisions described in the accompanying prospectus
under "Description of Debt Securities--Merger, Consolidation or Sale of
Assets" apply to the notes, the foregoing definition of Subsidiary will be
applicable instead of the definition of "Subsidiary" set forth in the
accompanying prospectus.
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<PAGE>
"TOTAL ASSETS" as of any date means the sum of (i) Undepreciated Real
Estate Assets and (ii) all other assets of the Company and its Subsidiaries
determined on a consolidated basis in accordance with GAAP (but excluding
accounts receivable and intangibles).
"TOTAL UNENCUMBERED ASSETS" as of any date means Total Assets minus the
value of any properties of the Company and its Subsidiaries that are
encumbered by any mortgage, charge, pledge, lien, security interest, trust
deed, deed of trust, deed to secure debt, security agreement, or other
encumbrance of any kind (other than those relating to Intercompany Debt),
including the value of any stock of any Subsidiary that is so encumbered
determined on a consolidated basis in accordance with GAAP. For purposes of
this definition, the value of each property will be equal to the purchase
price or cost of each property and the value of any stock subject to any
encumbrance will be determined by reference to the value of the properties
owned by the issuer of the stock as aforesaid.
"UNDEPRECIATED REAL ESTATE ASSETS" as of any date means the amount of
real estate assets of the Company and its Subsidiaries on the date, before
depreciation and amortization, determined on a consolidated basis in
accordance with GAAP.
"UNSECURED DEBT" means Debt of the Company or any Subsidiary that is not
Secured Debt.
BOOK-ENTRY SYSTEM
The following are summaries of certain rules and operating procedures of DTC
that affect the payment of principal, premium, if any, and interest and
transfers of interests in the Global Note. Upon issuance, the notes will only be
issued in the form of a Global Note which will be deposited with, or on behalf
of, DTC and registered in the name of Cede & Co., as nominee of DTC. Unless and
until it is exchanged in whole or in part for notes in definitive form under the
limited circumstances described below, a Global Note may not be transferred
except as a whole (i) by DTC to a nominee of DTC, (ii) by a nominee of DTC to
DTC or another nominee of DTC or (iii) by DTC or any nominee to a successor of
DTC or a nominee of a successor.
Ownership of beneficial interests in a Global Note will be limited to
persons that have accounts with DTC for such Global Note ("participants") or
persons that may hold interests through participants. Upon the issuance of a
Global Note, DTC will credit, on its book-entry registration and transfer
system, the participants' accounts with the respective principal amounts of the
notes represented by such Global Note beneficially owned by participants.
Ownership of beneficial interests in the Global Note will be shown on, and the
transfer of ownership interests will be effected only through, records
maintained by DTC (with respect to interests of participants) and on the records
of participants (with respect to interests of persons holding through
participants). The laws of some states may require that certain purchasers of
securities take physical delivery of the securities in definitive form. These
laws may limit or impair the ability to own, transfer or pledge beneficial
interests in the Global Note.
So long as DTC or its nominee is the registered owner of a Global Note, DTC
or its nominee, as the case may be, will be considered the sole owner or Holder
of the notes represented by the Global Note for all purposes under the
Indenture. Except as set forth below, owners of beneficial interests in a Global
Note will not be entitled to have notes represented by the Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of notes in certificated form and will not be considered the registered
owners or Holders thereof under the Indenture. Accordingly, each person owning a
beneficial interest in a Global Note must rely on the procedures of DTC and, if
the person is not a participant, on the procedures of the participant through
which the person owns its interest, to exercise any rights of a Holder under the
Indenture. The Company understands that under existing industry practices, if
the Company requests any action of Holders or if an owner of a beneficial
interest in a Global Note desires to give or take any action that a Holder is
entitled to give or take under the Indenture, DTC would authorize the
participants holding the relevant beneficial interests to give or take this
action, and the participants would authorize beneficial owners owning through
the participants to give or take this action or would otherwise act upon the
instructions of beneficial owners holding through them.
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<PAGE>
Principal, premium, if any, and interest payments on interests represented
by a Global Note will be made to DTC or its nominee, as the case may be, as the
registered owner of the Global Note. None of the Company, the Trustee or any
other agent of the Company or agent of the Trustee will have any responsibility
or liability for any aspect of the records relating to or payments made on
account of beneficial ownership of interests in the Global Notes or for
maintaining, supervising or reviewing any records relating to beneficial
ownership interests. The Company expects that DTC, upon receipt of any payment
of principal, premium, if any, or interest in respect of a Global Note, will
immediately credit participants' accounts with payments in amounts proportionate
to their respective beneficial interests in the Global Note as shown on the
records of DTC. The Company also expects that payments by participants to owners
of beneficial interests in the Global Note held through the participants will be
governed by standing customer instructions and customary practice, as is now the
case with securities held for the accounts of customers in bearer form or
registered in "street name," and will be the responsibility of the participants.
The Indenture will provide that if (i) DTC notifies the Company that it is
unwilling or unable to continue as depositary or if DTC ceases to be a clearing
agency registered under the Exchange Act at any time when the depositary is
required to be so registered to act as depositary for the notes and a successor
depositary is not appointed within 90 days after the Company receives notice or
learns of such ineligibility, (ii) the Company determines that the notes will no
longer be represented by a Global Note and executes and delivers to the Trustee
an officers' certificate to that effect or (iii) an Event of Default with
respect to the notes will have occurred and be continuing and beneficial owners
representing a majority in aggregate principal amount of the outstanding notes
advise DTC to cease acting as depositary for the notes, the Company will issue
the notes in definitive form in exchange for interests in the Global Note. Any
notes issued in definitive form in exchange for interests in the Global Note
will be registered in such name or names, and will be issued in denominations of
$25 and integral multiples thereof, as DTC will instruct the Trustee. It is
expected that these instructions will be based upon directions received by DTC
from participants with respect to ownership of beneficial interests in the
Global Note.
DTC is a limited-purpose trust company organized under the Banking Law of
the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities of its participants and to
facilitate the clearance and settlement of transactions among its participants
in these securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. DTC's participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
which (and/or their representatives) own DTC. Access to the DTC book-entry
system is also available to others, such as banks, brokers and dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the notes will be made by the Underwriters in immediately
available funds. All payments of principal, premium, if any, and interest in
respect of the notes will be made by the Company by wire transfer of immediately
available funds to an account maintained in the United States; provided that, if
notes are issued in definitive certificated form, the Holders thereof will have
given appropriate wire transfer instructions to the Company.
The notes will trade in DTC's Same-Day Funds Settlement System until
maturity or until the notes are issued in certificated form, and secondary
market trading activity in the notes will therefore be required by DTC to settle
in immediately available funds. The Company expects that secondary trading in
the certificated securities, if any, will also be settled in immediately
available funds. No assurance can be given as to the effect, if any, of
settlement in immediately available funds on trading activity in the notes.
S-29
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the purchase agreement (the
"Purchase Agreement"), we have agreed to sell to the Underwriters named below
(the "Underwriters"), and each of the Underwriters, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated, ("Merrill Lynch"), A.G. Edwards & Sons,
Inc., PaineWebber Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation, EVEREN Securities, Inc., Sutro & Co. Incorporated and Wheat First
Union, a division of Wheat First Securities, Inc. are acting as Representatives
(the "Representatives"), has severally agreed to purchase the respective
principal amount of notes set forth opposite their names below. In the Purchase
Agreement, the several Underwriters have agreed, subject to the terms and
conditions set forth in the Purchase Agreement, to purchase all of the notes
offered in this prospectus supplement if any of the notes are purchased. In the
event of a default by an Underwriter, the Purchase Agreement provides that, in
certain circumstances, the purchase commitments of the non-defaulting
Underwriters may be increased or the Purchase Agreement may be terminated.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITER NOTES
- ------------------------------------------------------------------------------ --------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................................ $ 23,500,000
A.G. Edwards & Sons, Inc...................................................... 22,250,000
PaineWebber Incorporated...................................................... 22,250,000
Donaldson, Lufkin & Jenrette Securities Corporation........................... 5,000,000
EVEREN Securities, Inc........................................................ 5,000,000
Sutro & Co. Incorporated...................................................... 5,000,000
Wheat First Securities, Inc................................................... 5,000,000
ABN AMRO Incorporated......................................................... 1,000,000
BT Alex. Brown Incorporated................................................... 1,000,000
Bear, Stearns & Co. Inc....................................................... 1,000,000
CIBC Oppenheimer Corp......................................................... 1,000,000
Dain Rauscher Wessels......................................................... 1,000,000
Fleet Securities, Inc......................................................... 1,000,000
Legg Mason Wood Walker, Incorporated.......................................... 1,000,000
OLDE Discount Corporation..................................................... 1,000,000
Piper Jaffray Inc............................................................. 1,000,000
Raymond James & Associates, Inc............................................... 1,000,000
SG Cowen Securities Corporation............................................... 1,000,000
Tucker Anthony Incorporated................................................... 1,000,000
--------------
Total............................................................... $ 100,000,000
--------------
--------------
</TABLE>
The Representatives have advised us that they propose initially to offer the
notes to the public at the public offering price set forth on the cover page of
this prospectus supplement, and to certain dealers at such price less a
concession not in excess of 2% of the principal amount thereof. The Underwriters
may allow, and those dealers may reallow, a discount not in excess of 1.6% of
the principal amount thereof on sales to certain other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed.
We estimate that we will spend approximately $225,000 for fees and expenses
associated with the offering of the notes.
We have granted to the Underwriters an option to purchase additional notes
up to an aggregate amount of $15,000,000, at the public offering price plus
accrued interest, if any, less the underwriting discount shown on the cover page
of this prospectus supplement, solely to cover overallotments, if any. The
option may be exercised at any time within 30 days after the date of this
prospectus supplement. To the extent that the option is exercised, each
Underwriter will be committed, subject to certain
S-30
<PAGE>
conditions, to purchase additional notes proportionate to the Underwriter's
initial commitment as indicated in the preceding table.
The following table shows the per note and total underwriting discount to be
paid by us to the Underwriters. This information is presented assuming either no
exercise or full exercise by the Underwriters of their overallotment option.
<TABLE>
<CAPTION>
WITHOUT WITH
PER NOTE OPTION OPTION
--------- -------------- --------------
<S> <C> <C> <C>
Public Offering Price....................................... $ 25.00 $ 100,000,000 $ 115,000,000
Underwriting Discount....................................... $ .875 $ 3,500,000 $ 4,025,000
Proceeds, before expenses, to Realty Income................. $ 24.125 $ 96,500,000 $ 110,975,000
</TABLE>
The notes constitute a new issue of securities with no established trading
market. We plan to list the notes on the New York Stock Exchange under the
trading symbol "OUI." We expect that the notes will begin trading on the New
York Stock Exchange within 30 days after they are first issued. No assurance can
be given as to whether or not a trading market for the notes will develop or as
to the liquidity of any trading market for the notes which may develop.
Until the distribution of the notes is completed, rules of the Securities
and Exchange Commission may limit the ability of the Underwriters to bid for and
purchase the notes. As an exception to these rules, the Underwriters are
permitted to engage in certain transactions that stabilize the price of the
notes. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the notes.
If the Underwriters create a short position in the notes in connection with
this offering, I.E., they sell more notes than are set forth on the cover page
of this prospectus supplement, the Representatives may reduce that short
position by purchasing notes in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither we nor any of the Underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the notes. In addition, neither we nor any of the
Underwriters make any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
We have agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act or to contribute to payments the
Underwriters may be required to make in respect thereof.
We have agreed for a period of 90 days from the date of this prospectus
supplement, not to, directly or indirectly, offer for sale, sell or otherwise
dispose of (or enter into any transaction or device which is designed to, or be
expected to, result in the disposition by any person at any time in the future
of) debt securities (other than the notes offered in this prospectus
supplement), without the prior written consent of Merrill Lynch.
LEGAL MATTERS
The validity of the notes to be issued in connection with the offering will
be passed upon for Realty Income by Latham & Watkins, Costa Mesa, California.
Brown & Wood LLP, San Francisco, California will act as counsel for the
Underwriters. Paul C. Pringle is a partner of Brown & Wood LLP and owns 2,065
shares of Realty Income's common stock. Certain matters of Maryland law will be
passed upon for the Company by Ballard Spahr Andrews & Ingersoll, LLP,
Baltimore, Maryland.
S-31
<PAGE>
PROSPECTUS
$300,000,000
REALTY INCOME CORPORATION
DEBT SECURITIES, PREFERRED STOCK AND COMMON STOCK
------------------------
Realty Income Corporation, a Maryland corporation (the "Company"), may from
time to time offer in one or more series (i) its debt securities (the "Debt
Securities"), (ii) shares of its Preferred Stock, $1.00 par value per share (the
"Preferred Stock"), or (iii) shares of its Common Stock, $1.00 par value per
share (the "Common Stock"), with an aggregate public offering price of up to
$300,000,000 on terms to be determined at the time of offering. The Debt
Securities, the Preferred Stock and the Common Stock (collectively, the
"Securities") may be offered, separately or together, in separate series, in
amounts, at prices and on terms to be set forth in one or more supplements to
this Prospectus (each, a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Debt Securities, the specific
title, aggregate principal amount, currency, form (which may be registered or
bearer, or certificated or global), authorized denominations, maturity, rate (or
manner of calculation thereof) and time of payment of interest, terms for
redemption at the Company's option or repayment at the holder's option, terms
for sinking fund payments, terms for conversion into shares of Preferred Stock
or Common Stock, covenants and any initial public offering price; (ii) in the
case of Preferred Stock, the specific designation, preferences, conversion and
other rights, voting powers, restrictions, limitations as to transferability,
dividends and other distributions and terms and conditions of redemption and any
initial public offering price; and (iii) in the case of Common Stock, any
initial public offering price. In addition, such specific terms may include
limitations on actual, beneficial or constructive ownership and restrictions on
transfer of the Securities, in each case as may be appropriate to preserve the
status of the Company as a real estate investment trust ("REIT") for federal
income tax purposes. See "Restrictions on Ownership and Transfers of Capital
Stock." The applicable Prospectus Supplement will also contain information,
where applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Securities covered
by such Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time by the Company, or to or through underwriters or dealers. If any agents
or underwriters are involved in the sale of any of the Securities, their names,
and any applicable purchase price, fee, commission or discount arrangement
between or among them, will be set forth, or will be calculable from the
information set forth, in the applicable Prospectus Supplement. See "Plan of
Distribution." No Securities may be sold without delivery of the applicable
Prospectus Supplement describing the method and terms of the offering of such
Securities.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is October 1, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The registration
statement on Form S-3 (of which this Prospectus is a part) (the "Registration
Statement"), the exhibits and schedules forming a part thereof and the reports,
proxy statements and other information filed by the Company with the Commission
in accordance with the Exchange Act can be inspected and copied at the
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following regional offices of the Commission: Seven World
Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the
Common Stock is currently listed on the New York Stock Exchange ("NYSE") and
similar information concerning the Company can be inspected and copied at the
offices of the NYSE, 20 Broad Street, New York, New York 10005. Electronic
filings made through the Commission's EDGAR filing system are publicly available
through the Commission's web site (http://www.sec.gov).
The Company has filed with the Commission the Registration Statement under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Securities. This Prospectus does not contain all the information set forth
in the Registration Statement, certain portions of which have been omitted as
permitted by the Commission's rules and regulations. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed or incorporated by reference as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference and the exhibits and schedules thereto. For further
information regarding the Company and the Securities, reference is hereby made
to the Registration Statement and such exhibits and schedules, which may be
obtained from the Commission at its principal office in Washington, D.C. upon
payment of the fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the Exchange
Act with the Commission and are incorporated herein by reference:
(i) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
(ii) the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997;
(iii) the Company's Current Report on Form 8-K dated May 5, 1997; and
(iv) the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Securities shall be deemed to be
incorporated by reference in this Prospectus and to be part hereof from the date
of filing such documents. Any statement contained herein or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein (or in the applicable Prospectus Supplement) or in
any other subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus. Copies of all documents
that are incorporated herein by reference (not including the exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
the information that this Prospectus incorporates) will be provided without
charge to each person, including any beneficial owner, to whom this Prospectus
is delivered, upon written or oral request. Requests should be directed to the
Corporate Secretary of the Company, 220 West Crest Street, Escondido, California
92025 (telephone number: (760) 741-2111).
2
<PAGE>
THE COMPANY
Realty Income Corporation, a Maryland corporation (the "Company"), is a
fully integrated, self-administered and self-managed real estate investment
trust ("REIT") that focuses on the acquisition of long-term net lease
properties. The Company's philosophy is to employ a strategy of acquiring,
owning and managing properties that are preleased on a long-term net lease basis
to national and regional chain operators in a variety of consumer service and
retail industries throughout the United States. As of August 19, 1997, the
Company directly owned controlling interests in 771 properties located
throughout the United States.
The Company commenced operations as a REIT on August 15, 1994 through the
merger and consolidation of 25 public and private real estate limited
partnerships (the "Consolidation"). From September 1993 until May 28, 1997, the
Company existed as a corporation formed under the laws of the State of Delaware
(the "Delaware Company"). In March 1997, the Company formed Realty Income of
Maryland, Inc., a Maryland corporation and wholly-owned subsidiary of the
Delaware Company (the "Maryland Company"), specifically for the purpose of
reincorporating the Company under the laws of the State of Maryland (the
"Reincorporation"). The Maryland Company conducted no business and had no
material assets or liabilities prior to May 28, 1997. On May 28, 1997, the
Delaware Company was merged into the Maryland Company pursuant to an Agreement
and Plan of Merger approved by the Company's stockholders. Upon completion of
the merger, the Maryland Company changed its name to Realty Income Corporation.
The Reincorporation did not result in any change in the Company's business,
assets or liabilities and did not result in any relocation of management or
other employees. For a more complete description of the potential effects of the
Reincorporation, reference is hereby made to the section entitled,
"Reincorporation of the Company in Maryland and Related Changes to the Rights of
Stockholders" of the Company's Proxy Statement filed with the Commission on
March 28, 1997 in connection with its 1997 Annual Meeting of Stockholders, which
section is incorporated by reference herein.
The Company's executive offices are located at 220 West Crest Street,
Escondido, California 92025, and the telephone number is (760) 741-2111.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Securities for
general corporate purposes, which may include the construction and acquisition
of additional properties and other acquisition transactions, the expansion and
improvement of certain properties in the Company's portfolio, and the repayment
of indebtedness.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth ratios of earnings to fixed charges for the
periods shown. The years ended December 31, 1996 and 1995 and the six months
ended June 30, 1997 are for the Company. The results of operations used to
compute the ratio for the year ended December 31, 1994 are comprised of those of
the combined 10 private and 15 publicly held real estate limited partnerships
that were included in the Consolidation (collectively, the "Predecessor") from
January 1, 1994 through August 15, 1994 and those of the Company from August 16,
1994 through December 31, 1994. The ratio shown for the year ended December 31,
1993 is derived from the combined historical financial information of the
Predecessor. Ratios are not shown for the year ended December 31, 1992 because
the Predecessor did not have any fixed charges for such period.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED JUNE 30, ------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
6x 14x 10x 39x 5,865x
</TABLE>
3
<PAGE>
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of net income before
extraordinary items plus fixed charges (excluding interest costs capitalized).
Fixed charges consist of interest expense (including interest costs capitalized)
and the amortization of debt issuance costs. To date, the Company has not issued
any Preferred Stock; therefore, the ratios of earnings to fixed charges and
preferred share dividends are the same as the ratios presented above.
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities will be direct obligations of the Company, which may be
secured or unsecured, and which may be senior or subordinated indebtedness of
the Company. The Debt Securities may be issued under one or more indentures,
each dated as of a date on or before the issuance of the Debt Securities to
which it relates and in the form that has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part or incorporated by
reference herein by means of a post-effective amendment to the Registration
Statement or a Form 8-K, subject to such amendments or supplements as may be
adopted from time to time. Each such indenture (collectively, the "Indenture")
will be entered into between the Company and a trustee (the "Trustee"), which
may be the same Trustee. The Indenture will be subject to, and governed by, the
Trust Indenture Act of 1939, as amended. The statements made hereunder relating
to the Indenture and the Debt Securities are summaries of certain anticipated
provisions thereof, do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all provisions of the Indenture and
such Debt Securities. Capitalized terms used but not defined herein shall have
the respective meanings set forth in the Indenture.
TERMS
The particular terms of the Debt Securities offered by a Prospectus
Supplement will be described in the particular Prospectus Supplement, along with
any applicable modifications of or additions to the general terms of the Debt
Securities as described herein and in the applicable Indenture. Accordingly, for
a description of the terms of any series of Debt Securities, reference must be
made to both the Prospectus Supplement relating thereto and the description of
the Debt Securities set forth in this Prospectus. To the extent that any
particular terms of the Debt Securities described in a Prospectus Supplement
differ from any of the terms described herein, then such terms described herein
shall be deemed to have been superseded by such Prospectus Supplement.
Except as set forth in any Prospectus Supplement, the Debt Securities may be
issued without limit as to aggregate principal amount, in one or more series, in
each case as established from time to time by the Company's Board of Directors
or as set forth in the applicable Indenture or one or more indentures
supplemental to the Indenture. All Debt Securities of one series need not be
issued at the same time and, unless otherwise provided, a series may be
reopened, without the consent of the holders of the Debt Securities of such
series, for issuances of additional Debt Securities of such series.
Each Indenture will provide that the Company may, but need not, designate
more than one Trustee thereunder, each with respect to one or more series of
Debt Securities. Any Trustee under an Indenture may resign or be removed with
respect to one or more series of Debt Securities, and a successor Trustee may be
appointed to act with respect to such series. If two or more persons are acting
as Trustee with respect to different series of Debt Securities, each such
Trustee shall be a Trustee of a trust under the applicable Indenture separate
and apart from the trust administered by any other Trustee and, except as
otherwise indicated herein, any action described herein to be taken by a Trustee
may be taken by each such Trustee with respect to, and only with respect to, the
one or more series of Debt Securities for which it is Trustee under the
applicable Indenture.
4
<PAGE>
The following summaries set forth certain general terms and provisions of
the Indenture and the Debt Securities. The Prospectus Supplement relating to the
series of Debt Securities being offered will contain further terms of such Debt
Securities, including the following specific terms:
(1) the title of such Debt Securities;
(2) the aggregate principal amount of such Debt Securities and any limit
on such aggregate principal amount;
(3) the price (expressed as a percentage of the principal amount
thereof) at which such Debt Securities will be issued and, if other than the
principal amount thereof, the portion of the principal amount thereof
payable upon declaration of acceleration of the maturity thereof, or (if
applicable) the portion of the principal amount of such Debt Securities that
is convertible into Common Stock or Preferred Stock, or the method by which
any such portion shall be determined;
(4) if convertible, the terms on which such Debt Securities are
convertible, including the initial conversion price or rate and conversion
period and, in connection with the preservation of the Company's status as a
REIT, any applicable limitations on the ownership or transferability of the
Common Stock or the Preferred Stock into which such Debt Securities are
convertible;
(5) the date or dates, or the method for determining such date or dates,
on which the principal of such Debt Securities will be payable;
(6) the rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which such Debt Securities
will bear interest, if any;
(7) the date or dates, or the method for determining such date or dates,
from which any interest will accrue, the dates upon which any such interest
will be payable, the record dates for payment of such interest, or the
method by which any such dates shall be determined, the persons to whom such
interest shall be payable, and the basis upon which interest shall be
calculated if other than that of a 360-day year of twelve 30-day months;
(8) the place or places where the principal of (and premium, if any) and
interest, if any, on such Debt Securities will be payable, where such Debt
Securities may be surrendered for conversion or registration of transfer or
exchange and where notices or demands to or upon the Company in respect of
such Debt Securities and the Indenture may be served;
(9) the period or periods, if any, within which, the price or prices at
which and the terms and conditions upon which such Debt Securities may be
redeemed, as a whole or in part, at the Company's option;
(10) the obligation, if any, of the Company to redeem, repay or purchase
such Debt Securities pursuant to any sinking fund or analogous provision or
at the option of a holder thereof, and the period or periods within which,
the price or prices at which and the terms and conditions upon which such
Debt Securities will be redeemed, repaid or purchased, as a whole or in
part, pursuant to such obligation;
(11) if other than U.S. dollars, the currency or currencies in which
such Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite currency
or currencies, and the terms and conditions relating thereto;
(12) whether the amount of payments of principal of (and premium, if
any) or interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula or
method may, but need not, be based on a currency, currencies, currency unit
or units or composite currency or currencies) and the manner in which such
amounts shall be determined;
5
<PAGE>
(13) whether such Debt Securities will be issued in certificated and/or
book-entry form, and, if so, the identity of the depositary for such Debt
Securities;
(14) whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the denominations
thereof and terms and conditions relating thereto;
(15) the applicability, if any, of the defeasance and covenant
defeasance provisions described herein or set forth in the applicable
Indenture, or any modification thereof;
(16) any deletions from, modifications of or additions to the events of
default or covenants of the Company with respect to such Debt Securities;
(17) whether and under what circumstances the Company will pay any
Additional Amounts on such Debt Securities in respect of any tax, assessment
or governmental charge and, if so, whether the Company will have the option
to redeem such Debt Securities in lieu of making such payment;
(18) the subordination provisions, if any, relating to such Debt
Securities;
(19) the provisions, if any, relating to any security provided for such
Debt Securities; and
(20) any other terms of such Debt Securities.
If so provided in the applicable Prospectus Supplement, the Debt Securities
may be issued at a discount below their principal amount and provide for less
than the entire principal amount thereof to be payable upon declaration of
acceleration of the maturity thereof ("Original Issue Discount Securities"). In
such cases, any material U.S. federal income tax, accounting and other
considerations applicable to Original Issue Discount Securities will be
described in the applicable Prospectus Supplement.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the Debt
Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof.
Unless otherwise described in the applicable Prospectus Supplement, the
principal of (and premium, if any) and interest on any series of Debt Securities
will be payable at the applicable Trustee's corporate trust office, the address
of which will be set forth in the applicable Prospectus Supplement; PROVIDED,
HOWEVER, that, unless otherwise provided in the applicable Prospectus
Supplement, at the Company's option, payment of interest may be made by check
mailed to the address of the person entitled thereto as it appears in the
applicable register for such Debt Securities or by wire transfer of funds to
such person at an account maintained within the United States.
Subject to certain limitations imposed on Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for any
authorized denomination of other Debt Securities of the same series and of a
like aggregate principal amount and tenor upon surrender of such Debt Securities
at the office of any transfer agent designated by the Company for such purpose.
In addition, subject to certain limitations imposed on Debt Securities issued in
book-entry form, the Debt Securities of any series may be surrendered for
conversion or registration of transfer thereof at the office of any transfer
agent designated by the Company for such purpose. Every Debt Security
surrendered for conversion, registration of transfer or exchange shall be duly
endorsed or accompanied by a written instrument of transfer and the person
requesting such transfer must provide evidence of title and identity
satisfactory to the Company and the applicable transfer agent. No service charge
will be made for any registration of transfer or exchange of any Debt
Securities, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith. The Company
may at any time rescind the designation of any transfer agent appointed with
respect to the Debt Securities of any series or approve a change in the location
through which any such transfer agent acts, except that the Company will be
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required to maintain a transfer agent in each place of payment for such series.
The Company may at any time designate additional transfer agents with respect to
any series of Debt Securities.
Neither the Company nor any Trustee shall be required to (a) issue, register
the transfer of or exchange Debt Securities of any series if such Debt Security
may be among those selected for redemption during a period beginning at the
opening of business 15 days before the mailing or first publication, as the case
may be, of notice of redemption of such Debt Securities and ending at the close
of business on (i) if the Debt Securities of such series are issuable only in
registered form, the day of mailing of the relevant notice of redemption or (ii)
if the Debt Securities of such series are issuable in bearer form, the day of
the first publication of the relevant notice of redemption or, if such Debt
Securities are also issuable in registered form and there is no such
publication, the day of mailing of the relevant notice of redemption; (b)
register the transfer of or exchange any Debt Security in registered form, or
portion thereof, so selected for redemption, in whole or in part, except the
unredeemed portion of any Debt Security being redeemed in part; or (c) exchange
any Debt Security in bearer form so selected for redemption, except in exchange
for a Debt Security of such series in registered form that is simultaneously
surrendered for redemption; or (d) issue, register the transfer of or exchange
any Debt Security that has been surrendered for repayment at the holder's
option, except the portion, if any, of such Debt Security not to be so repaid.
MERGER, CONSOLIDATION OR SALE OF ASSETS
Each Indenture will provide that the Company will not consolidate with, or
sell, lease or convey all or substantially all of its assets to, or merge with
or into, any person unless (a) either the Company shall be the continuing
entity, or the successor person (if other than the Company) formed by or
resulting from any such consolidation or merger or which shall have received the
transfer of such assets shall be a corporation organized and existing under the
laws of the United States or any State thereof and shall expressly assume the
Company's obligation to pay the principal of (and premium, if any) and interest
on all the Debt Securities issued under such Indenture and the due and punctual
performance and observance of all the covenants and conditions contained in such
Indenture and in such Debt Securities; (b) immediately after giving effect to
such transaction and treating any indebtedness that becomes an obligation of the
Company or any Subsidiary as a result thereof as having been incurred, and any
liens on any property or assets of the Company or any Subsidiary that are
incurred, created or assumed as a result thereof as having been created,
incurred or assumed, by the Company or such Subsidiary at the time of such
transaction, no event of default under the Indenture, and no event that, after
notice or the lapse of time, or both, would become such an event of default,
shall have occurred and be continuing; and (c) an officers' certificate and
legal opinion covering such conditions shall be delivered to the Trustee.
CERTAIN COVENANTS
EXISTENCE. Except as permitted under "--Merger, Consolidation or Sale of
Assets," each Indenture will require the Company to do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, all material rights (by certificate of incorporation, by-laws and
statute) and all material franchises; PROVIDED, HOWEVER, that the Company shall
not be required to preserve any right or franchise if its Board of Directors
determines that the preservation thereof is no longer desirable in the conduct
of its business.
MAINTENANCE OF PROPERTIES. Each Indenture will require the Company to cause
all of its material properties used or useful in the conduct of its business or
the business of any Subsidiary to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment and to cause
to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the Company's judgment may be necessary so that
the business carried on in connection therewith may be properly and
advantageously conducted at all times; PROVIDED, HOWEVER, that the Company and
its Subsidiaries shall not be prevented from selling or otherwise disposing of
their properties for value in the ordinary course of business.
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INSURANCE. Each Indenture will require the Company to, and to cause each of
its Subsidiaries to, keep in force upon all of its properties and operations
policies of insurance carried with responsible companies in such amounts and
covering all such risks as shall be customary in the industry in accordance with
prevailing market conditions and availability.
PAYMENT OF TAXES AND OTHER CLAIMS. Each Indenture will require the Company
to pay or discharge or cause to be paid or discharged, before the same shall
become delinquent, (a) all taxes, assessments and governmental charges levied or
imposed on it or any Subsidiary or on the income, profits or property of the
Company or any Subsidiary and (b) all lawful claims for labor, materials and
supplies that, if unpaid, might by law become a lien upon the property of the
Company or any Subsidiary; PROVIDED, HOWEVER, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim the amount, applicability or validity of which is
being contested in good faith by appropriate proceedings.
PROVISION OF FINANCIAL INFORMATION. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, each Indenture will require the
Company, within 15 days after each of the respective dates by which the Company
would have been required to file annual reports, quarterly reports and other
documents with the Commission if the Company were so subject, (a) to transmit by
mail to all holders of Debt Securities issued under such Indenture, as their
names and addresses appear in the applicable register for such Debt Securities,
without cost to such holders, copies of the annual reports, quarterly reports
and other documents that the Company would have been required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act if the Company
were subject to such Sections, (b) to file with the applicable Trustee copies of
the annual reports, quarterly reports and other documents that the Company would
have been required to file with the Commission pursuant to Section 13 or 15(d)
of the Exchange Act if the Company were subject to such Sections, and (c) to
supply, promptly upon written request and payment of the reasonable cost of
duplication and delivery, copies of such documents to any prospective holder of
such Debt Securities.
Except as may otherwise be provided in the Prospectus Supplement relating to
any series of Debt Securities, the term "Subsidiary", as used in the Indenture,
means with respect to the Company, any other Person of which more than 50% of
(i) the equity or other ownership interests or (ii) the total voting power of
shares of capital stock or other ownership interests entitled (without regard to
the occurrence of any contingency) to vote in the election of directors,
managers, trustees or general or managing partners thereof is at the time owned
by the Company or one or more of the other Subsidiaries of the Company or a
combination thereof.
ADDITIONAL COVENANTS. Any additional covenants of the Company with respect
to any of the series of Debt Securities will be set forth in the Prospectus
Supplement relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Unless otherwise provided in the applicable Indenture, each Indenture will
provide that the following events are "events of default" with respect to any
series of Debt Securities issued thereunder: (a) default for 30 days in the
payment of any installment of interest on any Debt Security of such series; (b)
default in the payment of the principal of (or premium, if any, on) any Debt
Security of such series when due, whether at stated maturity or by declaration
of acceleration, notice of redemption, notice of option to elect repayment or
otherwise; (c) default in making any sinking fund payment as required for any
Debt Security of such series; (d) default in the performance of any other
covenant of the Company contained in the Indenture (other than a covenant added
to the Indenture solely for the benefit of a series of Debt Securities issued
thereunder other than such series), continued for 60 days after written notice
to the Company by the Trustee or the holders of at least 25% in principal amount
of the outstanding Debt Securities of such series; (e) a default under any bond,
debenture, note or other evidence of indebtedness for money borrowed by the
Company or any of its Subsidiaries (including obligations under leases required
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to be capitalized on the balance sheet of the lessee under generally accepted
accounting principles, but not including any indebtedness or obligations for
which recourse is limited to property purchased) in an aggregate principal
amount in excess of $25,000,000 or under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any indebtedness for money borrowed by the Company or any of its Subsidiaries
(including such leases, but not including such indebtedness or obligations for
which recourse is limited to property purchased) in an aggregate principal
amount in excess of $25,000,000, whether such indebtedness exists at the date of
the relevant Indenture or shall thereafter be created, which default shall have
resulted in such indebtedness becoming or being declared due and payable prior
to the date on which it would otherwise have become due and payable or such
obligations being accelerated, without such acceleration having been rescinded
or annulled; (f) certain events of bankruptcy, insolvency or reorganization, or
court appointment of a receiver, liquidator or trustee of the Company or any
Significant Subsidiary of the Company; and (g) any other Event of Default
provided with respect to a particular series of Debt Securities. The term
"Significant Subsidiary" has the meaning ascribed to such term in Regulation S-X
promulgated under the Securities Act, as such Regulation was in effect on
January 1, 1996.
If an event of default under any Indenture with respect to Debt Securities
of any series at the time outstanding occurs and is continuing, then in every
such case the applicable Trustee or the holders of not less than 25% in
principal amount of the outstanding Debt Securities of that series may declare
the principal amount (or, if the Debt Securities of that series are Original
Issue Discount Securities or Indexed Securities, such portion of the principal
amount as may be specified in the terms thereof) of all the Debt Securities of
that series to be due and payable immediately by written notice thereof to the
Company (and to the applicable Trustee if given by the holders). However, at any
time after such a declaration of acceleration with respect to Debt Securities of
such series has been made, but before a judgment or decree for payment of the
money due has been obtained by the applicable Trustee, the holders of not less
than a majority of the principal amount of the outstanding Debt Securities of
such series may rescind and annul such declaration and its consequences if (a)
the Company shall have deposited with the applicable Trustee all required
payments of the principal of (and premium, if any) and interest on the Debt
Securities of such series (other than principal and premium, if any, and
interest which have become due solely as a result of such acceleration), plus
certain fees, expenses, disbursements and advances of the applicable Trustee and
(b) all events of default, other than the nonpayment of accelerated principal
(or specified portion thereof), premium, if any, and interest with respect to
Debt Securities of such series have been cured or waived as provided in the
Indenture. Each Indenture will also provide that the holders of not less than a
majority in principal amount of the outstanding Debt Securities of any series
may waive any past default with respect to such series and its consequences,
except a default (y) in the payment of the principal of (or premium, if any) or
interest on any Debt Security of such series or (z) in respect of a covenant or
provision contained in such Indenture that cannot be modified or amended without
the consent of the holder of each outstanding Debt Security of such series
affected thereby.
Each Indenture will require each Trustee to give notice to the holders of
Debt Securities within 90 days of a default under the Indenture unless such
default shall have been cured or waived, subject to certain exceptions;
PROVIDED, HOWEVER, that such Trustee may withhold notice to the holders of any
series of Debt Securities of any default with respect to such series (except a
default in the payment of the principal of (or premium, if any) or interest on
any Debt Security of such series or in the payment of any sinking fund
installment in respect of any Debt Security of such series) if specified
Responsible Officers of the Trustee consider such withholding to be in such
holders' interest.
Each Indenture will provide that no holders of Debt Securities of any series
may institute any proceedings, judicial or otherwise, with respect to the
Indenture or for any remedy thereunder, except in the case of failure of the
Trustee, for 60 days, to act after it has received a written request to
institute proceedings in respect of an event of default from the holders of not
less than 25% in principal amount of the outstanding Debt Securities of such
series, as well as an offer of indemnity reasonably satisfactory to it,
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and no direction inconsistent with such written request has been given to the
Trustee during such 60-day period by holders of a majority in principal amount
of the outstanding Debt Securities of such series. This provision will not
prevent, however, any holder of Debt Securities from instituting suit for the
enforcement of payment of the principal of (and premium, if any) and interest on
such Debt Securities at the respective due dates thereof.
Each Indenture will provide that, subject to provisions in the Trust
Indenture Act of 1939 relating to its duties in case of default, the Trustee is
under no obligation to exercise any of its rights or powers under the Indenture
at the request or direction of any holders of any series of Debt Securities then
outstanding under the Indenture, unless such holders shall have offered to the
Trustee reasonable security or indemnity. The holders of not less than a
majority in principal amount of the outstanding Debt Securities of any series
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or of exercising any trust
or power conferred upon the Trustee; provided that such direction shall not
conflict with any rule of law or the Indenture and the Trustee may refuse to
follow any direction that may involve the Trustee in personal liability or that
may be unduly prejudicial to the holders of Debt Securities of such series not
joining therein.
Within 120 days after the close of each fiscal year, the Company will be
required to deliver to the Trustee a certificate, signed by one of several
specified officers, stating whether or not such officer has knowledge of any
default under the Indenture and, if so, specifying each such default and the
nature and status thereof.
MODIFICATION OF THE INDENTURE
Modifications and amendments of any Indenture will be permitted with the
consent of the holders of not less than a majority in principal amount of all
outstanding Debt Securities of each series issued under such Indenture affected
by such modification or amendment; PROVIDED, HOWEVER, that no such modification
or amendment may, without the consent of the holder of each Debt Security
affected thereby, (a) change the stated maturity of the principal of, or any
installment of principal, interest (or premium, if any) on, any such Debt
Security; (b) reduce the principal amount of, or the rate or amount of interest
on, or any premium payable on redemption of, any such Debt Security, or reduce
the amount of principal of an Original Issue Discount Security that would be due
and payable upon declaration of acceleration of the maturity thereof or would be
provable in bankruptcy, or adversely affect any right of repayment at the option
of the holder of any Debt Security (or reduce the amount of premium payable upon
any such repayment); (c) change the place of payment, or the coin or currency,
for payment of principal of (or premium, if any) or interest on any such Debt
Security; (d) impair the right to institute suit for the enforcement of any
payment on or with respect to any such Debt Security when due; (e) reduce the
above-stated percentage of outstanding Debt Securities of any series necessary
to modify or amend the Indenture, to waive compliance with certain provisions
thereof or certain defaults and consequences thereunder or to reduce the quorum
or voting requirements set forth in the Indenture; or (f) modify any of the
foregoing provisions or any of the provisions relating to the waiver of certain
past defaults or certain covenants, except to increase the required percentage
to effect such action or to provide that certain other provisions may not be
modified or waived without the consent of the holder of each outstanding Debt
Security affected thereby.
The holders of a majority in aggregate principal amount of outstanding Debt
Securities of any series may, on behalf of all holders of Debt Securities of
that series waive, insofar as that series is concerned, compliance by the
Company with certain restrictive covenants in the applicable Indenture.
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Modifications and amendments of an Indenture will be permitted to be made by
the Company and the Trustee without the consent of any holder of Debt Securities
for any of the following purposes: (a) to evidence the succession of another
person to the Company as obligor under the Indenture; (b) to add to the
covenants of the Company for the benefit of the holders of all or any series of
Debt Securities or to surrender any right or power conferred upon the Company in
the Indenture; (c) to add events of default for the benefit of the holders of
all or any series of Debt Securities; (d) to add or change any provisions of the
Indenture to facilitate the issuance of, or to liberalize certain terms of, Debt
Securities in bearer form, or to permit or facilitate the issuance of Debt
Securities in uncertificated form, PROVIDED that such action shall not adversely
affect the interests of the holders of the Debt Securities of any series in any
material respect; (e) to change or eliminate any provisions of the Indenture,
PROVIDED that any such change or elimination does not apply to any outstanding
Debt Securities of a series created prior to the date of such amendment or
supplement that are entitled to the benefit of such provision; (f) to secure the
Debt Securities; (g) to establish the form or terms of Debt Securities of any
series, including the provisions and procedures, if applicable, for the
conversion of such Debt Securities into Common Stock or Preferred Stock; (h) to
provide for the acceptance of appointment by a successor Trustee or facilitate
the administration of the trusts under the Indenture by more than one Trustee;
(i) to cure any ambiguity, defect or inconsistency in the Indenture or to make
any other provisions with respect to matters or questions arising under the
Indenture PROVIDED, HOWEVER, that such action shall not adversely affect the
interests of holders of Debt Securities of any series in any material respect;
or (j) to supplement any of the provisions of the Indenture to the extent
necessary to permit or facilitate defeasance, covenant defeasance and discharge
of any series of such Debt Securities, PROVIDED, HOWEVER, that such action shall
not adversely affect the interests of the holders of the Debt Securities of any
series in any material respect.
Each Indenture will provide that in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (a) the principal amount of an Original Issue Discount Security that
shall be deemed to be outstanding shall be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (b) the principal amount of
any Debt Security denominated in a foreign currency that shall be deemed
outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (a) above), (c) the
principal amount of an Indexed Security that shall be deemed outstanding shall
be the principal face amount of such Indexed Security at original issuance,
unless otherwise provided with respect to such Indexed Security in the
applicable Indenture, and (d) Debt Securities owned by the Company or any other
obligor upon the Debt Securities or any affiliate of the Company or of such
other obligor shall be disregarded.
Each Indenture will contain provisions for convening meetings of the holders
of Debt Securities of a series. A meeting may be permitted to be called at any
time by the Trustee, and also, upon request, by the Company or the holders of at
least 10% in principal amount of the outstanding Debt Securities of such series,
in any such case upon notice given as provided in the Indenture. Except for any
consent or waiver that must be given by the holder of each Debt Security
affected thereby, any resolution presented at a meeting or adjourned meeting
duly reconvened at which a quorum is present may be adopted by the affirmative
vote of the holders of a majority in principal amount of the outstanding Debt
Securities of that series; PROVIDED, HOWEVER, that, except as referred to above,
any resolution with respect to any request, demand, authorization, direction,
notice, consent, waiver or other action that may be made, given or taken by the
holders of a specified percentage, which is less than a majority, in principal
amount of the outstanding Debt Securities of a series may be adopted at a
meeting or adjourned meeting duly reconvened at which a quorum is present by the
affirmative vote of the holders of such specified percentage in principal amount
of the outstanding Debt Securities of that series. Any resolution passed or
decision taken at any meeting of holders of Debt Securities of any series duly
held in accordance with the
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Indenture will be binding on all holders of Debt Securities of that series. The
persons holding or representing a majority in principal amount of the
outstanding Debt Securities of a series shall constitute a quorum for a meeting
of holders of such series; PROVIDED, HOWEVER, that if any action is to be taken
at such meeting with respect to a consent or waiver that may be given by the
holders of not less than a specified percentage in principal amount of the
outstanding Debt Securities of a series, the persons holding or representing
such specified percentage in principal amount of the outstanding Debt Securities
of such series will constitute a quorum.
Notwithstanding the foregoing provisions, each Indenture will provide that
if any action is to be taken at a meeting of holders of Debt Securities of any
series with respect to any request, demand, authorization, direction, notice,
consent, waiver or other action that the Indenture expressly provides may be
made, given or taken by the holders of such series and one or more additional
series: (a) there shall be no minimum quorum requirement for such meeting and
(b) the principal amount of the outstanding Debt Securities of all such series
that are entitled to vote in favor of such request, demand, authorization,
direction, notice, consent, waiver or other action shall be taken into account
in determining whether such request, demand, authorization, direction, notice,
consent, waiver or other action has been made, given or taken under the
Indenture.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless otherwise indicated in the applicable Prospectus Supplement, upon
request of the Company any Indenture shall cease to be of further effect with
respect to any series of Debt Securities issued thereunder specified in such
Company request (except as to certain limited provisions of such Indenture which
shall survive) when either (i) all Debt Securities of such series have been
delivered to the Trustee for cancellation or (ii) all Debt Securities of such
series have become due and payable or will become due and payable within one
year (or are scheduled for redemption within one year) and the Company has
irrevocably deposited with the applicable Trustee, in trust, funds in such
currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are payable in an amount sufficient to
pay the entire indebtedness on such Debt Securities in respect of principal (and
premium, if any) and interest to the date of such deposit (if such Debt
Securities have become due and payable) or to the stated maturity or redemption
date, as the case may be.
Each Indenture will provide that, unless otherwise indicated in the
applicable Prospectus Supplement, the Company may elect either to (a) defease
and be discharged from any and all obligations with respect to any series of
Debt Securities (except for the obligation to pay Additional Amounts, if any,
upon the occurrence of certain events of tax with respect to payments on such
Debt Securities and the obligations to register the transfer or exchange of such
Debt Securities, to replace temporary or mutilated, destroyed, lost or stolen
Debt Securities, to maintain an office or agency in respect of such Debt
Securities and to hold money for payment in trust) ("defeasance") or (b) be
released from its obligations with respect to certain covenants (which will be
described in the relevant Prospectus Supplement) applicable to such Debt
Securities under the applicable Indenture (which may include, subject to a
limited exception, the covenants described under "--Certain Covenants"), and any
omission to comply with such obligations shall not constitute a default or an
event of default with respect to such Debt Securities ("covenant defeasance"),
in either case upon the irrevocable deposit by the Company with the applicable
Trustee, in trust, of an amount, in such currency or currencies, currency unit
or units or composite currency or currencies in which such Debt Securities are
payable at stated maturity, or Government Obligations (as defined below), or
both, applicable to such Debt Securities that through the scheduled payment of
principal and interest in accordance with their terms will provide money in an
amount sufficient to pay the principal of (and premium, if any) and interest on
such Debt Securities, and any mandatory sinking fund or analogous payments
thereon, on the scheduled due dates therefor.
Such a trust may only be established if, among other things, the Company has
delivered to the applicable Trustee an opinion of counsel (as specified in the
applicable Indenture) to the effect that the
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holders of such Debt Securities will not recognize income, gain or loss for U.S.
federal income tax purposes as a result of such defeasance or covenant
defeasance and will be subject to U.S. federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if such
defeasance or covenant defeasance had not occurred, and such opinion of counsel,
in the case of defeasance, must refer to and be based on a ruling of the
Internal Revenue Service (the "IRS") or a change in applicable U.S. federal
income tax law occurring after the date of the applicable Indenture. In the
event of such defeasance, the holders of such Debt Securities would thereafter
be able to look only to such trust fund for payment of principal (and premium,
if any) and interest.
"Government Obligations" means securities that are (a) direct obligations of
the United States of America or the government which issued the foreign currency
in which the Debt Securities of a particular series are payable, for the payment
of which its full faith and credit is pledged, or (b) obligations of a person
controlled or supervised by and acting as an agency or instrumentality of the
United States of America or such government which issued the foreign currency in
which the Debt Securities of such series are payable, the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America or such other government, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such Government Obligation or a specific payment of interest on
or principal of any such Government Obligation held by such custodian for the
account of the holder of a depository receipt; PROVIDED, HOWEVER, that (except
as required by law) such custodian is not authorized to make any deduction from
the amount payable to the holder of such depository receipt from any amount
received by the custodian in respect of the Government Obligation or the
specific payment of interest on or principal of the Government Obligation
evidenced by such depository receipt.
Unless otherwise provided in the applicable Prospectus Supplement, if after
the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any series,
(a) the holder of a Debt Security of such series is entitled to, and does, elect
pursuant to the applicable Indenture or the terms of such Debt Security to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Debt Security or (b)
a Conversion Event (as defined below) occurs in respect of the currency,
currency unit or composite currency in which such deposit has been made, the
indebtedness represented by such Debt Security will be deemed to have been, and
will be, fully discharged and satisfied through the payment of the principal of
(and premium, if any) and interest on such Debt Security as they become due out
of the proceeds yielded by converting the amount so deposited in respect of such
Debt Security into the currency, currency unit or composite currency in which
such Debt Security becomes payable as a result of such election or Conversion
Event based on the applicable market exchange rate. "Conversion Event" means the
cessation of use of (i) a currency, currency unit or composite currency both by
the government of the country which issued such currency and for the settlement
of transactions by a central bank or other public institution of or within the
international banking community, (ii) the ECU both within the European Monetary
System and for the settlement of transactions by public institutions of or
within the European Communities, or (iii) any currency unit or composite
currency other than the ECU for the purposes for which it was established.
Unless otherwise provided in the applicable Prospectus Supplement, all payments
of principal of (and premium, if any) and interest on any Debt Security that is
payable in a foreign currency that ceases to be used by its government of
issuance shall be made in U.S. dollars.
In the event the Company effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because of
the occurrence of any event of default, other than the event of default
described in clause (d) under "--Events of Default, Notice and Waiver" with
respect to the specified sections of the applicable Indenture (which sections
would no longer be applicable to such Debt Securities) or clause (g) thereunder
with respect to any other covenant as to which there has been covenant
defeasance, the amount in such currency, currency unit or composite currency in
which such
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Debt Securities are payable, and Government Obligations on deposit with the
applicable Trustee, may not be sufficient to pay amounts due on such Debt
Securities at the time of the acceleration resulting from such event of default.
The Company would, however, remain liable to make payment of such amounts due at
the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions, if
any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock or Preferred Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include
whether such Debt Securities are convertible into Common Stock or Preferred
Stock, the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the holders
or the Company, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such Debt
Securities and any restrictions on conversion, including restrictions directed
at maintaining the Company's REIT status.
UNCLAIMED PAYMENTS
All amounts paid by the Company to a paying agent or a Trustee for the
payment of the principal of or any premium or interest on any Debt Security that
remain unclaimed at the end of two years after such principal, premium or
interest has become due and payable will be repaid to the Company, and the
holder of such Debt Security thereafter may look only to the Company for payment
thereof.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary identified in the applicable
Prospectus Supplement relating to such series. Global Securities may be issued
in either registered or bearer form and in either temporary or permanent form.
The specific terms of the depositary arrangement with respect to a series of
Debt Securities will be described in the applicable Prospectus Supplement
relating to such series.
DESCRIPTION OF COMMON STOCK
The Company has authority to issue 100,000,000 shares of Common Stock, $1.00
par value per share. As of August 19, 1997, the Company had outstanding
22,994,964 shares of Common Stock.
GENERAL
The following description of the Common Stock sets forth certain general
terms and provisions of the Common Stock to which any Prospectus Supplement may
relate, including a Prospectus Supplement providing that the Common Stock will
be issuable upon conversion of Debt Securities or Preferred Stock. The
statements below describing the Common Stock are in all respects subject to and
qualified in their entirety by reference to the applicable provisions of the
Company's charter (the "Charter") and Bylaws (the "Bylaws").
TERMS
Subject to the preferential rights of any other shares or series of stock
and to the provisions of the Charter regarding the restrictions on transfer of
stock, holders of Common Stock are entitled to receive dividends when, as and if
authorized and declared by the Company's Board of Directors out of assets
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legally available therefor. Payment and authorization of dividends on the Common
Stock and purchases of shares thereof by the Company may be subject to certain
restrictions if the Company fails to pay dividends on the Preferred Stock. See
"Description of Preferred Stock." Upon any liquidation, dissolution or winding
up of the Company, holders of Common Stock are entitled to share equally and
ratably in any assets available for distribution to them, after payment or
adequate provision for payment of the debts and other liabilities of the Company
and the preferential amounts owing with respect to any outstanding Preferred
Stock. Subject to the provisions of the Charter regarding the restrictions on
transfer of stock, each outstanding share of Common Stock entitles the holder to
one vote on all matters submitted to a vote of stockholders, including the
election of directors and, except as provided with respect to any other class or
series of stock, the holders of such shares will possess the exclusive voting
power. The Company's Board of Directors is divided into three classes of
directors. The initial terms of the Class I, Class II and Class III directors
will expire in 1998, 1999 and 2000, respectively. Beginning in 1998, directors
of each class will be chosen for three-year terms upon the expiration of their
current terms and each year one class of directors will be elected by the
stockholders. The staggered terms of directors may reduce the possibility of a
tender offer or an attempt to change control of the Company even though a tender
offer or change in control might involve a premium price for the Common Stock or
otherwise be in the best interest of the stockholders. Holders of Common Stock
do not have cumulative voting rights in the election of directors, which means
that holders of more than 50% of all the shares of the Company's Common Stock
voting for the election of directors can elect all the directors of the class
standing for election at the time if they choose to do so and the holders of the
remaining shares cannot elect any directors of such class. Holders of shares of
Common Stock do not have preemptive rights, which means they have no right under
the Charter, Bylaws or Maryland law to acquire any additional shares of Common
Stock that may be issued by the Company at a subsequent date. Holders of shares
of Common Stock have no preference, conversion, exchange, sinking fund,
redemption or appraisal rights. All shares of Common Stock now outstanding are,
and additional shares of Common Stock offered will be when issued, fully paid
and nonassessable.
Under the Maryland General Corporation Law (the "MGCL"), a Maryland
corporation generally cannot dissolve, amend its charter, merge, sell all or
substantially all of its assets, engage in a share exchange or engage in similar
transactions outside the ordinary course of business unless approved by the
affirmative vote of stockholders holding at least two thirds of the shares
entitled to vote on the matter unless a lesser percentage (but not less than a
majority of all of the votes entitled to be cast on the matter) is set forth in
the corporation's charter. The Charter provides that any such action shall be
effective if approved by the affirmative vote of holders of shares entitled to
cast a majority of all the votes entitled to be cast on the matter.
The Charter authorizes the Board of Directors to reclassify any unissued
shares of Common Stock into other classes or series of stock and to establish
the number of shares in each class or series and to set the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
transferability, dividends or other distributions, qualifications or terms or
conditions of redemption for each such class or series.
MARYLAND BUSINESS COMBINATION LAW
Under the MGCL, certain "business combinations" (including certain issuances
of equity securities) between a Maryland corporation and any person who
beneficially owns ten percent or more of the voting power of the corporation's
shares (an "Interested Stockholder") or an affiliate thereof are prohibited for
five years after the most recent date on which the Interested Stockholder
becomes an Interested Stockholder. Thereafter, any such business combination
must be approved by two super-majority stockholder votes unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in cash
or in the same form as previously paid by the Interested Stockholder for its
shares. The business combinations provisions of the MGCL do not apply, however,
to business combinations that are approved or exempted by the Board of Directors
prior to the time that the Interested Stockholder becomes an Interested
Stockholder.
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These provisions of the MGCL may delay, defer or prevent a transaction or a
change in control of the Company that might involve a premium price for the
Common Stock or otherwise be in the best interests of the stockholders.
MARYLAND CONTROL SHARE ACQUISITIONS LAW
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror or by officers or directors who
are employees of the corporation. "Control Shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
the acquiror or in respect of which the acquiror is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors within
one of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a majority
or more of all voting power. Control shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained
stockholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
As permitted by the MGCL, the Bylaws contain a provision exempting the
Company from the control share acquisition statute any and all acquisitions by
any person of the Company's shares of stock. There can be no assurance that such
provision will not be amended or eliminated by the Board of Directors at any
time in the future.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), not more than 50% in value of its outstanding
capital stock may be owned, actually or constructively, by five or fewer
individuals (defined in the Code to include certain entities) during the last
half of a taxable year. To assist the Company in meeting this requirement and
certain other requirements relating to its tax status as a REIT, the Company may
take certain actions to limit the actual, beneficial or constructive ownership
by a single person or entity of the Company's outstanding equity securities. See
"Restrictions on Ownership and Transfers of Capital Stock."
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TRANSFER AGENT
The registrar and transfer agent for the Common Stock is The Bank of New
York.
DESCRIPTION OF PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of Preferred Stock,
$1.00 par value per share, of which no shares were outstanding as of August 19,
1997.
GENERAL
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Charter (including any applicable Articles
Supplementary) and the Bylaws.
The Charter authorizes the Board of Directors to classify any unissued
shares of Preferred Stock and to reclassify any previously classified but
unissued shares of any class or series, as authorized by the Board of Directors.
Prior to issuance of shares of each series, the Board is required by the MGCL
and the Charter to set, subject to the provisions of the Charter regarding the
restrictions on transfer of stock, the preferences, conversion or other rights,
voting powers, restrictions, limitations as to transferability, dividends or
other distributions, qualifications and terms or conditions of redemption for
each such series. Thus, the Board could authorize the issuance of shares of
Preferred Stock with terms and conditions which could have the effect of
delaying, deferring or preventing a transaction or a change in control of the
Company that might involve a premium price for holders of Common Stock or
otherwise be in their best interest. As of the date hereof, no shares of
Preferred Stock are outstanding and the Company has no present plans to issue
any Preferred Stock. The Preferred Stock will, when issued, be fully paid and
nonassessable and will have no preemptive rights.
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms of and other information concerning the
Preferred Stock, including:
(1) the title of such Preferred Stock;
(2) the number of shares of such Preferred Stock offered, the
liquidation preference per share and the offering price of such Preferred
Stock;
(3) the dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Stock;
(4) whether such Preferred Stock is cumulative or not and, if
cumulative, the date from which dividends on such Preferred Stock shall
accumulate;
(5) the procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) the provision for a sinking fund, if any, for such Preferred Stock;
(7) any voting rights of such Preferred Stock;
(8) the provision for redemption, if applicable, of such Preferred
Stock;
(9) any listing of such Preferred Stock on any securities exchange;
(10) the terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into Common Stock, including the conversion price
(or manner of calculation thereof);
(11) a discussion of federal income tax considerations applicable to
such Preferred Stock;
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(12) any limitations on actual, beneficial or constructive ownership and
restrictions on transfer, in each case as may be appropriate to preserve the
Company's REIT status;
(13) the relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company;
(14) whether liquidation preferences on Preferred Stock shall be counted
as liabilities of the Company in determining whether distributions to junior
stockholders can be made under the MGCL;
(15) any limitations on issuance of any series or class of Preferred
Stock ranking senior to or on a parity with such series or class of
Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company; and
(16) any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock.
RANK
Unless otherwise specified in the applicable Prospectus Supplement, the
Preferred Stock will, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company, rank (a)
senior to all classes or series of Common Stock and to all equity securities
ranking junior to such Preferred Stock with respect to dividend rights or rights
upon liquidation, dissolution or winding up of the Company; (b) on a parity with
all equity securities issued by the Company the terms of which specifically
provide that such equity securities rank on a parity with the Preferred Stock
with respect to dividend rights or rights upon liquidation, dissolution or
winding up of the affairs of the Company; and (c) junior to all equity
securities issued by the Company the terms of which specifically provide that
such equity securities rank senior to the Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
affairs of the Company. For these purposes, the term "equity securities" does
not include convertible debt securities.
DIVIDENDS
Holders of shares of the Preferred Stock of each series or class shall be
entitled to receive, when, as and if authorized and declared by the Company's
Board of Directors, out of the Company's assets legally available for payment,
cash dividends at such rates and on such dates as will be set forth in the
applicable Prospectus Supplement. Each such dividend shall be payable to holders
of record as they appear on the Company's stock transfer books on such record
dates as shall be fixed by the Company's Board of Directors.
Dividends on any series or class of Preferred Stock may be cumulative or
noncumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Company's Board of Directors fails to
authorize a dividend payable on a dividend payment date on any series or class
of Preferred Stock for which dividends are noncumulative, then the holders of
such series or class of Preferred Stock will have no right to receive a dividend
in respect of the dividend period ending on such dividend payment date, and the
Company will have no obligation to pay the dividend accrued for such period,
whether or not dividends on such series or class are declared or paid for any
future period.
If any shares of Preferred Stock of any series or class are outstanding, no
full dividends shall be authorized or paid or set apart for payment on the
Preferred Stock of any other series or class ranking, as to dividends, on a
parity with or junior to the Preferred Stock of such series or class for any
period unless (a) if such series or class of Preferred Stock has a cumulative
dividend, then full cumulative dividends have been or contemporaneously are
authorized and paid or authorized and a sum sufficient for the payment thereof
is set apart for such payment on the Preferred Stock of such series or class for
all past dividend periods and the then current dividend period or (b) if such
series or class of Preferred Stock does not have
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a cumulative dividend, then full dividends for the then current dividend period
have been or contemporaneously are authorized and paid or authorized and a sum
sufficient for the payment thereof is set apart for such payment on the
Preferred Stock of such series or class. When dividends are not paid in full (or
a sum sufficient for such full payment is not so set apart) upon the shares of
Preferred Stock of any series or class and the shares of any other series or
class of Preferred Stock ranking on a parity as to dividends with the Preferred
Stock of such series or class, then all dividends authorized on shares of
Preferred Stock of such series or class and any other series or class of
Preferred Stock ranking on a parity as to dividends with such Preferred Stock
shall be authorized pro rata so that the amount of dividends authorized per
share on the Preferred Stock of such series or class and such other series or
class of Preferred Stock shall in all cases bear to each other the same ratio
that accrued dividends per share on the shares of Preferred Stock of such series
or class (which shall not include any accumulation in respect of unpaid
dividends for prior dividend periods if such Preferred Stock does not have a
cumulative dividend) and such other series or class of Preferred Stock bear to
each other. No interest, or sum of money in lieu of interest, shall be payable
in respect of any dividend payment or payments on Preferred Stock of such series
or class that may be in arrears.
Except as provided in the immediately preceding paragraph, unless (a) if
such series or class of Preferred Stock has a cumulative dividend, full
cumulative dividends on the Preferred Stock of such series or class have been or
contemporaneously are authorized and paid or authorized and a sum sufficient for
the payment thereof is set apart for payment for all past dividend periods and
the then current dividend period and (b) if such series or class of Preferred
Stock does not have a cumulative dividend, full dividends on the Preferred Stock
of such series or class have been or contemporaneously are authorized and paid
or authorized and a sum sufficient for the payment thereof is set apart for
payment for the then current dividend period, then no dividends (other than in
the Common Stock or other stock of the Company ranking junior to the Preferred
Stock of such series or class as to dividends and upon liquidation) shall be
authorized or paid or set aside for payment nor shall any other distribution be
authorized or made on the Common Stock or any other stock of the Company ranking
junior to or on a parity with the Preferred Stock of such series or class as to
dividends or upon liquidation, nor shall the Common Stock or any other stock of
the Company ranking junior to or on a parity with the Preferred Stock of such
series or class as to dividends or upon liquidation be redeemed, purchased or
otherwise acquired for any consideration (or any amounts be paid to or made
available for a sinking fund for the redemption of any shares of any such stock)
by the Company (except by conversion into or exchange for other stock of the
Company ranking junior to the Preferred Stock of such series or class as to
dividends and upon liquidation).
Any dividend payment made on shares of a series or class of Preferred Stock
shall first be credited against the earliest accrued but unpaid dividend due
with respect to shares of such series or class that remains payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the shares of
Preferred Stock will be subject to mandatory redemption or redemption at the
Company's option, as a whole or in part, in each case on the terms, at the times
and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series or class of Preferred Stock
that is subject to mandatory redemption will specify the number of shares of
such Preferred Stock that shall be redeemed by the Company in each year
commencing after a date to be specified, at a redemption price per share to be
specified, together with an amount equal to all accumulated and unpaid dividends
thereon (which shall not, if such Preferred Stock does not have a cumulative
dividend, include any accumulation in respect of unpaid dividends for prior
dividend periods) to the date of redemption. The redemption price may be payable
in cash or other property, as specified in the applicable Prospectus Supplement.
If the redemption price for Preferred Stock of any series or class is payable
only from the net proceeds of the issuance of stock of the Company, the terms of
such Preferred Stock may provide that, if no such stock shall have been
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issued or to the extent the net proceeds from any issuance are insufficient to
pay in full the aggregate redemption price then due, such Preferred Stock shall
automatically and mandatorily be converted into shares of the applicable stock
of the Company pursuant to conversion provisions specified in the applicable
Prospectus Supplement.
Notwithstanding the foregoing, unless (a) if such series or class of
Preferred Stock has a cumulative dividend, full cumulative dividends on all
shares of such series or class of Preferred Stock have been or contemporaneously
are authorized and paid or authorized and a sum sufficient for the payment
thereof is set apart for payment for all past dividend periods and the then
current dividend period and (b) if such series or class of Preferred Stock does
not have a cumulative dividend, full dividends on the Preferred Stock of such
series or class have been or contemporaneously are authorized and paid or
authorized and a sum sufficient for the payment thereof is set apart for payment
for the then current dividend period, then no shares of such series or class of
Preferred Stock shall be redeemed unless all outstanding shares of Preferred
Stock of such series or class are simultaneously redeemed; PROVIDED, HOWEVER,
that the foregoing shall not prevent the purchase or acquisition of shares of
Preferred Stock of such series or class to preserve the Company's REIT status or
pursuant to a purchase or exchange offer made on the same terms to holders of
all outstanding shares of Preferred Stock of such series or class. In addition,
unless (i) if such series or class of Preferred Stock has a cumulative dividend,
full cumulative dividends on all outstanding shares of such series or class of
Preferred Stock have been or contemporaneously are authorized and paid or
authorized and a sum sufficient for the payment thereof is set apart for payment
for all past dividend periods and the then current dividend period and (ii) if
such series or class of Preferred Stock does not have a cumulative dividend,
full dividends on the Preferred Stock of such series or class have been or
contemporaneously are authorized and paid or authorized and a sum sufficient for
the payment thereof is set apart for payment for the then current dividend
period, the Company shall not purchase or otherwise acquire directly or
indirectly any shares of Preferred Stock of such series or class (except by
conversion into or exchange for stock of the Company ranking junior to the
Preferred Stock of such series or class as to dividends and upon liquidation);
PROVIDED, HOWEVER, that the foregoing shall not prevent the purchase or
acquisition of shares of Preferred Stock of such series or class to preserve the
Company's REIT status or pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding shares of Preferred Stock of such
series or class.
If fewer than all the outstanding shares of Preferred Stock of any series or
class are to be redeemed, the number of shares to be redeemed will be determined
by the Company and such shares may be redeemed pro rata from the holders of
record of such shares in proportion to the number of such shares held by such
holders (with adjustments to avoid redemption of fractional shares) or any other
equitable method determined by the Company.
Notice of redemption will be mailed at least 30, but not more than 60, days
before the redemption date to each holder of record of a share of Preferred
Stock of any series or class to be redeemed at the address shown on the
Company's stock transfer books. Each notice shall state: (a) the redemption
date; (b) the number of shares and series or class of the Preferred Stock to be
redeemed; (c) the redemption price; (d) the place or places where certificates
for such Preferred Stock are to be surrendered for payment of the redemption
price; (e) that dividends on the shares to be redeemed will cease to accumulate
on such redemption date; and (f) the date on which the holder's conversion
rights, if any, as to such shares shall terminate. If fewer than all the shares
of Preferred Stock of any series or class are to be redeemed, the notice mailed
to each such holder thereof shall also specify the number of shares of Preferred
Stock to be redeemed from each such holder and, upon redemption, a new
certificate shall be issued representing the unredeemed shares without cost to
the holder thereof. If notice of redemption of any shares of Preferred Stock has
been given and if the funds necessary for such redemption have been set aside by
the Company in trust for the benefit of the holders of any shares of Preferred
Stock so called for redemption, then from and after the redemption date
dividends will cease to accrue on such shares of Preferred Stock, such shares of
Preferred Stock shall no longer be deemed outstanding and all rights of the
holders of such shares will
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terminate, except the right to receive the redemption price. In order to
facilitate the redemption of shares of Preferred Stock of any series or class,
the Board of Directors may fix a record date for the determination of shares of
such series or class of Preferred Stock to be redeemed.
Subject to applicable law and the limitation on purchases when dividends on
a series or class of Preferred Stock are in arrears, the Company may, at any
time and from time to time, purchase any shares of such series or class of
Preferred Stock in the open market, by tender or by private agreement.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of the Common Stock or any other series or class of stock of
the Company ranking junior to any series or class of the Preferred Stock in the
distribution of assets upon any liquidation, dissolution or winding up of the
affairs of the Company, the holders of such series or class of Preferred Stock
shall be entitled to receive out of assets of the Company legally available for
distribution to shareholders liquidating distributions in the amount of the
liquidation preference per share (set forth in the applicable Prospectus
Supplement), plus an amount equal to all dividends accrued and unpaid thereon
(which shall not include any accumulation in respect of unpaid dividends for
prior dividend periods if such Preferred Stock does not have a cumulative
dividend). After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Preferred Stock will have no right or
claim to any of the remaining assets of the Company. If, upon any such voluntary
or involuntary liquidation, dissolution or winding up, the legally available
assets of the Company are insufficient to pay the amount of the liquidating
distributions on all outstanding shares of any series or class of Preferred
Stock and the corresponding amounts payable on all shares of other classes or
series of stock of the Company ranking on a parity with such series or class of
Preferred Stock in the distribution of assets upon liquidation, dissolution or
winding up, then the holders of such series or class of Preferred Stock and all
other such classes or series of capital stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
any series or class of Preferred Stock, the remaining assets of the Company
shall be distributed among the holders of any other classes or series of stock
ranking junior to such series or class of Preferred Stock upon liquidation,
dissolution or winding up, according to their respective rights and preferences
and in each case according to their respective number of shares. For such
purposes, the consolidation or merger of the Company with or into any other
entity, or the sale, lease, transfer or conveyance of all or substantially all
of the Company's property or business, shall not be deemed to constitute a
liquidation, dissolution or winding up of the affairs of the Company.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except as
set forth below or as indicated in the applicable Prospectus Supplement.
Unless provided otherwise for any series or class of Preferred Stock, so
long as any shares of Preferred Stock of a series or class remain outstanding,
the Company shall not, without the affirmative vote or consent of the holders of
at least a majority of the shares of such series or class of Preferred Stock
outstanding at the time, given in person or by proxy, either in writing or at a
meeting (such series or class voting separately as a class), (a) authorize or
create, or increase the authorized or issued amount of, any class or series of
stock ranking prior to such series or class of Preferred Stock with respect to
payment of dividends or the distribution of assets upon liquidation, dissolution
or winding up or reclassify any authorized stock of the Company into any such
shares, or create, authorize or issue any obligation or security convertible
into or evidencing the right to purchase any such shares; or (b) amend, alter or
repeal
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the provisions of the Charter or the Articles Supplementary for such series or
class of Preferred Stock, whether by merger, consolidation or otherwise, so as
to materially and adversely affect any right, preference, privilege or voting
power of such series or class of Preferred Stock or the holders thereof;
PROVIDED, HOWEVER, that any increase in the amount of the authorized Preferred
Stock or the creation or issuance of any other series or class of Preferred
Stock, or any increase in the amount of authorized shares of such series or
class or any other series or class of Preferred Stock, in each case ranking on a
parity with or junior to the Preferred Stock of such series or class with
respect to payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up, shall not be deemed to materially and adversely
affect such rights, preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series or class of Preferred Stock
shall have been redeemed or called for redemption upon proper notice and
sufficient funds shall have been deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series or class
of Preferred Stock are convertible into shares of Common Stock will be set forth
in the applicable Prospectus Supplement relating thereto. Such terms will
include the number of shares of Common Stock into which the Preferred Stock is
convertible, the conversion price (or manner of calculation thereof), the
conversion period, provisions as to whether conversion will be at the option of
the holders of the Preferred Stock or the Company, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of such Preferred Stock.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding capital stock may be owned, actually or constructively,
by five or fewer individuals (defined in the Code to include certain entities)
during the last half of a taxable year. To assist the Company in meeting this
requirement and certain other requirements relating to its tax status as a REIT,
the Company may take certain actions to limit the actual, beneficial or
constructive ownership by a single person or entity of the Company's outstanding
equity securities. See "Restrictions on Ownership and Transfers of Capital
Stock."
TRANSFER AGENT
The transfer agent and registrar for any series or class of Preferred Stock
will be set forth in the applicable Prospectus Supplement.
RESTRICTIONS ON OWNERSHIP AND TRANSFERS OF CAPITAL STOCK
The following summary of certain restrictions on the ownership and transfer
of shares of stock of the Company does not purport to be complete and is subject
to, and qualified in its entirety by reference to, the applicable provisions of
the Charter and Bylaws.
In order for the Company to qualify as a REIT under the Code, no more than
50% in value of its outstanding shares of stock may be owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year for which an election to be treated as a REIT has been made). In addition,
if the Company, or an owner of 10% or more of the Company, actually or
constructively owns 10% or more of a tenant of the Company (or a tenant of any
partnership in which the Company is a partner), the rent received by the Company
(either directly or through any such partnership) from such tenant will not be
qualifying income for purposes of the REIT gross income tests of the Code. A
REIT's stock must also be beneficially owned by 100 or more persons during at
least 335 days of a taxable year of twelve months or during a
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proportionate part of a shorter taxable year (other than the first year for
which an election to be treated as a REIT has been made).
Because the Company expects to continue to qualify as a REIT, the Charter
contains restrictions on the ownership and transfer of Common Stock which are
intended to assist the Company in complying with these requirements. The Charter
provides that, subject to certain specified exceptions, no person or entity may
own, or be deemed to own by virtue of the applicable constructive ownership
provisions of the Code, more than 9.8% (by number or value, whichever is more
restrictive) of the outstanding shares of Common Stock (the "Ownership Limit").
The constructive ownership rules of the Code are complex, and may cause shares
of Common Stock owned actually or constructively by a group of related
individuals and/or entities to be constructively owned by one individual or
entity. As a result, the acquisition of less than 9.8% of the shares of Common
Stock (or the acquisition of an interest in an entity that owns, actually or
constructively, Common Stock) by an individual or entity, could, nevertheless
cause that individual or entity, or another individual or entity, to own
constructively in excess of 9.8% of the outstanding Common Stock and thus
violate the Ownership Limit, or such other limit as permitted by the Board of
Directors. The Board of Directors may, but in no event is required to, waive the
Ownership Limit with respect to a particular stockholder if it determines that
such ownership will not jeopardize the Company's status as a REIT. As a
condition of such waiver, the Board of Directors may require a ruling from the
Internal Revenue Service or an opinion of counsel satisfactory to it and/or
undertakings or representations from the applicant with respect to preserving
the REIT status of the Company.
The Charter further prohibits (i) any person from actually or constructively
owning shares of Common Stock of the Company that would result in the Company
being "closely held" under Section 856(h) of the Code or otherwise cause the
Company to fail to qualify as a REIT, and (ii) any person from transferring
shares of Common Stock of the Company if such transfer would result in shares of
stock of the Company being beneficially owned by fewer than 100 persons
(determined without reference to any rules of attribution).
Any person who acquires or attempts to acquire actual or constructive
ownership of shares of stock of the Company that will violate any of the
foregoing restrictions on transferability and ownership is required to give
notice immediately to the Company and provide the Company with such other
information as the Company may request in order to determine the effect of such
transfer on the Company's status as a REIT. The foregoing restrictions on
transferability and ownership will not apply if the Board of Directors
determines that it is no longer in the best interest of the Company to attempt
to qualify, or to continue to qualify, as a REIT and such determination is
approved by a two thirds vote of the Company's stockholders as required by the
Charter. Except as otherwise described above, any change in the Ownership Limit
would require an amendment to the Charter.
Pursuant to the Charter, if any purported transfer of Common Stock or any
other event would otherwise result in any person violating the Ownership Limit
or such other limit as permitted by the Board of Directors, or result in the
Company being "closely held" under Section 856(h) of the Code or otherwise cause
the Company to fail to qualify as a REIT, then that number of shares in excess
of the Ownership Limit or such other limit shall be transferred to a trust for
the benefit of a charitable beneficiary as described below and the purported
transferee (the "Prohibited Transferee"), shall acquire no rights (or, in the
case of any event other than a purported transfer, the person or entity holding
record title to any such excess shares (the "Prohibited Owner") shall cease to
have any rights) in such excess shares. Any such excess shares described above
will be transferred automatically, by operation of law, to a trust, the
beneficiary of which will be a qualified charitable organization selected by the
Company (the "Beneficiary"). Such automatic transfer shall be deemed to be
effective as of the close of business on the business day prior to the date of
such violative transfer. Within 20 days of receiving notice from the Company of
the transfer of shares to the trust, the trustee of the trust (who shall be
designated by the Company and be unaffiliated with the Company and any
Prohibited Transferee or Prohibited Owner) will be required to sell such excess
shares to a person or entity who could own such shares without violating the
Ownership Limit,
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or such other limit as permitted by the Board of Directors, and distribute to
the Prohibited Transferee or Prohibited Owner, as applicable, an amount equal to
the lesser of the price paid by the Prohibited Transferee or Prohibited Owner
for such excess shares or the net sales proceeds received by the trust for such
excess shares. In the case of any excess shares resulting from any event other
than a transfer, or from a transfer for no consideration (such as a gift), the
trustee will be required to sell such excess shares to a qualified person or
entity and distribute to the Prohibited Owner an amount equal to the lesser of
the Market Price (as defined in the Charter) of such excess shares as of the
date of such event or the net sales proceeds received by the trust for such
excess shares. In either case, any proceeds in excess of the amount
distributable to the Prohibited Transferee or Prohibited Owner, as applicable,
will be distributed to the Beneficiary. Prior to a sale of any such excess
shares by the trust, the trustee will be entitled to receive, in trust for the
Beneficiary, all dividends and other distributions paid by the Company with
respect to such excess shares, and also will be entitled to exercise all voting
rights with respect to such excess shares. Subject to Maryland law, effective as
of the date that such shares have been transferred to the trust, the trustee
shall have the authority (at the trustee's sole discretion) (i) to rescind as
void any vote cast by a Prohibited Transferee or Prohibited Owner, as
applicable, prior to the discovery by the Company that such shares have been
transferred to the trust and (ii) to recast such vote in accordance with the
desires of the trustee acting for the benefit of the Beneficiary. However, if
the Company has already taken irreversible corporate action, then the trustee
shall not have the authority to rescind and recast such vote. Any dividend or
other distribution paid to the Prohibited Transferee or Prohibited Owner (prior
to the discovery by the Company that such shares had been automatically
transferred to a trust as described above) will be required to be repaid to the
trustee upon demand for distribution to the Beneficiary. In the event that the
transfer to the trust as described above is not automatically effective (for any
reason) to prevent violation of the Ownership Limit or such other limit as
permitted by the Board of Directors, then the Charter provides that the transfer
of the excess shares will be void.
In addition, shares of stock of the Company held in the trust shall be
deemed to have been offered for sale to the Company, or its designee, at a price
per share equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the trust (or, in the case of a devise or gift or
other transaction which does not involve a purchase of stock, the Market Price
as of the day of the event which resulted in the transfer of such excess shares
to the trust) and (ii) the Market Price on the date the Company, or its
designee, accepts such offer. The Company shall have the right to accept such
offer until the trustee has sold the shares of stock held in the trust. Upon
such a sale to the Company, the interest of the Beneficiary in the shares sold
shall terminate and the trustee shall distribute the net proceeds of the sale to
the Prohibited Transferee or Prohibited Owner.
If any purported transfer of shares of Common Stock would cause the Company
to be beneficially owned by fewer than 100 persons, such transfer will be null
and void in its entirety and the intended transferee will acquire no rights to
the stock.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above. The foregoing ownership
limitations could delay, defer or prevent a transaction or a change in control
of the Company that might involve a premium price for the Common Stock or
otherwise be in the best interest of stockholders.
Under the Charter, each stockholder shall upon demand be required to
disclose to the Company in writing such information as the Company may request
in order to determine the Company's status as a REIT.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations to the
Company is based on current law, is for general information only, and is not tax
advice. The tax treatment of a holder of any of the Securities will vary
depending upon the terms of the specific Securities acquired by such holder, as
well as his particular situation, and this discussion does not attempt to
address any aspects of federal income taxation relating to holders of
Securities. Certain federal income tax considerations relevant to holders of the
Securities will be provided in the applicable Prospectus Supplement relating
thereto.
EACH INVESTOR IS URGED TO CONSULT THE APPLICABLE PROSPECTUS SUPPLEMENT, AS
WELL AS HIS OWN TAX ADVISOR, REGARDING THE TAX CONSEQUENCES TO HIM OF THE
ACQUISITION, OWNERSHIP AND SALE OF THE SECURITIES, INCLUDING THE FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION, OWNERSHIP AND
SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY AS A REIT
GENERAL. The Company has elected to be taxed as a real estate investment
trust under Sections 856 through 860 of the Code, commencing with its taxable
year ended December 31, 1994. The Company believes that, commencing with its
taxable year ended December 31, 1994, it has been organized and has operated in
such a manner as to qualify for taxation as a REIT under the Code, and the
Company intends to continue to operate in such a manner, but no assurance can be
given that it has operated or will operate in a manner so as to qualify or
remain qualified.
These sections of the Code are highly technical and complex. The following
sets forth the material aspects of the sections that govern the federal income
tax treatment of a REIT. This summary is qualified in its entirety by the
applicable Code provisions, rules and regulations promulgated thereunder, and
administrative and judicial interpretations thereof. Latham & Watkins has acted
as tax counsel to the Company in connection with this Prospectus and the
Company's election to be taxed as a REIT.
Latham & Watkins has rendered an opinion to the Company as of September 12,
1997 to the effect that commencing with the Company's taxable year ended
December 31, 1994, the Company has been organized in conformity with the
requirements for qualification as a REIT, and its proposed method of operation
has enabled and will continue to enable it to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized that
this opinion is based on various assumptions and is conditioned upon certain
representations made by the Company as to factual matters, and that Latham &
Watkins undertakes no obligation to update this opinion subsequent to such date.
Moreover, such qualification and taxation as a REIT depends upon the Company's
ability to meet (through actual annual operating results, distribution levels
and diversity of stock ownership) the various qualification tests imposed under
the Code discussed below, the results of which have not been and will not be
reviewed by Latham & Watkins. Accordingly, no assurance can be given that the
actual results of the Company's operation in any particular taxable year will
satisfy such requirements. See "--Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
investment in a regular corporation. However, the Company will be subject to
federal income tax as follows: First, the Company will be taxed at regular
corporate rates on any undistributed real estate investment trust taxable
income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its items of tax preference. Third, if Company has (i) net income from the sale
or other disposition of "foreclosure property" which is held primarily for sale
to customers in the ordinary course of business or (ii) other non-qualifying
income from foreclosure property, it will be subject to tax at the highest
corporate rate on such income. Fourth, if
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the Company has net income from prohibited transactions (which are, in general,
certain sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business other than foreclosure property),
such income will be subject to a 100% tax. Fifth, if the Company should fail to
satisfy the 75% gross income test or the 95% gross income test (as discussed
below), but has nonetheless maintained its qualification as a real estate
investment trust because certain other requirements have been met, it will be
subject to a 100% tax on an amount equal to (a) the gross income attributable to
the greater of the amount by which the Company fails the 75% or 95% test,
multiplied by (b) a fraction intended to reflect the Company's profitability.
Sixth, if the Company should fail to distribute during each calendar year at
least the sum of (i) 85% of its real estate investment trust ordinary income for
such year, (ii) 95% of its real estate investment trust capital gain net income
for such year, and (iii) any undistributed taxable income from prior periods,
the Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, with respect to any
asset (a "Built-in Gain Asset") acquired by the Company from a corporation which
is or has been a C corporation (i.e., generally a corporation subject to full
corporate-level tax) in a transaction in which the basis of the Built-in Gain
Asset in the hands of the Company is determined by reference to the basis of the
asset in the hands of the C corporation, if the Company recognizes gain on the
disposition of such asset during the 10-year period (the "Recognition Period")
beginning on the date on which such asset was acquired by the Company, then, to
the extent of the Built-in Gain (i.e., the excess of (a) the fair market value
of such asset over (b) the Company's adjusted basis in such asset, determined as
of the beginning of the Recognition Period), such gain will be subject to tax at
the highest regular corporate rate pursuant to Treasury Regulations that have
not yet been promulgated. The results described above with respect to the
recognition of Built-in Gain assume that the Company has made an election
pursuant to IRS Notice 88-19.
REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or directors,
(2) the beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest, (3) which would be taxable as
a domestic corporation, but for Sections 856 through 859 of the Code, (4) which
is neither a financial institution nor an insurance company subject to certain
provisions of the Code, (5) the beneficial ownership of which is held by 100 or
more persons, (6) during the last half of each taxable year, not more than 50%
in value of the outstanding stock of which is owned, actually or constructively,
by five or fewer individuals (as defined in the Code to include certain
entities) and (7) which meets certain other tests, described below, regarding
the nature of its income and assets and the amount of its distributions. The
Code provides that conditions (1) to (4) must be met during the entire taxable
year and that condition (5) must be met during at least 335 days of a taxable
year of 12 months, or during a proportionate part of a taxable year of less than
12 months. Conditions (5) and (6) will not apply until after the first taxable
year for which an election is made to be taxed as a real estate investment
trust.
The Company believes that it has satisfied condition (5) and that it has
issued sufficient shares to allow it to satisfy condition (6). In addition, the
Company's Charter provides for restrictions regarding ownership and transfer of
the Company's capital stock, which restrictions are intended to assist the
Company in continuing to satisfy the share ownership requirements described in
(5) and (6) above. Such ownership and transfer restrictions are described in
"Restrictions on Ownership and Transfers of Capital Stock." There can be no
assurance, however, that such transfer and ownership restrictions will, in all
cases, prevent a violation of the stock ownership provisions described in (5)
and (6) above. The ownership and transfer restrictions pertaining to a
particular class or series of capital stock will be described in the applicable
Prospectus Supplement pertaining to such class or series.
The Company owns, and has owned, interests in various partnerships. In the
case of a REIT that is a partner in a partnership, Treasury Regulations provide
that the REIT will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to be entitled to the income of the partnership
attributable to such share. In addition, the character of the assets and gross
income of the partnership will retain the same character in the hands of the
real estate investment trust for purposes of
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Section 856 of the Code, including satisfying the gross income tests and the
asset tests. Thus, the Company's proportionate share of the assets, liabilities
and items of income of the partnerships in which the Company is a partner will
be treated as assets, liabilities and items of income of the Company for
purposes of applying the requirements described herein. See "--Tax Risks
Associated with the Partnerships."
The Company owns 100% of the stock of a subsidiary that is a qualified REIT
subsidiary (a "QRS") and may acquire stock of one or more new subsidiaries. A
corporation will qualify as a QRS if 100% of its stock is held by the Company at
all times during the period such QRS was in existence. A QRS will not be treated
as a separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a QRS will be treated as assets, liabilities and such
items (as the case may be) of the Company for all purposes of the Code including
the REIT qualification tests. For this reason, references under "Certain Federal
Income Tax Considerations" to the income and assets of the Company shall include
the income and assets of any QRS. A QRS will not be subject to federal income
tax and the Company's ownership of the voting stock of a QRS will not violate
the restrictions against ownership of securities of any one issuer which
constitute more than 10% of such issuer's voting securities or more than 5% of
the value of the Company's total assets, described below under "--Asset Tests."
INCOME TESTS. In order to maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, dividends, interest and gain
from the sale or disposition of stock or securities (or from any combination of
the foregoing). Third, short-term gain from the sale or other disposition of
stock or securities, gain from prohibited transactions and gain on the sale or
other disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a real estate investment trust
described above only if several conditions are met. First, the amount of rent
must not be based in whole or in part on the income or profits of any person.
However, an amount received or accrued generally will not be excluded from the
term "rents from real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. Second, the Code provides that
rents received from a tenant will not qualify as "rents from real property" in
satisfying the gross income tests if the real estate investment trust, or an
owner of 10% or more of the real estate investment trust, actually or
constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property leased in connection with a
lease of real property is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property." Finally, for rents received to qualify as
"rents from real property," the real estate investment trust generally must not
operate or manage the property or furnish or render services to the tenants of
such property, other than through an independent contractor from whom the real
estate investment trust derives no revenue; PROVIDED, HOWEVER, the Company may
directly perform certain services that are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant" of the property. The Company does not and
will not (i) charge rent for any property that is based in whole or in part on
the income or profits of any person (except by reason of being based on a
percentage of receipts or sales, as described above), (ii) rent any property to
a Related Party Tenant, (iii) derive rental income attributable to personal
property (other than personal property leased in connection with the lease of
real property, the amount of which is less than 15% of the total rent received
under the lease), or (iv) perform
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services considered to be rendered to the occupant of the property, other than
through an independent contractor from whom the Company derives no revenue.
Notwithstanding the foregoing, the Company may take certain of the actions set
forth in (i) through (iv) above to the extent such actions will not, based on
the advice of tax counsel to the Company, jeopardize the Company's tax status as
a REIT.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a real estate
investment trust for such year if it is entitled to relief under certain
provisions of the Code. These relief provisions will generally be available if
the Company's failure to meet such tests was due to reasonable cause and not due
to willful neglect, the Company attaches a schedule of the sources of its income
to its federal income tax return, and any incorrect information on the schedule
was not due to fraud with intent to evade tax. It is not possible, however, to
state whether in all circumstances the Company would be entitled to the benefit
of these relief provisions. As discussed above under "--General," even if these
relief provisions apply, a tax would be imposed with respect to the excess net
income.
ASSET TESTS. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets (including stock or debt instruments held for not more than one
year purchased with the proceeds of a stock offering or long-term (at least five
years) public debt offering of the Company), cash, cash items and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities.
ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its stockholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (ii) 95% of the net income
(after tax), if any, from foreclosure property, minus (B) the sum of certain
items of non-cash income. In addition, if the Company disposes of any asset
during its Recognition Period, the Company will be required, pursuant to IRS
regulations which have not yet been promulgated, to distribute at least 95% of
the Built-in Gain (after tax), if any, recognized on the disposition of such
asset. Such distributions must be paid in the taxable year to which they relate,
or in the following taxable year if declared before the Company timely files its
tax return for such year and if paid on or before the first regular dividend
payment after such declaration. To the extent that the Company does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its REIT taxable income, as adjusted, it will be subject to tax
thereon at regular ordinary and capital gain corporate tax rates.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in arriving at taxable income of the Company. In the event that
such timing differences occur, in order to meet the 95% distribution
requirement, the Company may find it necessary to arrange for short-term, or
possibly long-term, borrowings or to pay dividends in the form of taxable stock
dividends.
Under certain circumstances, the Company may be able to rectify a failure to
meet the above distribution requirements for a year by paying "deficiency
dividends" to stockholders in a later year, which
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may be included in the Company's deduction for dividends paid for the earlier
year. Thus, the Company may be able to avoid being taxed on amounts distributed
as deficiency dividends; however, the Company will be required to pay interest
based upon the amount of any deduction taken for deficiency dividends.
Furthermore, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its real estate investment trust ordinary
income for such year, (ii) 95% of its real estate investment trust capital gain
income for such year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. The Company intends
to make timely distributions sufficient to satisfy the annual distribution
requirements set forth above.
DISTRIBUTION OF ACQUIRED EARNINGS. In addition to the above annual
distribution requirements, a REIT is not allowed to have accumulated earnings
and profits attributable to non-REIT years. A REIT has until the close of its
first taxable year in which it has non-REIT earnings and profits to distribute
any such earnings and profits. In a corporate reorganization qualifying as a
tax-free statutory merger, the acquired corporation's earnings and profits are
carried over to the surviving corporation. Any earnings and profits treated as
having been acquired by a REIT through such a merger will be treated as
accumulated earnings and profits of the REIT attributable to non-REIT years. On
August 17, 1995, R.I.C. Advisor, Inc., a California corporation ("R.I.C.
Advisor"), merged with and into the Company (the "Merger") pursuant to an
Agreement and Plan of Merger dated as of April 28, 1995, by and among the
Company, R.I.C. Advisor and the shareholders of R.I.C. Advisor. Accordingly, as
a result of the Merger, the Company was treated as having acquired the earnings
and profits (the "Acquired Earnings") of R.I.C. Advisor. The Company was
required to distribute (or be deemed to distribute) the Acquired Earnings prior
to the close of 1995. Failure to do so would result in the loss of the Company's
REIT status, which would have a material adverse effect on the financial
position and results of operations of the Company and its ability to make
distributions to stockholders and debt service payments. See "--Failure to
Qualify."
The amount of the Acquired Earnings was based on the earnings and profits of
R.I.C. Advisor immediately prior to the Merger. The Acquired Earnings were
determined through an earnings and profits study based on the corporate tax
returns of R.I.C. Advisor for the tax years beginning with R.I.C. Advisor's date
of incorporation through the date of the Merger. The Company requested that KPMG
Peat Marwick LLP perform certain procedures relating to the amount of the
earnings and profits of R.I.C. Advisor for purposes of the earnings and profits
distribution requirement. Based on KPMG Peat Marwick LLP's conclusions (which
were based on R.I.C. Advisor's tax returns as filed with the Internal Revenue
Service (the "IRS"), certain other information provided by R.I.C. Advisor and
other assumptions and qualifications set forth in KPMG Peat Marwick LLP's
report) and other relevant factors, the Company believes that it made (or was
deemed to make) distributions to its shareholders which were sufficient to
distribute the Acquired Earnings prior to the close of 1995.
The calculation of the amount of Acquired Earnings is subject to challenge
by the IRS. The IRS may examine R.I.C. Advisor's prior tax returns and propose
adjustments to increase its taxable income. Because the earnings and profits
study used to calculate the amount of Acquired Earnings was based on these
returns, such adjustments may increase the amount of the Acquired Earnings. If
the IRS determines that the Company did not distribute all of the Acquired
Earnings prior to the end of 1995, the Company would fail to qualify as a REIT
for 1995 and perhaps for subsequent years, which would have a material adverse
effect on the financial position and results of operations of the Company and
its ability to make distributions to stockholders and debt service payments. See
"--Failure to Qualify." However, the Company may make an additional distribution
within 90 days of such a determination by the IRS to distribute the Acquired
Earnings and would be required to pay to the IRS an interest charge based on 50%
of the amount not previously distributed. If such additional distribution is
made, the Company's failure to distribute the Acquired Earnings would not
prevent it from qualifying as a REIT for years subsequent to 1995.
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TAX RISKS ASSOCIATED WITH THE PARTNERSHIPS
The Company presently owns an interest in one partnership and previously
owned an interest in other partnerships. The ownership of an interest in a
partnership may involve special tax risks, including the possible challenge by
the IRS of (i) allocations of income and expense items, which could affect the
computation of taxable income of the Company, and (ii) the status of a
partnership as a partnership (as opposed to an association taxable as a
corporation) for federal income tax purposes. If the partnership was treated as
an association taxable as a corporation for federal income tax purposes, the
partnership would be treated as a taxable entity. In addition, in such a
situation, (i) if the Company owned more than 10% of the outstanding voting
securities of such partnership, or the value of such securities exceeded 5% of
the value of the Company's assets, the Company would fail to satisfy the asset
tests described above and would therefore fail to qualify as a REIT, (ii)
distributions from the partnership to the Company would be treated as dividends,
which are not taken into account in satisfying the 75% gross income test
described above and could, therefore, make it more difficult for the Company to
satisfy such test, (iii) the interest in the partnership held by the Company
would not qualify as a "real estate asset," which could make it more difficult
for the Company to meet the 75% asset test described above, and (iv) the Company
would not be able to deduct its share of any losses generated by the
partnerships in computing its taxable income. See "--Failure to Qualify" for a
discussion of the effect of the Company's failure to meet such tests for a
taxable year. The Company believes that each of the partnerships in which the
Company owns or has owned an interest have been and will be treated for tax
purposes as a partnership (rather than an association taxable as a corporation).
The Company's position will not be binding on the IRS and no assurance can be
given that the IRS will not successfully challenge the status of any partnership
as a partnership for federal income tax purposes.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Such a failure to qualify for taxation as a REIT would
reduce the cash available for distribution by the Company to stockholders and to
pay debt service and could have an adverse effect on the market value and
marketability of the Securities. Distributions to stockholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company will
also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible to
state whether in all circumstances the Company would be entitled to such
statutory relief.
TAXPAYER RELIEF ACT OF 1997
On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act
of 1997 (H.R. 2014), which will have the effect of modifying certain
REIT-related Code provisions for tax years beginning on or after January 1,
1998. Some of the potentially significant REIT-related changes contained in this
legislation include: (i) the rule disqualifying a REIT for any year in which it
fails to comply with certain regulations requiring the REIT to monitor its stock
ownership is replaced with an intermediate financial penalty; (ii) the rule
disqualifying a REIT in any year that it is "closely held" does not apply if
during such year the REIT complied with certain regulations which require the
REIT to monitor its stock ownership, and the REIT did not know or have reason to
know that it was closely held; (iii) a REIT is permitted to render a DE MINIMIS
amount of impermissible services to tenants in connection with the management of
property and still treat amounts received with respect to such property (other
than certain amounts relating to such services) as qualified rent; (iv) the
rules regarding attribution to partnerships for purposes of defining
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qualified rent and independent contractors are modified so that attribution
occurs only when a partner owns a 25% or greater interest in the partnership;
(v) the 30% gross income test is repealed; (vi) any corporation wholly-owned by
a REIT is permitted to be treated as a qualified REIT subsidiary regardless of
whether such subsidiary has always been owned by the REIT; (vii) the ordering
rule for purposes of the requirement that newly-electing REITs distribute
earnings and profits accumulated in non-REIT years is modified; (viii) the class
of excess noncash items for purposes of the REIT distribution requirements is
expanded; (ix) the rules regarding the treatment of hedges are modified; and (x)
certain other Code provisions relating to REITs are amended. Some or all of the
provisions could affect both the Company's operations and its ability to
maintain its REIT status for its taxable years beginning in 1998.
STATE AND LOCAL TAXES
The Company may be subject to state or local taxes in other jurisdictions
such as those in which the Company may be deemed to be engaged in activities or
own property or other interests. Such tax treatment of the Company in states
having taxing jurisdiction over it may differ from the federal income tax
treatment described in this summary.
PLAN OF DISTRIBUTION
The Company may sell the Securities to one or more underwriters for public
offering and sale by them or may sell the Securities to investors directly or
through agents. Any such underwriter or agent involved in the offer and sale of
the Securities will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Securities at a fixed price or prices,
which may be changed, at prices relating to the prevailing market prices at the
time of sale or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as the Company's agents to offer and sell the
Securities upon the terms and conditions as are set forth in the applicable
Prospectus Supplement. In connection with the sale of Securities, underwriters
may be deemed to have received compensation from the Company in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of Securities for whom they may act as agent. Underwriters may sell
Securities to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent. Any underwriting
compensation paid by the Company to underwriters or agents in connection with
the offering of Securities, and any discounts, concessions or commissions
allowed by underwriters to participating dealers, will be set forth in the
applicable Prospectus Supplement. Underwriters, dealers and agents participating
in the distribution of the Securities may be deemed to be underwriters, and any
discounts and commissions received by them and any profit realized by them on
resale of the Securities may be deemed to be underwriting discounts and
commissions, under the Securities Act. Any such underwriter or agent will be
identified, and such compensation received from the Company will be described,
in the applicable Prospectus Supplement.
Underwriters, dealers and agents may be entitled, under agreements entered
into with the Company, to indemnification against and contribution toward
certain civil liabilities, including liabilities under the Securities Act.
Certain of the underwriters, dealers and agents and their affiliates may be
customers of, engage in transactions with and perform services for the Company
and its subsidiaries in the ordinary course of business.
Unless otherwise specified in the related Prospectus Supplement, each series
of Securities will be a new issue with no established trading market, other than
the Common Stock. The Common Stock is currently listed on the NYSE. Unless
otherwise specified in the related Prospectus Supplement, any shares of Common
Stock sold pursuant to a Prospectus Supplement will be listed on the NYSE,
subject to official notice of issuance. The Company may elect to list any series
of Debt Securities or Preferred Stock on an
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exchange or Nasdaq, but is not obligated to do so. It is possible that one or
more underwriters may make a market in a series of Securities, but will not be
obligated to do so and may discontinue any market making at any time without
notice. Therefore, there can be no assurance as to the liquidity of, or the
trading market for, the Securities.
EXPERTS
The consolidated financial statements and financial statement schedule of
Realty Income Corporation as of December 31, 1996 and 1995 and for each of the
years in the three-year period ended December 31, 1996 included in Realty Income
Corporation's Annual Report on Form 10-K for the fiscal year ended December 31,
1996 and incorporated by reference herein have been audited by KPMG Peat Marwick
LLP, independent certified public accountants, and have been incorporated herein
by reference in reliance upon the reports of KPMG Peat Marwick LLP, incorporated
herein by reference, and upon the authority of such firm as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the Securities will be passed upon for the Company by
Ballard Spahr Andrews & Ingersoll. Certain legal matters will be passed upon for
the Company by Latham & Watkins.
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[A photograph of a tenant storefront]
[A photograph of a tenant storefront]
[A photograph of a tenant storefront]
[A photograph of a tenant storefront]
[A photograph of a tenant storefront]
REALTY INCOME ACQUIRES NET-LEASED RETAIL PROPERTIES NATIONWIDE.
The Company is one of the nation's largest owners of freestanding,
net-leased retail properties diversified by retail tenant and industry segment.
<PAGE>
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$100,000,000
[LOGO]
8 1/4% MONTHLY INCOME SENIOR NOTES DUE 2008
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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
DONALDSON, LUFKIN & JENRETTE
EVEREN SECURITIES, INC.
SUTRO & CO. INCORPORATED
WHEAT FIRST UNION
OCTOBER 23, 1998
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