<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
=========
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended MARCH 31, 1998, or
==================
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
COMMISSION FILE NUMBER 1-13318
==============================
REALTY INCOME CORPORATION
=========================
(Exact name of registrant as specified in its charter)
MARYLAND
========
(State or other jurisdiction of incorporation or organization)
33-0580106
==========
(I.R.S. Employer Identification No.)
220 WEST CREST STREET, ESCONDIDO, CALIFORNIA 92025
===================================================
(Address of principal executive offices)
(760) 741-2111
==============
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
There were 26,836,564 shares of common stock outstanding as of
May 13, 1998.
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REALTY INCOME CORPORATION
Form 10-Q
March 31, 1998
Table of Contents
-----------------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Pages
============================== -----
<S> <C> <C>
Item 1: Financial Statements
Consolidated Balance Sheets........................ 3-4
Consolidated Statements of Income.................. 5
Consolidated Statements of Cash Flows.............. 6-7
Notes to Consolidated Financial Statements......... 8-10
Item 2: Management's Discussion and Analysis Of
Financial Condition and Results Of Operations......10-25
PART II. OTHER INFORMATION
==========================
Item 6: Exhibits and Reports on Form 8-K...................25-26
SIGNATURE................................................... 26
EXHIBIT INDEX............................................... 26
</TABLE>
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PART I. FINANCIAL INFORMATION
==============================
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
===========================
March 31, 1998 and December 31, 1997
(dollars in thousands, except per share data)
1998 1997
(Unaudited)
=========== =========
<S> <C> <C>
ASSETS
Real estate, at cost:
Land $ 232,496 $ 214,342
Buildings and improvements 516,582 485,455
--------- ---------
749,078 699,797
Less - accumulated depreciation
and amortization (156,182) (152,206)
--------- ---------
Net real estate 592,896 547,591
Cash and cash equivalents 1,713 2,123
Accounts receivable 1,771 2,888
Due from affiliates 333 348
Other assets 3,259 3,170
Goodwill, net 20,669 20,901
--------- ---------
TOTAL ASSETS $ 620,641 $ 577,021
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Distributions payable $ 4,361 $ 4,112
Accounts payable and accrued expenses 4,133 2,180
Other liabilities 4,810 4,814
Lines of credit payable 38,000 22,600
Notes payable 110,000 110,000
--------- ---------
TOTAL LIABILITIES 161,304 143,706
--------- ---------
</TABLE>
Continued on next page
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(continued)
<TABLE>
<CAPTION>
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
===========================
March 31, 1998 and December 31, 1997
(dollars in thousands, except per share data)
1998 1997
(Unaudited)
=========== =========
<S> <C> <C>
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, 26,836,564 and 25,698,464
shares issued and outstanding in
1998 and 1997, respectively 26,837 25,698
Paid in capital in excess of par value 610,119 582,450
Accumulated distributions
in excess of net income (177,619) (174,833)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 459,337 433,315
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 620,641 $ 577,021
========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
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<TABLE>
<CAPTION>
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Income
=================================
For the three months ended March 31, 1998 and 1997
(dollars in thousands, except per share data)
(Unaudited)
1998 1997
========== ==========
<S> <C> <C>
REVENUE
Rental $ 19,168 $ 15,449
Interest and other 54 31
---------- ----------
19,222 15,480
---------- ----------
EXPENSES
Depreciation and amortization 5,084 4,464
General and administrative 1,465 1,253
Property 473 491
Interest 2,491 1,312
---------- ----------
9,513 7,520
---------- ----------
Income from operations 9,709 7,960
Gain on sales of properties 215 225
---------- ----------
NET INCOME $ 9,924 $ 8,185
========== ==========
Basic and diluted net income per share $ 0.38 $ 0.36
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
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<TABLE>
<CAPTION>
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
=====================================
For the three months ended March 31, 1998 and 1997
(dollars in thousands)
(Unaudited)
1998 1997
========= =========
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,924 $ 8,185
Adjustments to net income:
Depreciation and amortization 5,084 4,464
Gain on sales of properties (215) (225)
Change in assets and liabilities:
Accounts receivable and
other assets 1,280 657
Accounts payable, accrued
expenses and other liabilities 2,186 (2,053)
--------- ---------
Net cash provided by
operating activities 18,259 11,028
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of properties 1,948 1,339
Acquisition of and additions
to properties (52,061) (17,933)
--------- ---------
Net cash used in
investing activities (50,113) (16,594)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of distributions (12,462) (10,861)
Proceeds from line of credit 54,700 18,200
Payment of lines of credit (39,300) --
Proceeds from stock offerings,
net offering costs of $64 28,437 --
Proceeds from stock options exercised 69 --
--------- ---------
Net cash provided by
financing activities 31,444 7,339
--------- ---------
</TABLE>
Continued on next page
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(continued)
<TABLE>
<CAPTION>
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
=====================================
For the three months ended March 31, 1998 and 1997
(dollars in thousands)
(Unaudited)
1998 1997
========= =========
<S> <C> <C>
Net increase (decrease) in
cash and cash equivalents (410) 1,773
Cash and cash equivalents,
beginning of period 2,123 1,559
--------- ---------
Cash and cash equivalents,
end of period $ 1,713 $ 3,332
========= =========
</TABLE>
Interest paid during the first three months of 1998 and 1997 was
$92,000 and $1.2 million, respectively.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
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REALTY INCOME CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
==========================================
March 31, 1998
(Unaudited)
1. Management Statement and General
The financial statements of Realty Income Corporation ("Realty Income"
or the "Company") were prepared from the books and records of the
Company without audit and in the opinion of management include all
adjustments (consisting of only normal recurring accruals) necessary
to present a fair statement of results for the interim periods
presented. Readers of this quarterly report should refer to the
audited financial statements of the Company for the year ended
December 31, 1997, which are included in the Company's 1997 Annual
Report on Form 10-K, as certain disclosures which would substantially
duplicate those contained in such audited financial statements have
been omitted from this report.
2. Property Acquisitions
During the first quarter of 1998, the Company acquired 22 retail
properties in 16 states for $50.1 million (excluding the estimated
unfunded development costs of $5.1 million on properties under
construction at March 31, 1998). During the first quarter of 1998,
the Company also invested $1.7 million in 14 development properties
acquired in 1997. The 22 properties acquired in the first quarter of
1998 are 100% leased under net leases, with an average initial lease
term of 15.5 years. During the first quarter of 1997, the Company
acquired 11 retail properties located in six states, investing $17.9
million.
3. Credit Facility Available For Acquisitions
The Company has a $150 million, three year, revolving, unsecured
acquisition credit facility that expires in December 2000. The credit
facility is from The Bank of New York, as agent, and several U.S. and
non-U.S. banks. In November 1997, the Company obtained a $10 million
unsecured line of credit with The Bank of New York, which was repaid
and canceled in January 1998. As of March 31, 1998 and
December 31, 1997, the outstanding balances on the credit facility and
line of credit were $38.0 million and $22.6 million, respectively,
with an effective interest rate of approximately 6.55% and 6.66%,
respectively.
The credit facility currently bears interest at 0.85% over the London
Interbank Offered Rate ("LIBOR") and offers the Company other interest
rate options. A facility fee of 0.15%, per annum, accrues on the
total commitment of the credit facility.
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The credit facility is subject to various leverage and interest
coverage ratio limitations. The Company is and has been in compliance
with these limitations.
In the first quarter of 1998 and 1997, interest of $80,000 and $36,000
respectively, was capitalized on properties under construction.
4. Common Stock Offerings
A. In March 1998, the Company issued 372,093 shares of common stock
to a unit investment trust at a net price to the Company of $25.53125
per share. The net proceeds of $9.5 million were used to repay
borrowings under the credit facility of $7.9 million and to acquire
properties.
B. In February 1998, the Company issued 751,174 shares of common
stock to a unit investment trust at a net price to the Company of
$25.295 per share. The net proceeds of $19.0 million were used to
repay borrowings under the credit facility.
5. Distributions Paid And Payable
During the three months ended March 31, 1998, the Company paid three
monthly distributions of $0.16 per share, totaling $0.48 per share.
For the three months ended March 31, 1997, the Company paid three
monthly distributions of $0.1575 per share, totaling $0.4725 per
share. As of March 31, 1998, a distribution of $0.1625 per share was
declared and paid on April 15, 1998.
6. Gain on Sales of Properties
For the three months ended March 31, 1998, the Company sold three
properties (one child care center, one multi-tenant location and one
restaurant) for $1.9 million and recognized a gain of $215,000. For
the three months ended March 31, 1997, the company sold four
properties (two restaurants, one child care center and one multi-
tenant location) for $1.3 million and recognized a gain of $225,000.
7. Net Income per Share
Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during each
period. Diluted net income per share is computed by dividing the
amount of net income for the period by each share that would have been
outstanding assuming the issuance of common shares for all potentially
dilutive common shares outstanding during the reporting period.
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The following is a reconciliation of the denominator of the basic net
income per share computation to the denominator of the diluted net
income per share computation, for the three months ended
March 31, 1998 and 1997 (net income was available to common
shareholders for all periods presented):
1998 1997
---------- ----------
Weighted average shares used for
the basic net income computation 26,028,589 22,986,690
Incremental shares from the assumed
conversion of stock options 9,006 3,038
---------- ----------
Adjusted weighted average shares used
for diluted net income computation 26,037,595 22,989,728
========== ==========
8. Subsequent Event
In May 1998, the Company entered into a treasury interest rate lock
agreement to hedge against the possibility of rising interest rates
applicable to an anticipated debt offering. Under the interest rate
lock agreement, the Company receives or makes 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, at the end of six months.
The Company has only limited involvement with a derivative financial
instrument and does not use it for trading purposes. The derivative
financial instrument is used to manage a well-defined interest rate
risk.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
- --------------------------
This report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of
the Exchange Act. When used in this quarterly report, the words
estimated, anticipated and similar expressions are intended to
identify forward-looking statements. Such forward-looking statements
are inherently subject to risk and uncertainties, many of which cannot
be predicted with accuracy and some of which might not even be
anticipated. Future events and actual results, financial and
otherwise, may differ materially from the results discussed in the
forward-looking statements. In particular, among the factors that
could cause actual results to differ materially are the continued
qualification as a real estate investment trust, general business and
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economic conditions, competition, interest rates, accessibility of
debt and equity capital markets and other risks inherent in the real
estate business including tenant defaults, potential liability
relating to environmental matters and illiquidity of real estate
investments. For further description and detail of other factors
please see "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Annual
Report on the From 10-K for the fiscal year ended December 31, 1997.
Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
GENERAL
- -------
Realty Income Corporation, a Maryland corporation ("Realty Income" or
the "Company") was organized to operate as an equity real estate
investment trust ("REIT"). Realty Income is 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 March 31, 1998, the Company owned a
diversified portfolio of 845 retail properties located in 43 states
with over 6.6 million square feet of leasable space. Of the 845
properties in the portfolio, 839 are single-tenant properties with the
remainder being multi-tenant properties. As of March 31, 1998, 835,
or over 99%, of the 839 single-tenant properties were net leased with
an average remaining lease term (excluding extension options) of
approximately 8.4 years.
The Company's primary business objective is to generate a consistent
and predictable level of funds from operations ("FFO") per share and
distributions to stockholders. Additionally, the Company generally
will seek to increase FFO per share and distributions to stockholders
through both active portfolio management and the acquisition of
additional properties. The Company also seeks to lower the ratio of
distributions to stockholders as a percentage of FFO in order to allow
internal cash flow to be used to fund additional acquisitions and for
other corporate purposes.
The Company's portfolio management focus includes: (i) contractual
rent increases or existing leases; (ii) rental increases at the
termination of existing leases when market conditions permit; and
(iii) the active management of the Company's property portfolio,
including selective sales of properties. The Company generally
pursues the acquisition of additional properties under long-term, net
lease agreements with initial contractual base rent which, at the time
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of acquisition and as a percentage of acquisition costs, is in excess
of the Company's estimated cost of capital.
Realty Income adheres to a focused strategy of acquiring freestanding,
single-tenant, retail properties leased to regional and national
retail chains under long-term, net lease agreements. The Company
typically acquires retail store locations, which provides capital to
the operators for continued expansion and other corporate purposes.
Realty Income's acquisition and investment activities are concentrated
in highly specific target markets and focus primarily on middle-market
and upper-market retailers providing goods and services which satisfy
basic consumer needs. The Company's net lease agreements generally
are for initial terms of 10 to 20 years, require the tenant to pay a
minimum monthly rent and property operating expenses (taxes, insurance
and maintenance), and provide for future rent increases (typically
subject to ceilings) based on increases in the consumer price index or
additional rent calculated as a percentage of the tenant's gross sales
above a specific level.
From 1970 through December 31, 1997, Realty Income has acquired and
leased back to regional and national retail chains 797 properties
(including 32 properties that have been sold) and has collected over
98% of the original contractual rent obligation on these properties.
Realty Income believes that the long-term ownership of an actively
managed, diversified portfolio of retail properties leased under long-
term, net lease agreements can produce consistent, predictable income
and the potential for long-term share price appreciation. Management
believes that the income generated under long-term leases, coupled
with the tenant's responsibility for property expenses under the net
lease structure, generally produces a more predictable income stream
than many other types of real estate portfolios.
Other Information
The Company's common stock is listed on the New York Stock Exchange
under the symbol "O" and its central index key ("CIK") number is
726728.
The Company anticipates that the year 2000 date issue will not
adversely affect its current software or computers and will not have a
material impact on its consolidated financial position, results of
operations, or liquidity.
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LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash Reserves
Realty Income was organized for the purpose of operating as an equity
REIT which acquires and leases properties and distributes to
stockholders, in the form of monthly cash distributions, a substantial
portion of its net cash flow generated from leases on its retail
properties. The Company intends to retain an appropriate amount of
cash as working capital reserves. At March 31, 1998, the Company had
cash and cash equivalents totaling $1.7 million.
Management believes that the Company's cash and cash equivalents on
hand, cash provided from operating activities and borrowing capacity
are sufficient to meet its liquidity needs for the foreseeable future,
except that the Company intends to utilize additional sources of
capital to fund property acquisitions.
Capital Funding
Realty Income has a $150 million, three-year revolving, unsecured
acquisition credit facility that expires in December 2000. The credit
facility currently bears interest at 0.85% over the London Interbank
Offered Rate ("LIBOR") and offers the Company other interest rate
options. As of May 8, 1998, $106.1 million of borrowing capacity was
available to the Company under the acquisition credit facility. At
that time, the outstanding balance was $43.9 million with an effective
interest rate of 6.54%. This credit facility has been and is expected
to be used to acquire additional retail properties leased to national
and regional retail chains under long term lease agreements. Any
additional borrowings will increase the Company's exposure to interest
rate risk.
Realty Income expects to meet its long-term capital needs for the
acquisition of properties through the issuance of public or private
debt or equity. In August 1997, the Company filed a universal shelf
registration statement with the Securities and Exchange Commission
covering up to $300 million in value of common stock, preferred stock
and/or debt securities. Approximately $101.4 million in value of
common stock and debt securities has been issued under the universal
shelf registration statement through May 8, 1998.
In May 1998, the Company entered into a treasury interest rate lock
agreement to hedge against the possibility of rising interest rates
applicable to an anticipated debt offering. Under the interest rate
lock agreement, the Company receives or makes 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, at the end of six months.
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On March 30, 1998, Realty Income issued 372,093 shares of common stock
at a net price to the Company of $25.53125 per share to a unit
investment trust. The net proceeds were used to repay borrowings of
$7.9 million under the acquisition credit facility and to acquire
additional properties.
On February 23, 1998, Realty Income issued 751,174 shares of common
stock at a net price to the Company of $25.295 per share to a unit
investment trust. The net proceeds were used to repay borrowings of
$19.0 million under the acquisition credit facility.
The Company received investment grade corporate credit ratings from
Duff & Phelps Rating Company, Moody's Investor Service, Inc., and
Standard & Poor's Rating 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 the
Company's senior debt. These ratings are subject to change based
upon, among other things, the Company's results of operations and
financial condition.
Property Acquisitions
During the first quarter of 1998, Realty Income acquired 22 retail
properties located in 16 states for $50.1 million (excluding the
estimated unfunded development costs of $5.1 million on properties
under construction at March 31, 1998) and selectively sold three
properties, increasing the number of properties in its portfolio by
2.3% to 845 from 826 at December 31, 1997. During the first quarter
of 1998, the Company also invested $1.7 million in development
properties acquired in 1997 and $14,000 in three existing properties
in its portfolio. The 22 properties acquired will contain
approximately 357,000 leasable square feet and are 100% leased under
net leases, with an average initial lease term of 15.5 years. The
weighted average annual unleveraged return on the cost of the 22
properties (including the estimated unfunded development cost of the
properties under development) is estimated to be 10.6%, 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 22 properties acquired
in 1998 will not differ from the foregoing percentage.
Of the properties acquired during first quarter of 1998, 14 were
occupied as of May 8, 1998 and the remaining properties were pre-
leased and under construction pursuant to contracts under which the
tenant has agreed to develop the properties (with development costs
funded by the Company) and to begin paying rent when the premises open
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for business. All of the properties acquired in 1998, including the
properties under development, are leased with initial terms of 11 to
19 years.
Distributions
Cash distributions paid during the first quarter of 1998 and 1997 were
$12.5 million and $10.9 million, respectively.
During the first three months of 1998, the Company paid three monthly
distributions of $0.16 per share, totaling $0.48 per share. In
April 1998, the monthly distribution was increased to $0.1625 per
share. In March and April 1998, the Company declared distributions of
$0.1625 per share which were paid on April 15, 1998 and payable on
May 18, 1998, respectively.
FUNDS FROM OPERATIONS ("FFO")
- -----------------------------
FFO for the first quarter of 1998 increased by $2.34 million or 18.9%
to $14.75 million versus $12.41 million during the first quarter of
1997.
The following is a reconciliation of net income to FFO, and
information regarding distributions paid and diluted weighted average
number of shares outstanding for the first quarter of 1998 and 1997
(dollars in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net income $ 9,924 $ 8,185
Plus depreciation and amortization 5,084 4,464
Less depreciation of furniture,
fixtures and equipment and
amortization of organization costs (39) (11)
Less gain on sales of properties (215) (225)
-------- --------
Total Funds From Operations $ 14,754 $ 12,413
======== ========
Cash Distributions Paid $ 12,462 $ 10,861
FFO in excess of Distributions $ 2,292 $ 1,552
Diluted weighted average
number of shares outstanding 26,037,595 22,989,728
</TABLE>
Management considers FFO to be an appropriate measure of the
performance of an equity REIT. FFO is used by financial analysts in
evaluating REITs and can be one measure of a REIT's ability to make
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cash distribution payments. Presentation of this information provides
the reader with an additional measure to compare the performance of
different REITs, although it should be noted that not all REITs
calculate FFO the same way so comparisons with such REITs may not be
meaningful.
Realty Income defines FFO as net income before gain on sales of
properties, plus depreciation and amortization. In accordance with
the recommendations of the National Association of Real Estate
Investment Trusts ("NAREIT"), amortization of deferred financing costs
is not added back to net income to calculate FFO. Amortization of
financing costs are included in interest expense in the consolidated
statements of income.
FFO is not necessarily indicative of cash flow available to fund cash
needs and should not be considered as an alternative to net income as
an indication of the Company's performance or to cash flows from
operating, investing, and financing activities as a measure of
liquidity or ability to make cash distributions or to pay debt
service.
RESULTS OF OPERATIONS
- ---------------------
The following is a comparison of the three months ended March 31, 1998
to the three months ended March 31, 1997
Rental revenue was $19.17 million for 1998 versus $15.45 million for
1997, an increase of 24.1% or $3.72 million. The increase in rental
revenue was primarily due to the acquisition of 118 properties during
1997 and the first quarter of 1998 (the "New Properties"). The New
Properties generated revenue of $3.69 million in 1998 compared to
$129,000 in 1997, an increase of $3.56 million.
Of the 845 properties in the portfolio as of March 31, 1998, 839 are
single-tenant properties with the remaining properties being multi-
tenant properties. Of the 839 single-tenant properties, 835, or over
99%, were net leased with an average remaining lease term (excluding
extension options) of approximately 8.4 years. At March 31, 1998, 835
of the Company's 839 single tenant properties had leases which provide
for increases in rents through: (i) base rent increases tied to a
consumer price index with adjustment ceilings; (ii) overage rent based
on a percentage of the tenants' gross sales or (iii) fixed increases.
Some leases contain more than one of these clauses. Percentage rent,
which is included in rental revenue, was $208,000 during 1998 and
$293,000 in 1997.
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Same store rents generated on 719 properties owned during all of both
the first quarter of 1998 and 1997 increased by $124,000 or 0.8%, to
$15.25 million from $15.13 million.
The following tables represent Realty Income's rental revenue by
industry (dollars in thousands):
<TABLE>
<CAPTION>
Annualized as For the Quarter Ended
of April 1, 1998 March 31, 1998
---------------------- ----------------------
Rental(1) Percentage Rental Percentage
Industry Revenue of Total Revenue of Total
- -------------------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Apparel Stores $ 3,927 4.8% $ 515 2.7%
Automotive Parts 6,717 8.1 1,436 7.5
Automotive Service 6,667 8.1 1,501 7.8
Book Stores 450 0.5 113 0.6
Child Care 24,509 29.6 5,947 31.0
Consumer Electronics 4,432 5.4 1,172 6.1
Convenience Stores 4,470 5.4 1,110 5.8
Health and Fitness 408 0.5 -- --
Home Furnishings 5,704 6.9 1,295 6.8
Office Supplies 2,476 3.0 615 3.2
Pet Supplies 253 0.3 63 0.3
Private Education 923 1.1 40 0.2
Restaurants 13,576 16.4 3,369 17.6
Shoe Stores 529 0.6 115 0.6
Video Rental 2,813 3.4 641 3.3
Other 4,881 5.9 1,236 6.5
- -------------------- ------- ------ ------- ------
Totals $82,735 100.0% $19,168 100.0%
==================== ======= ====== ======= ======
</TABLE>
[FN]
(1) Annualized rental revenue is calculated by multiplying the
monthly contracted base rent as of April 1, 1998 by 12 and adding the
previous 12 month's historic percentage rent, which totaled $1.7
million. For properties under construction, an estimated contractual
base rent is used based upon the estimated total costs of each
property.
</FN>
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<TABLE>
<CAPTION>
For the Quarter Ended
March 31, 1997
---------------------
Rental Percentage
Industry Revenue of Total
- -------------------- ------- ----------
<S> <C> <C>
Apparel Stores $ -- --%
Automotive Parts 1,560 10.1
Automotive Service 888 5.7
Book Stores 32 0.2
Child Care 5,889 38.1
Consumer Electronics 1,044 6.8
Convenience Stores 786 5.1
Health and Fitness -- --
Home Furnishings 642 4.2
Office Supplies 80 0.5
Pet Supplies -- --
Private Education -- --
Restaurants 3,303 21.4
Shoe Stores -- --
Video Rental -- --
Other 1,225 7.9
- -------------------- ------- ------
Totals $15,449 100.0%
==================== ======= ======
</TABLE>
At March 31, 1998, the Company had four properties that were not under
lease as compared to eight at December 31, 1997. At March 31, 1998,
841, or over 99%, of the 845 properties in the portfolio were under
lease agreements with third party tenants.
Interest and other revenue during the first quarter of 1998 and 1997
totaled $54,000 and $31,000, respectively, an increase of $23,000.
Depreciation and amortization was $5.1 million in the first quarter of
1998 versus $4.5 million in the comparable quarter of 1997. The
increase of $620,000 in 1998 was primarily due to depreciation of the
New Properties.
General and administrative expenses increased by $212,000 to $1.5
million in the first quarter of 1998 versus $1.3 million in 1997. The
increase in general and administrative expenses was primarily due to
an increase in property acquisition expenses and employee costs.
General and administrative expenses as a percentage of revenue
decreased to 7.6% in 1998 as compared to 8.1% in 1997. During 1997,
the Company increased its number of employees to 47 from 35. The
majority of the new employees work primarily on new property
acquisitions and were hired during the second and third quarter of
1997.
Page 18
<PAGE>
Property expenses are broken down into costs associated with non-net
leased multi-tenant properties, unleased single-tenant properties and
general portfolio expenses. Expenses related to the multi-tenant and
unleased single-tenant properties include, but are not limited to,
property taxes, maintenance, insurance, utilities, property
inspections, bad debt expense and legal fees. General portfolio costs
include, but are not limited to, insurance, legal, property
inspections and title search fees. At March 31, 1998, four properties
were available for lease as compared to eight at December 31, 1997.
Property expenses were $473,000 in the first quarter of 1998 and
$491,000 in 1997, a decrease of $18,000. The decrease in property
expenses was primarily attributable to having fewer properties
available for lease. It is anticipated that as additional properties
are acquired, property expenses will increase.
Interest expense in 1998 increased by $1.2 million to $2.5 million, as
compared to $1.3 million in 1997. The following is a summary of the
five components of interest expense for the first quarter of 1998 and
1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 Net Change
-------- -------- ----------
<S> <C> <C> <C>
Interest on outstanding
loans and notes $ 2,449 $ 1,279 $ 1,170
Amortization of the gain on the
1996 treasury lock agreement (28) -- (28)
Credit facility commitment fees 56 20 36
Amortization of credit facility
origination costs and deferred
bond financing costs 94 49 45
Interest capitalized (80) (36) (44)
-------- -------- --------
Totals $ 2,491 $ 1,312 $ 1,179
======== ======== ========
</TABLE>
Interest on outstanding loans and notes was $1.2 million higher in the
first quarter of 1998 than in 1997, due to an increase in the average
outstanding balances and a higher average interest rate. The higher
average outstanding balances and higher average interest rate was due
to the Notes issued in May 1997. During the 1998, the average
outstanding balances and interest rate (after taking into effect
amortization of the gain on the treasury lock agreement) on the Notes
and credit facility were $129.3 million and 7.59% as compared to $77.0
million and 6.73% during 1997. During 1998, the credit facility's
average interest rate was 6.66% and average outstanding balance was
$19.3 million.
Page 19
<PAGE>
The Company reviews long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. No charge was recorded for impairment
loss during the first quarter of 1998 and 1997.
During the first quarter of 1998, the Company sold three properties
(one restaurant, one child care center and one multi-tenant location)
for a total of $1.9 million and recorded a gain of $215,000. During
the first quarter of 1997, the Company sold four properties (two
restaurants and one child care center and one multi-tenant location)
for $1.3 million and recognized a gain of $225,000.
In the first quarter of 1998, the Company had net income of $9.92
million versus $8.19 million in 1997. The $1.73 million increase in
net income is primarily due to the increase in rental revenue from the
New Properties of $3.56 million, which was partially offset by an
increase in depreciation and amortization, general and administrative,
and interest expense totaling $2.0 million.
PROPERTIES
- ----------
As of April 1, 1998, Realty Income owned a diversified portfolio of
845 properties in 43 states consisting of over 6.6 million square feet
of leasable space. At April 1, 1998, over 98% of the properties were
under net lease agreements. Net leases typically require the tenant
to be responsible for property operating costs including property
taxes, insurance and maintenance.
The Company's net leased retail properties are retail locations
primarily leased to regional and national retail chain store
operators. The average leasable retail space of the 845 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 sufficient
population base to constitute a sufficient market or trade area for
the retailer's business.
Page 20
<PAGE>
The following table sets forth certain information regarding the
Company's properties as of April 1, 1998, classified according to the
business of the respective tenants.
<TABLE>
<CAPTION>
Annualized
Approximate Rent (1)
Number of Leaseable (in thou-
Industry Properties Square Feet sands)
- ------------------------------ ---------- ----------- ----------
<S> <C> <C> <C>
Apparel Stores 5 228,800 $ 3,927
Automotive Parts 103 556,900 6,717
Automotive Service 96 320,000 6,667
Book Stores 1 30,000 450
Child Care 316 2,011,900 24,509
Consumer Electronics 37 559,200 4,432
Convenience Stores 53 153,900 4,470
Health & Fitness 1 32,700 408
Home Furnishings & Accessories 15 831,700 5,704
Office Supplies 8 198,400 2,476
Pet Supplies 1 16,000 253
Private Education 2 52,500 923
Restaurants 171 868,700 13,576
Shoe Stores 2 27,700 529
Video Rental 22 166,300 2,813
Other 12 555,600 4,881
- ------------------------------ ---------- ----------- ----------
TOTALS 845 6,610,300 $ 82,735
============================== ========== =========== ==========
</TABLE>
[FN]
(1) Annualized Rent is calculated by multiplying the monthly
contractual base rent as of April 1, 1998 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 properties under
construction, an estimated contractual base rent is used based upon
the estimated total costs of each property.
</FN>
Of the 845 properties in the portfolio at April 1, 1998, 839 were
single-tenant properties with the remaining properties being multi-
tenant properties. As of April 1, 1998 835 or over 99% of the single-
tenant properties were net leased with an average remaining lease term
(excluding extension options) of approximately 8.4 years.
Page 21
<PAGE>
The following table sets forth certain information regarding the
timing of the lease term expirations (excluding extension options) on
April 1, 1998.
<TABLE>
<CAPTION>
Number of Annualized Base Percent of
Leases Rent (1) (2) Annualized
Year Expiring (in thousands) Base Rent
- ------ --------- --------------- ----------
<C> <C> <C> <C>
1998 2 $ 96 0.1%
1999 37 1,580 2.1
2000 31 1,645 2.1
2001 54 4,315 5.6
2002 74 5,966 7.8
2003 66 5,140 6.7
2004 110 8,956 11.6
2005 85 6,046 7.8
2006 29 2,467 3.2
2007 87 5,499 7.1
2008 47 3,843 5.0
2009 16 1,144 1.5
2010 39 3,634 4.7
2011 36 4,660 6.0
2012 52 5,848 7.6
2013 16 4,797 6.2
2014 6 755 1.0
2015 27 4,976 6.5
2016 9 1,562 2.0
2017 11 4,090 5.3
2018 1 39 0.1
- ------ --------------- --------------- ----------
Totals 835 $ 77,058 100.0%
====== =============== =============== ==========
</TABLE>
[FN]
(1) Annualized base rent is calculated by multiplying the monthly
contractual base rent as of April 1, 1998 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 properties.
Percentage rent for the previous twelve months totaled $1.7 million.
(2) This table does not include six multi-tenant properties and four
vacant, unleased single-tenant properties owned by the Company. The
lease expirations for properties under construction are based on the
estimated date of completion of such properties.
</FN>
Page 22
<PAGE>
The following table sets forth certain state-by-state information
regarding the properties owned by the Company as of April 1, 1998.
<TABLE>
<CAPTION>
Annualized
Approximate Rent (1) Percent of
Number of Percent Leasable (in thou- Annualized
State Properties Leased Square Feet sands) Rent
- ------------ ---------- ------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Alabama 7 100% 49,800 $ 458 0.6%
Arizona 27 99 181,200 2,474 3.0
Arkansas 1 100 3,100 61 0.1
California 52 94 987,800 11,018 13.3
Colorado 42 100 231,800 3,234 3.9
Connecticut 9 100 216,300 2,815 3.4
Florida 54 100 545,600 5,616 6.8
Georgia 46 100 266,600 3,802 4.6
Idaho 11 100 52,000 759 0.9
Illinois 28 100 192,200 2,451 3.0
Indiana 24 100 130,000 1,662 2.0
Iowa 8 100 51,700 462 0.6
Kansas 18 100 183,500 2,018 2.4
Kentucky 12 100 36,000 927 1.1
Louisiana 2 100 10,700 148 0.2
Maryland 6 100 34,900 537 0.6
Massachusetts 5 100 25,900 545 0.7
Michigan 6 100 35,000 518 0.6
Minnesota 18 100 126,500 1,954 2.4
Mississippi 12 100 128,900 902 1.1
Missouri 30 100 176,800 2,165 2.6
Montana 2 100 30,000 297 0.4
Nebraska 9 100 93,700 1,135 1.4
Nevada 7 100 86,400 1,336 1.6
New Hampshire 1 100 6,400 125 0.2
New Jersey 2 100 22,700 351 0.4
New Mexico 3 100 12,000 107 0.1
New York 9 100 170,600 3,591 4.4
North Carolina 28 100 125,800 2,211 2.7
Ohio 59 100 280,000 4,492 5.4
Oklahoma 14 100 80,700 935 1.1
Oregon 17 100 92,400 1,262 1.5
Pennsylvania 9 100 62,700 922 1.1
South Carolina 21 100 80,600 1,280 1.5
South Dakota 2 100 12,600 172 0.2
Tennessee 19 100 179,600 2,101 2.5
Texas 137 100 1,102,600 10,995 13.3
Utah 7 100 45,400 594 0.7
Virginia 20 100 101,000 1,689 2.0
</TABLE>
(continued on next page)
Page 23
<PAGE>
<TABLE>
<CAPTION>
(continued)
Annualized
Approximate Rent (1) Percent of
Number of Percent Leasable (in thou- Annualized
State Properties Leased Square Feet sands) Rent
- ------------ ---------- ------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Washington 43 98 252,600 3,317 4.0
West Virginia 2 100 16,800 147 0.2
Wisconsin 12 100 69,300 882 1.1
Wyoming 4 100 20,100 268 0.3
- ------------ ---------- ------- ----------- ---------- ----------
Totals 845 99% 6,610,300 $82,735 100.0%
============ ========== ======= =========== ========== ==========
</TABLE>
[FN]
(1) Annualized Rent is calculated by multiplying the monthly
contractual base rent as of April 1, 1998 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 properties under
construction, an estimated contractual base rent is used based upon
the estimated total costs of each property.
</FN>
IMPACT OF INFLATION
- -------------------
Tenant leases generally provide for limited increases in rent as a
result of increases in the tenant's sales volumes and/or increases in
the consumer price index. Management expects that inflation will
cause these lease provisions to result in increases in rent over time.
However, during times when inflation is greater than increases in rent
as provided for in the leases, rent increases may not keep up with the
rate of inflation.
Over 98% of the properties in the portfolio are leased to tenants
under net leases in which the tenant is responsible for property costs
and expenses. These features in the leases reduce the Company's
exposure to rising property expenses due to inflation.
Inflation and increased costs may have an adverse impact on the
tenants if increases in the tenant's operating expenses exceed
increases in revenue.
Page 24
<PAGE>
IMPACT OF ACCOUNTING PRONOUNCEMENTS
- -----------------------------------
In March 1998, the Financial Accounting Standards Board's Emerging
Issues Task Force reached a consensus on Issue No. 97-11, "Accounting
for Internal Costs Relating to Real Estate Property Acquisitions"
("EITF 97-11"), EITF 97-11 states that internal costs of
preacquisition activities incurred in connection with the acquisition
of an operating property should be expensed as incurred. EITF 97-11
is to be implemented on a prospective basis effective on the date the
consensus was reached.
The Company anticipates that the adoption of EITF 97-11 will not have
a material effect on the financial position, results of operations or
liquidity of the Company, nor result in disclosures that will be
materially different from those presently included in its financial
statements.
PART II. OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
=========== ===========
<S> <C>
3.1 Articles of Incorporation of the Company (filed) as
Appendix B to the Company's Proxy Statement dated
March 28, 1997 ("1997 Proxy Statement") and incorporated
herein by reference)
3.2 Bylaws of the Company (filed as Appendix C to the
Company's 1997 Proxy Statement and incorporated
herein by reference)
4.1 Pricing Committee Resolutions and Form of 7.75%
Notes due 2007 (filed as Exhibit 4.2 to the Company's
Form 8-K dated May 5, 1997 and incorporated herein by
reference)
4.2 Indenture dated as of May 6, 1997 between the Company
and The Bank of New York (filed as Exhibit 4.1 to the
Company's Form 8-K dated May 5, 1997 and incorporated
herein by reference)
</TABLE>
Page 25
<PAGE>
<TABLE>
<S> <C>
4.3 First Supplemental Indenture dated as of May 28, 1997,
between the Company and The Bank of New York (filed as
Exhibit 4.3 to the Company's Form 8-B and incorporated
herein by reference)
27 Financial Data Schedule
</TABLE>
B. Two reports on Form 8-K were filed by registrant during the
quarter for which this report is filed.
A report on Form 8-K was dated February 23, 1998 and filed on
February 24, 1998 reporting the issuance of 751,174 shares of
common stock on February 23, 1998.
A report on From 8-K was dated March 30, 1998 and filed on
March 31, 1998 reporting the issuance of 372,093 shares of
common stock on March 30, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REALTY INCOME CORPORATION
<TABLE>
<S> <C>
(Signature and Title) /s/ GARY M. MALINO
Date: May 13, 1998 -------------------------------------
Gary M. Malino, Senior Vice President
Chief Financial Officer (Principal
Financial and Accounting Officer)
EXHIBIT INDEX
</TABLE>
<TABLE>
<CAPTION>
Exhibit No. Description Page
=========== =========== ====
<S> <C> <C>
27 Financial Data Schedule .................... 27
</TABLE>
Page 26
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE>5
<LEGEND>
This Schedule contains summary financial information extracted from
the registrant's Balance Sheet as of March 31, 1998 and Income
Statement for the three months ended March 31, 1998 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER>1
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,713,000
<SECURITIES> 0
<RECEIVABLES> 2,104,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> <F1> 0
<PP&E> 749,078,000
<DEPRECIATION> (156,182,000)
<TOTAL-ASSETS> 620,641,000
<CURRENT-LIABILITIES> <F1> 0
<BONDS> 148,000,000
<COMMON> 26,837,000
0
0
<OTHER-SE> 432,500,000
<TOTAL-LIABILITY-AND-EQUITY> 620,641,000
<SALES> 0
<TOTAL-REVENUES> 19,222,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,022,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,491,000
<INCOME-PRETAX> 9,924,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,924,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,924,000
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
<FN>
Current assets and current liabilities are not applicable to
the Company under current industry standards.
/FN
Page 27
<PAGE>
</TABLE>
