<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
=========
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 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 checkmark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
There were 26,817,003 shares of common stock outstanding as of
November 12, 1998.
Page 1
REALTY INCOME CORPORATION
Form 10-Q
September 30, 1998
Table of Contents
-----------------
PART I. FINANCIAL INFORMATION Pages
============================== -----
Item 1: Financial Statements
Consolidated Balance Sheets........................ 3-4
Consolidated Statements of Income.................. 5
Consolidated Statements of Cash Flows.............. 6-7
Notes to Consolidated Financial Statements......... 8-12
Item 2: Management's Discussion And Analysis Of
Financial Condition And Results Of Operations......12-35
PART II. OTHER INFORMATION
==========================
Item 6: Exhibits and Reports on Form 8-K...................36-37
SIGNATURE................................................... 37
EXHIBIT INDEX............................................... 37
EXHIBITS.................................................... 38
Page 2
PART I. FINANCIAL INFORMATION
==============================
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
===========================
September 30, 1998 And December 31, 1997
(dollars in thousands, except per share data)
1998
(Unaudited) 1997
=========== =========
<S> <C> <C>
ASSETS
Real estate, at cost:
Land $ 265,865 $ 214,342
Buildings and improvements 570,563 485,455
--------- ---------
836,428 699,797
Less accumulated depreciation
and amortization (165,980) (152,206)
--------- ---------
Net real estate 670,448 547,591
Cash and cash equivalents 2,788 2,123
Accounts receivable 1,374 2,888
Due from affiliates -- 348
Other assets 2,781 3,170
Goodwill, net 20,208 20,901
--------- ---------
TOTAL ASSETS $ 697,599 $ 577,021
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Distributions payable $ 4,492 $ 4,112
Accounts payable and accrued expenses 8,294 2,180
Other liabilities 4,632 4,814
Lines of credit payable 117,000 22,600
Notes payable 110,000 110,000
--------- ---------
TOTAL LIABILITIES 244,418 143,706
--------- ---------
</TABLE>
Continued on next page
Page 3
(continued)
<TABLE>
<CAPTION>
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
===========================
September 30, 1998 And December 31, 1997
(dollars in thousands, except per share data)
1998
(Unaudited) 1997
=========== =========
<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, 26,816,885 and 25,698,464
shares issued and outstanding in
1998 and 1997, respectively 26,817 25,698
Paid in capital in excess of par value 609,678 582,450
Accumulated distributions
in excess of net income (183,314) (174,833)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 453,181 433,315
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 697,599 $ 577,021
========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
Page 4
<TABLE>
<CAPTION>
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Income
=================================
For the three and nine months ended September 30, 1998 and 1997
(dollars in thousands, except per share data)
(Unaudited)
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/98 9/30/97 9/30/98 9/30/97
======== ======== ======== ========
<S> <C> <C> <C> <C>
REVENUE
Rental $ 21,814 $ 16,801 $ 61,325 $ 48,256
Interest and other 155 42 233 190
-------- -------- -------- --------
21,969 16,843 61,558 48,446
-------- -------- -------- --------
EXPENSES
Depreciation and
amortization 5,630 4,706 16,083 13,654
Interest 3,682 2,450 9,037 5,771
General and
administrative 1,667 1,338 4,843 3,923
Property 497 409 1,396 1,262
Provision for
impairment losses -- 70 -- 140
-------- -------- -------- --------
11,476 8,973 31,359 24,750
-------- -------- -------- --------
Income from
operations 10,493 7,870 30,199 23,696
Gain on sales of
properties -- 596 526 1,023
-------- -------- -------- --------
NET INCOME $ 10,493 $ 8,466 $ 30,725 $ 24,719
======== ======== ======== ========
Basic and diluted net
income per share $ 0.39 $ 0.37 $ 1.16 $ 1.08
======== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
Page 5
<TABLE>
<CAPTION>
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
=====================================
For the nine months ended September 30, 1998 and 1997
(dollars in thousands)
(Unaudited)
1998 1997
========= =========
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 30,725 $ 24,719
Adjustments to net income:
Depreciation and amortization 16,083 13,654
Provision for impairment losses -- 140
Gain on sales of properties (526) (1,023)
Change in assets and liabilities:
Accounts receivable and
other assets 1,935 901
Accounts payable, accrued
expenses and other liabilities 2,427 4,677
--------- ---------
Net cash provided by
operating activities 50,644 43,068
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of properties 2,770 3,858
Acquisition of and additions
to properties (136,784) (114,190)
--------- ---------
Net cash used in
investing activities (134,014) (110,332)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit 145,100 92,400
Payment of lines of credit (50,700) (94,800)
Proceeds from notes issued -- 109,152
Payments of distributions (38,826) (32,586)
Proceeds from stock offering,
net of offering costs of $109 28,392 --
Proceeds from stock options exercised 69 246
Payments to the defined benefit
pension plan -- (2,223)
Increase in other assets -- (286)
--------- ---------
Net cash provided by
financing activities 84,035 71,903
--------- ---------
</TABLE>
(Continued on next page)
Page 6
(continued)
<TABLE>
<CAPTION>
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
=====================================
For the nine months ended September 30, 1998 And 1997
(dollars in thousands)
(Unaudited)
1998 1997
========= =========
<S> <C> <C>
Net increase in cash and
cash equivalents 665 4,639
Cash and cash equivalents,
beginning of period 2,123 1,559
--------- ---------
Cash and cash equivalents,
end of period $ 2,788 $ 6,198
========= =========
</TABLE>
For supplemental disclosures, see note 10.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
Page 7
REALTY INCOME CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
==========================================
September 30, 1998
(Unaudited)
1. Management Statement and General
The consolidated 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 nine months of 1998, the Company invested $140.2
million in 99 new properties and properties under development
with an initial aggregate contractual lease rate of 10.4%. The
99 properties are located in 34 states and contain approximately
1.0 million leasable square feet. The 99 properties are 100%
leased under net leases, with an average initial lease term of
14.6 years.
During the first nine months of 1997, the Company invested $116.0
million in 64 new properties and properties under development
with an initial aggregate contractual lease rate of 10.3%. The
64 properties are located in 24 states and contain approximately
969,700 leasable square feet. The 64 properties are 100% leased
under net leases, with an average initial lease term of 14.7 years.
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
September 30, 1998 and December 31, 1997, the outstanding
balances on the credit facility and line of credit were $117.0
million and $22.6 million, respectively, with an effective
interest rate of approximately 6.52% and 6.66%, respectively.
Page 8
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.
The credit facility is subject to various leverage and interest
coverage ratio limitations. The Company is and has been in
compliance with these limitations.
For the nine months ended September 30, 1998 and 1997, interest
of $420,000 and $135,000 respectively, was capitalized on
properties under construction. For the three months ended
September 30, 1998 and 1997, interest of $186,000 and $53,000,
respectively, was so capitalized.
4. Common Stock Offerings
A. In March 1998, the Company issued 372,093 shares of common
stock to a unit investment trust. The shares were issued at a
net price to the Company of $25.53125 per share. The net
proceeds of $9.5 million from the issuance 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. The shares were issued at a
net price to the Company of $25.295 per share. The net proceeds
of $18.9 million from the issuance were used to repay borrowings
under the credit facility.
5. Distributions Paid and Payable
During the nine months ended September 30, 1998, the Company paid
three monthly distributions of $0.16 per share, three monthly
distributions of $0.1625 per share and three monthly
distributions of $0.165 per share, totaling $1.4625 per share.
For the nine months ended September 30, 1997, the Company paid
nine monthly distributions of $0.1575 per share, totaling $1.4175
per share. As of September 30, 1998, a distribution of $0.1675
per share was declared and paid on October 15, 1998.
6. Gain on Sales of Properties
For the three months ended September 30, 1998, no properties were
sold. For the three months ended September 30, 1997, the Company
sold two properties (one child care and one restaurant) for $1.0
million and recognized a gain of $596,000.
For the nine months ended September 30, 1998, the Company sold
five properties (two child care centers, one multi-tenant
location and two restaurants) for $2.8 million and recognized a
gain of $526,000. For the nine months ended September 30, 1997,
Page 9
the Company sold nine properties (six restaurants, one multi-
tenant and two child care centers) for $3.9 million and
recognized a gain of $1.0 million.
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.
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 and nine
months ended September 30, 1998 and 1997 (net income was
available to common shareholders for all periods presented):
<TABLE>
Three Three
Months Months
Ended Ended
9/30/98 9/30/97
---------- ----------
<S> <C> <C>
Weighted average shares used for
the basic net income
per share computation 26,826,584 22,994,321
Incremental shares from the assumed
conversion of stock options 8,034 5,215
---------- ----------
Adjusted weighted average shares
used for diluted net income
per share computation 26,834,618 22,999,536
=========== ==========
Nine Nine
Months Months
Ended Ended
9/30/98 9/30/97
---------- ----------
Weighted average shares used for
the basic net income
per share computation 26,566,891 22,989,582
Incremental shares from the assumed
conversion of stock options 9,035 3,623
---------- ----------
Adjusted weighted average shares
used for diluted net income
per share computation 26,575,926 22,993,205
========== ==========
</TABLE>
Page 10
8. Subsequent Event
On October 28, 1998, Realty Income issued $100 million of 8.25%
unsecured senior notes due November 2008 (the "Notes"). The
Notes were sold at par ($25.00). After taking into effect the
results of the treasury interest rate lock agreement (see note
9), the effective interest rate to the Company on the Notes is
9.12%. The net proceeds from the issuance of the Notes were used
to repay $96.0 million of outstanding borrowings under the
Company's credit facility and for other corporate purposes.
Interest on the Notes is payable monthly on the 15th of each
month, commencing in December 1998. The Notes commenced trading
on the New York Stock Exchange on November 3, 1998 under the
symbol OUI.
9. Derivative Financial Instrument
In May 1998, the Company entered into a treasury interest rate
lock agreement to protect against the possibility of rising
interest rates applicable to an anticipated debt offering (see
note 8). Under the interest rate lock agreement, the Company was
to 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, at
the end of six months. Based on the 10-year treasury interest
rate at October 23, 1998 (the interest rate pricing date), the
Company made a payment of $8.7 million in settlement of the
agreement. The payment on the agreement is being amortized over
10 years (the life of the Notes, see note 8) as a yield
adjustment to interest expense.
The Company had only limited involvement with this single
derivative financial instrument and did not use it for trading
purposes.
10. Supplemental Disclosure of Cash Flow Information
Interest paid during the first nine months of 1998 and 1997 was
$6.2 million and $2.3 million, respectively.
The following non-cash investing and financing activities are
included in the accompanying financial statements:
As of September 30, 1998, investments in 11 properties under
development resulted in the following (dollars in thousands):
Increases in:
Buildings $3,743
Accounts payable $3,743
Page 11
As of September 30, 1998, the acquisition of three properties
resulted in the following (dollars in thousands):
Increases in:
Land $1,724
Building $ 77
Other liabilities $1,801
Receipt of shares in August 1998 as payment of the amount due
from affiliates resulted in the following (dollars in thousands):
Decreases in:
Due from affiliate $ 350
Common Stock $ 20
Paid in Capital in
excess of par value $ 413
Increase in:
Interest income $ 83
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. 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 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-Other Items" in our Annual Report on
Form 10-K for the year ended December 31, 1997 (the "Annual
Report") including the subheadings entitled "Competition for
Acquisition of Real Estate", "Environmental Liabilities",
"Taxation of the Company", "Effect of Distribution Requirements",
"Real Estate Ownership Risk" and "Dependence on Key Personnel"
and the section entitled "Management's Discussion and Analysis of
Page 12
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 statement, whether as a result of new
information, future events or otherwise. In light of these risks
and uncertainties, the forward-looking events discussed might not
occur. You should rely only on the information contained or
incorporated by reference in this Report on Form 10-Q.
GENERAL
- -------
Realty Income Corporation, a Maryland corporation ("Realty
Income", the "Company", "our" or "we") was 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 September 30, 1998, we owned a diversified portfolio of 920
retail properties located in 44 states with over 7.2 million
square feet of leasable space. Of the 920 properties in the
portfolio, 913 are single-tenant properties with the remainder
being multi-tenant properties. As of September 30, 1998, 910 of
the 913 single-tenant properties, or over 99%, were net leased
with an average remaining lease term (excluding extension
options) of approximately 8.4 years. Net leases typically
require the tenant to be responsible for property operating costs
including property taxes, insurance and maintenance.
Our primary business objective is to generate a consistent and
predictable level of funds from operations ("FFO") per share and
distributions to stockholders. In addition, 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 gains) in
order to meet REIT qualification requirements. We intend to use
undistributed cash flow to fund additional 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 the Company's property portfolio,
including selective sales of properties.
Page 13
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 costs, is in
excess of our estimated cost of capital.
Our 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.
In identifying new properties for acquisition, 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. Upper
market retail chains typically consist of companies with 500 or
more stores that operate nationally in a mature retail concept.
Upper market retain 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;
- 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
Page 14
- 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
- They have the ability to grow because of access to capital
which 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.
Since 1970 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 obligation on
these 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 and the potential for long-term share price
appreciation. 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
produces a more predictable income stream than many other types
of real estate portfolios.
Year 2000 Issue
Some of our existing computer programs identify a year by using
only two digits instead of four, which could cause these
programs to fail or create erroneous results beginning in the
year 2000. This situation has been generally referred to as the
Year 2000 issue. We have formed a project team to identify Year
2000 impacts, resolve Year 2000 problems, and implement
compliance plans. Our Management Information Department has
completed its inventory and assessment of Year 2000 implications
Page 15
for vendor-supplied software and hardware. We have no
internally developed software. We have developed a plan for
converting impacted items, and have begun the conversion. We
believe that the costs of remediation associated with conversion
and testing of our corporate level computer systems will be less
than $30,000 and that remediation will be completed in the
second quarter of 1999.
The second component of our Year 2000 compliance plan is to
ensure that our significant tenants are assessed for Year 2000
compliance. We have initiated discussions with these
significant tenants in order to assess their ability to
successfully resolve the Year 2000 issue. Through
November 10, 1998, tenants representing approximately 60% of our
revenue have confirmed that they are Year 2000 compliant or
anticipate being compliant by the end of the first quarter of
1999. Due to the nature of the tenants' businesses, we do not
believe the Year 2000 issue will materially impact the tenants'
ability to pay rent. However, the failure of one or more
tenants to pay rent as a result of the Year 2000 issue could
have a material adverse effect on the Company's results of
operations or financial position.
The third component of our Year 2000 compliance plan is to
ensure that our significant vendors are assessed for Year 2000
compliance. We have initiated discussions with these
significant vendors in order to assess their ability to
successfully resolve the Year 2000 issue. Through
November 10, 1998, 50% of our significant vendors have confirmed
that they are Year 2000 compliant or anticipate being compliant
by the end of the second quarter of 1999. Our transfer agent
anticipates being Year 2000 compliant by the end of 1998.
Upon completion of the Company's assessment and conversion
program, we will consider the necessity of implementing a
contingency plan to mitigate any adverse effects associated with
the Year 2000 issue. Though we do not expect the Year 2000
issue to have a material adverse effect on our results of
operations or financial position, there can be no assurances of
that position.
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 and its cusip number is 756109-104. We issued
10-year notes on October 28, 1998 which began trading on the NYSE
on November 3, 1998 under the symbol "OUI". The cusip number of
these notes is 756109-AA2.
Page 16
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash Reserves
Realty Income is organized to operate 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. We intend to retain an appropriate amount of cash as
working capital reserves. At September 30, 1998, the Company had
cash and cash equivalents totaling $2.8 million.
We believe that the Company's 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, except that we intend to utilize additional sources of
capital to fund property acquisitions and repayment of our
acquisition credit facility.
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 November 10, 1998, $119.4 million
of borrowing capacity was available to the Company under the
acquisition credit facility. At that time, the outstanding
balance was $30.6 million with an effective interest rate of
6.18%. This 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 lease agreements. Any
additional borrowings will increase the Company's exposure to
interest rate risk.
We expect to meet our long-term capital needs for the acquisition
of properties through the issuance of public or private debt or
equity. In August 1997, we 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 $201.4 million in value of
securities has been issued under the universal shelf registration
statement through November 10, 1998, leaving $98.6 million
available.
In October 1998, we issued $100 million of 8.25% unsecured senior
notes due November 2008 (the "Notes"). The Notes were sold at
par ($25.00). After taking into effect the results of the
treasury interest rate lock agreement, which is described in the
next paragraph, the effective rate to the Company on the Notes is
9.12%. The net proceeds from the issuance of the Notes were used
Page 17
to repay $96.0 million of outstanding borrowings under the
Company's credit facility and for other corporate purposes.
Interest on the Notes is payable monthly on the 15th of each
month, commencing in December 1998. The Notes commenced trading
on the New York Stock Exchange on November 3, 1998 under the
symbol "OUI". The cusip number of the Notes is 756109-AA2.
In May 1998, we entered into a treasury interest rate lock
agreement to protect against the possibility of rising interest
rates applicable to an anticipated debt offering (discussed in the
preceding paragraph). Under the interest rate lock agreement, we
were to 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, at the end of six months. Based on the 10-year treasury
interest rate at October 23, 1998 (the interest rate pricing
date), the Company made a payment of $8.7 million in settlement of
the agreement. The payment on the agreement is being amortized
over 10 years (the life of the Notes) as a yield adjustment to
interest expense.
On March 30, 1998, we 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, we 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 $18.9 million under the acquisition credit facility.
We 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 our 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 third quarter of 1998, we acquired 33 retail
properties located in 22 states and invested $38.2 million in new
properties and properties under development (excluding estimated
unfunded development costs on properties under construction at
September 30, 1998 of $16.5 million). During the quarter, the
Company also invested $36,000 in existing properties in its
portfolio. During the third quarter of 1998, the Company added
three new industries and five new retailers to its real estate
portfolio. The 33 properties acquired will contain
Page 18
approximately 392,100 leasable square feet and are 100% leased
under net leases, with an average initial lease term of 14.5
years. The weighted average annual unleveraged return on the
cost of the 33 properties (including the estimated unfunded
development cost of the properties under development) is
estimated to be 10.6%, computed as the 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 33
properties acquired in the third quarter of 1998 will not differ
from the foregoing percentage.
During the first nine months of 1998, Realty Income acquired 99
retail properties located in 34 states and invested $140.2
million in new properties and properties under development
(excluding estimated unfunded development costs on properties
under construction at September 30, 1998 of $19.1 million) and
selectively sold five properties, increasing the number of
properties in its portfolio by 11.4% to 920 from 826 at
December 31, 1997. During the first nine months of 1998, the
Company added five new industries and 16 new retailers to its
real estate portfolio. The Company also invested $110,000 in
existing properties in its portfolio. The 99 properties acquired
will contain approximately 1.0 million leasable square feet and
are 100% leased under net leases, with an average initial lease
term of 14.6 years. The weighted average annual unleveraged
return on the cost of the 99 properties (including the estimated
unfunded development cost of the properties under development) is
estimated to be 10.4%, computed as the 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 99
properties acquired in 1998 will not differ from the foregoing
percentage.
Of the properties acquired during the first nine months of 1998,
84 were occupied as of November 10, 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 for business. All of
the properties acquired in 1998, including the properties under
development, are leased with initial terms of 9 to 20 years.
Page 19
The following table summarized Realty Income's 1998 acquisition
activity by quarter.
<TABLE>
<CAPTION>
Initial Approx.
Properties Lease Term Leasable Total
Acquired (Years) Square Feet Invested
========== ========== =========== ============
<S> <C> <C> <C> <C>
1st quarter 22 15.5 356,600 $ 51,812,000
2nd quarter 44 14.4 300,700 50,159,000
3rd quarter 33 14.5 392,100 38,210,000
- -------------- ---------- ---------- ----------- ------------
Totals 99 14.6 1,049,400 $140,181,000
============== ========== ========== =========== ============
</TABLE>
Distributions
Cash distributions paid during the first nine months of 1998 and
1997 were $38.8 million and $32.6 million, respectively.
During the first nine months of 1998, the Company paid three
monthly distributions of $0.16 per share, three monthly
distributions of $0.1625 per share and three monthly
distributions of $0.1650 per share. Distributions for the first
nine months of 1998 totaled $1.4625 per share. In April, July
and October 1998, the monthly distributions were increased to
$0.1625, $0.1650 and $0.1675 per share, respectively. In
September, October and November 1998, the Company declared
distributions of $0.1675 per share which were paid on
October 15, 1998, and payable on November 16, 1998 and
December 15, 1998, respectively.
FUNDS FROM OPERATIONS ("FFO")
- -----------------------------
FFO for the third quarter of 1998 increased by $3.47 million or
27.5% to $16.08 million versus $12.61 million during the third
quarter of 1997.
Page 20
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 third quarter of
1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net income $ 10,493 $ 8,466
Plus depreciation and amortization 5,630 4,706
Plus provision for impairment loss -- 70
Less depreciation of furniture,
fixtures and equipment and
amortization of organization costs (40) (36)
Less gain on sales of properties -- (596)
-------- --------
Total Funds From Operations $ 16,083 $ 12,610
======== ========
Cash Distributions Paid $ 13,281 $ 10,864
FFO in excess of Distributions $ 2,802 $ 1,746
Diluted weighted average
number of shares outstanding 26,834,618 22,999,536
</TABLE>
FFO for the first nine months of 1998 increased by $8.73 million
or 23.3% to $46.16 million versus $37.43 million during the same
period 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 nine months of
1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net income $ 30,725 $ 24,719
Plus depreciation and amortization 16,083 13,654
Plus provision for impairment loss -- 140
Less depreciation of furniture,
fixtures and equipment and
amortization of organization costs (119) (60)
Less gain on sales of properties (526) (1,023)
-------- --------
Total Funds From Operations $ 46,163 $ 37,430
======== ========
Cash Distributions Paid $ 38,826 $ 32,586
FFO in excess of Distributions $ 7,337 $ 4,844
Diluted weighted average
number of shares outstanding 26,575,926 22,993,205
</TABLE>
Page 21
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 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.
We define 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 our results of operations for
the three and nine months ended September 30, 1998 to the three
and nine months ended September 30, 1997.
Rental revenue was $21.81 million for the third quarter of 1998
versus $16.80 million for the comparable quarter of 1997, an
increase of 29.8% or $5.01 million. The increase in rental
revenue was primarily due to the acquisition of 195 properties
during 1997 and the first nine months of 1998 (the "New
Properties"). The New Properties generated revenue of $6.27
million in the third quarter of 1998 compared to $1.46 million in
the third quarter of 1997, an increase of $4.81 million.
Rental revenue was $61.33 million for the first nine months of
1998 versus $48.26 million for the comparable period of 1997, an
increase of 27.1% or $13.07 million. The increase in rental
revenue was primarily due to the acquisition of the New
Properties. The New Properties generated revenue of $15.01
million in the first nine months of 1998 compared to $2.25
million in the comparable period of 1997, an increase of $12.76
million.
Of the 920 properties in the portfolio as of September 30, 1998,
913 are single-tenant properties with the remaining properties
Page 22
being multi-tenant properties. Of the 913 single-tenant
properties 910, or over 99%, were leased with an average
remaining lease term (excluding extension options) of
approximately 8.4 years. At September 30, 1998, 910 of the
Company's 913 single tenant properties were under leases that
provide for increases in rents through:
- Base rent increases tied to a consumer price index with
adjustment ceilings;
- Overage rent based on a percentage of the tenants' gross
sales or,
- Fixed increases.
Some leases contain more than one of these clauses. Percentage
rent, which is included in rental revenue, was $228,000 during
the third quarter of 1998 and $216,000 in the comparable quarter
of 1997. Percentage rent during the first nine months of 1998
and 1997 was $503,000 and $586,000, respectively.
Same store rents generated on 717 properties owned during the
entire first nine months of 1998 and 1997 increased by $597,000
or 1.3%, to $45.78 million from $45.18 million. Same store rents
generated on the same 717 properties owned during the entire
third quarter of 1998 and 1997 increased by $278,000 or 1.9%, to
$15.38 million from $15.10 million.
Page 23
The following tables represent Realty Income's rental revenue by
industry (dollars in thousands):
<TABLE>
<CAPTION>
Annualized Rent as of Nine Months Ended
September 30, 1998 September 30, 1998
--------------------- ---------------------
Rental(1) Percentage Rental Percentage
Industry Revenue of Total Revenue of Total
- -------------------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Apparel Stores $ 3,927 4.2% $ 2,479 4.0%
Automotive Parts 8,268 8.9 4,391 7.2
Automotive Service 6,845 7.4 4,680 7.6
Book Stores 450 0.5 338 0.5
Business Services 120 0.1 -- --
Child Care 25,298 27.2 18,023 29.4
Consumer Electronics 4,431 4.8 3,468 5.7
Convenience Stores 5,390 5.8 3,732 6.1
Drug Stores 235 0.2 1 --
Grocery Stores 742 0.8 -- --
Health & Fitness 1,239 1.3 -- --
Home Furnishings 8,064 8.7 4,768 7.8
Office Supplies 2,476 2.7 1,897 3.1
Pet Supplies & Services 1,375 1.5 289 0.5
Private Education 1,296 1.4 502 0.8
Restaurants 14,304 15.4 10,283 16.8
Shoe Stores 890 0.9 451 0.7
Video Rental 3,707 4.0 2,222 3.6
Other 3,878 4.2 3,801 6.2
- -------------------- ------- ------ ------- ------
Total $92,935 100.0% $61,325 100.0%
==================== ======= ====== ======= ======
</TABLE>
[CAPTION]
[FN]
(1) Annualized rental revenue is calculated by multiplying the
monthly contractual base rent as of October 1, 1998 for each of
the properties 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>
Page 24
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1997
---------------------
Rental Percentage
Industry Revenue of Total
- -------------------- ------- ----------
<S> <C> <C>
Apparel Stores $ 14 --%
Automotive Parts 4,295 8.9
Automotive Service 3,008 6.2
Book Stores 273 0.6
Business Services -- --
Child Care 17,776 36.8
Consumer Electronics 3,262 6.8
Convenience Stores 2,650 5.5
Drug Stores -- --
Grocery Stores -- --
Health & Fitness -- --
Home Furnishings 2,529 5.2
Office Supplies 596 1.2
Pet Supplies & Services 71 0.1
Private Education -- --
Restaurants 10,066 20.9
Shoe Stores 24 0.1
Video Rental 36 0.1
Other 3,656 7.6
- -------------------- ------- ------
Totals $48,256 100.0%
==================== ======= ======
</TABLE>
At September 30, 1998, the Company had three properties that were
not under lease, as compared to three at June 30, 1998 and eight
at December 31, 1997. At September 30, 1998, 917, or over 99%,
of the 920 properties in the portfolio were under lease
agreements with third party tenants.
Interest and other revenue during the third quarter of 1998 and
1997 totaled $155,000 and $42,000, respectively, an increase of
$113,000. Interest and other revenue during the first nine
months of 1998 and 1997 totaled $233,000 and $190,000,
respectively, an increase of $43,000.
Depreciation and amortization was $5.6 million in the third
quarter of 1998 versus $4.7 million in the comparable quarter of
1997 and $16.1 million for the first nine months of 1998 versus
$13.7 million for the comparable nine months of 1997. The
increase in 1998 was primarily due to depreciation of New
Properties.
Page 25
Interest expense in the third quarter of 1998 increased by $1.2
million to $3.7 million, as compared to $2.5 million in the third
quarter of 1997. The following is a summary of the five
components of interest expense for the third quarter of 1998 and
1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 Net Change
-------- -------- ----------
<S> <C> <C> <C>
Interest on outstanding
loans and notes $ 3,742 $ 2,405 $ 1,337
Amortization of the gain on the
1996 treasury lock agreement (29) (29) --
Credit facility commitment fees 58 44 14
Amortization of credit facility
origination costs and deferred
bond financing costs 97 83 14
Interest capitalized (186) (53) (133)
-------- -------- --------
Totals $ 3,682 $ 2,450 $ 1,232
======== ======== ========
</TABLE>
Interest on outstanding loans and notes was $1.3 million higher
in the third quarter of 1998 than in 1997, due to an increase in
the average outstanding balance, which was partially offset by a
lower average interest rate. During the third quarter of 1998,
the average outstanding balance and interest rate (after taking
into affect amortization of the gain on the 1997 treasury lock
agreement) on the 1997 notes and credit facility were $208.1
million and 7.08% as compared to $124.9 million and 7.50% during
the third quarter of 1997. During the third quarter of 1998, the
credit facility's average outstanding balance was $98.1 million
and average interest rate was 6.52%. The credit facility's
balance at September 30, 1998 was $117.0 million.
Interest expense for the first nine months of 1998 increased by
$3.27 million to $9.04 million, as compared to $5.77 million in
the comparable period of 1997. The following is a summary of the
five components of interest expense for the first nine months of
1998 and 1997 (dollars in thousands):
Page 26
<TABLE>
<CAPTION>
1998 1997 Net Change
-------- -------- ----------
<S> <C> <C> <C>
Interest on outstanding
loans and notes $ 9,085 $ 5,654 $ 3,431
Amortization of the gain on the
1996 treasury lock agreement (86) (46) (40)
Credit facility commitment fees 171 99 72
Amortization of credit facility
origination costs and deferred
bond financing costs 287 199 88
Interest capitalized (420) (135) (285)
-------- -------- ----------
Totals $ 9,037 $ 5,771 $ 3,266
======== ======== ==========
</TABLE>
Interest on outstanding loans and notes was $3.4 million higher in
the first nine months of 1998 than in 1997, due to an increase in
the average outstanding balance, which was partially offset by a
lower average interest rate. During the first nine months of
1998, the average outstanding balance and interest rate (after
taking into affect amortization of the gain on the 1997 treasury
lock agreement) on the 1997 notes and credit facility were $165.1
million and 7.29% as compared to $108.4 million and 7.35% during
the comparable period of 1997. During the first nine months of
1998, the credit facility's average outstanding balance was $55.1
and average interest rate was 6.52%.
General and administrative expenses increased by $329,000 to
$1.67 million in the third quarter of 1998 versus $1.34 million
in the comparable quarter of 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 the third quarter of 1998 as compared to 7.9% in the
comparable quarter of 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. Realty Income
has 49 employees as of November 10, 1998.
General and administrative expenses increased by $920,000 to $4.8
million in the first nine months of 1998 versus $3.9 million in
the first nine months of 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
7.9% in the first nine months of 1998 as compared to 8.1% in the
first nine months of 1997.
Page 27
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
September 30, 1998, three properties were available for lease, as
compared to three at June 30, 1998 and eight at December 31, 1997.
Property expenses were $497,000 in the third quarter of 1998 and
$409,000 in the third quarter of 1997, an increase of $88,000.
The increase in property expenses was primarily attributable to
the New Properties. It is anticipated that property expenses
will increase as additional properties are acquired. Property
expenses as a percentage of revenue decreased to 2.3% in the
third quarter of 1998 as compared to 2.4% in the comparable
quarter of 1997.
Property expenses were $1.4 million in the first nine months of
1998 and $1.3 million in the comparable period of 1997, an
increase of $134,000. The increase in property expenses was
primarily attributable to the New Properties. Property expenses
as a percentage of revenue decreased to 2.3% in the first nine
months of 1998 as compared to 2.6% in the comparable period of
1997.
We review 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 nine months of 1998. In the third
quarter of 1997, a $70,000 charge was taken to reduce the net
carrying value to its estimated fair value less costs to sell on
one property because it became held for sale. During the first
nine months of 1997, a $140,000 charge was taken on two
properties. Both of these properties have been sold.
We sold no properties during the third quarter of 1998. During
the third quarter of 1997, we sold two properties (one child care
center and one restaurant) for $1.0 million and recognized a gain
of $596,000.
During the first nine months of 1998, we sold five properties (two
child care centers, one multi-tenant location and two restaurants)
for a total of $2.8 million and recorded a gain of $526,000.
During the first nine months of 1997, the Company sold nine
properties (six restaurants, two child care centers and one multi-
tenant location) for $3.9 million and recognized a gain of $1.0
million.
Page 28
In the third quarter of 1998, the Company had net income of $10.5
million versus $8.5 million in 1997. The $2.0 million increase in
net income is primarily due to the increase in rental revenue from
the New Properties of $4.8 million, which was partially offset by
an increase of $2.5 million in the following expenses:
- Depreciation and amortization of $924,000;
- Interest expense of $1.2 million; and
- General and administrative of $329,000.
In the first nine months of 1998, the Company had net income of
$30.7 million versus $24.7 million in the comparable period of
1997. The $6.0 million increase in net income is primarily due to
the increase in rental revenue from the New Properties of $12.8
million, which was partially offset by an increase of $6.6 million
in the following expenses:
- Depreciation and amortization of $2.4 million;
- Interest expense of $3.3 million; and
- General and administrative of $920,000.
PROPERTIES
- ----------
As of October 1, 1998, Realty Income owned a diversified portfolio
of 920 properties in 44 states consisting of over 7.2 million
square feet of leasable space. At October 1, 1998, approximately
99% of the properties were under net lease agreements. Net leases
typically require the tenant to be responsible for property
operating costs including property taxes, insurance and
maintenance.
Our properties are retail locations primarily leased to regional
and national retail chain store operators. The average leasable
retail space of the 920 properties is approximately 7,900 square
feet on approximately 47,800 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.
The following table sets forth certain information regarding the
Company's properties as of October 1, 1998, classified according
to the business of the respective tenants.
Page 29
<TABLE>
<CAPTION>
Approximate Percent of
Number of Leasable Annualized Annualized
Industry Properties Square Feet Rent (1) Rent
- -------------------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Apparel Stores 5 228,900 $ 3,927,000 4.2%
Automotive Parts 121 676,100 8,268,000 8.9
Automotive Service 98 325,100 6,845,000 7.4
Book Stores 1 30,000 450,000 0.5
Business Services 1 7,500 120,000 0.1
Child Care 321 2,064,200 25,298,000 27.2
Consumer Electronics 37 559,200 4,431,000 4.8
Convenience Stores 61 168,200 5,390,000 5.8
Drug Stores 1 11,300 235,000 0.2
Grocery 2 67,700 742,000 0.8
Health & Fitness 2 70,700 1,239,000 1.3
Home Furnishings 35 1,016,300 8,064,000 8.7
Office Supplies 8 198,400 2,476,000 2.7
Pet Supplies & Services 7 117,700 1,375,000 1.5
Private Education 4 77,100 1,296,000 1.4
Restaurants 173 869,200 14,304,000 15.4
Shoe Stores 3 44,100 890,000 0.9
Video Rental 29 215,600 3,707,000 4.0
Other 11 547,100 3,878,000 4.2
- -------------------- ---------- ----------- ----------- ---------
TOTALS 920 7,294,400 $92,935,000 100.0%
==================== ========== =========== =========== =========
</TABLE>
[FN]
(1) Annualized Rent is calculated by multiplying the monthly
contractual base rent as of October 1, 1998 for each of the
properties by 12 and adding the previous 12 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 each property.
</FN>
Of the 920 properties in the portfolio at October 1, 1998, 913
were single-tenant properties with the remaining properties being
multi-tenant properties. As of October 1, 1998, 910 of the 913
single-tenant properties, or over 99%, were net leased with an
average remaining lease term (excluding extension options) of
approximately 8.4 years.
The following table sets forth certain information regarding the
timing of the lease term expirations (excluding extension
options) on the Company's 910 net leased, single-tenant retail
properties as of October 1, 1998.
Page 30
<TABLE>
<CAPTION>
Percent of
Number of Total
Leases Annualized Annualized
Year Expiring Base Rent(1)(2) Base Rent
- ------ --------- --------------- ----------
<S> <C> <C> <C>
1999 30 $ 1,297,000 1.5%
2000 38 1,973,000 2.3
2001 48 4,076,000 4.6
2002 79 6,346,000 7.2
2003 68 5,273,000 6.0
2004 111 9,137,000 10.4
2005 81 5,900,000 6.7
2006 28 2,429,000 2.8
2007 92 5,870,000 6.7
2008 61 5,084,000 5.8
2009 17 1,347,000 1.5
2010 38 3,258,000 3.7
2011 37 5,119,000 5.8
2012 52 5,872,000 6.7
2013 65 11,884,000 13.6
2014 5 571,000 0.7
2015 30 5,209,000 5.9
2016 13 1,978,000 2.3
2017 11 4,107,000 4.7
2018 6 959,000 1.1
- ------ --------- --------------- ----------
Totals 910 $ 87,689,000 100.0%
====== ========= =============== ==========
</TABLE
<FN>
(1) Annualized base rent is calculated by multiplying the monthly
contractual base rent as of October 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
properties. Percentage rent for the previous 12 months totaled
$1.7 million.
(2) This table does not include seven multi-tenant properties and
three 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>
The following table sets forth certain state-by-state information
regarding the properties owned by the Company as of
October 1, 1998.
Page 31
</TABLE>
<TABLE>
<CAPTION>
Approximate Percent of
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 29 99 193,500 2,667,000 2.9
Arkansas 4 100 31,100 551,000 0.6
California 56 94 1,034,000 11,244,000 12.1
Colorado 41 100 228,500 3,409,000 3.7
Connecticut 9 100 216,300 2,825,000 3.0
Delaware 1 100 5,400 72,000 0.1
Florida 58 100 581,900 6,298,000 6.8
Georgia 48 100 298,800 4,162,000 4.5
Idaho 12 100 58,500 857,000 0.9
Illinois 29 100 202,200 2,582,000 2.8
Indiana 24 100 130,000 1,694,000 1.8
Iowa 9 100 60,600 574,000 0.6
Kansas 20 100 202,500 2,253,000 2.4
Kentucky 13 100 43,500 1,092,000 1.2
Louisiana 5 100 39,600 515,000 0.6
Maryland 7 100 42,900 658,000 0.7
Massachusetts 7 100 53,000 966,000 1.0
Michigan 8 100 52,300 772,000 0.8
Minnesota 18 100 126,900 1,945,000 2.1
Mississippi 15 100 148,500 1,137,000 1.2
Missouri 31 100 186,100 2,316,000 2.5
Montana 2 100 30,000 296,000 0.3
Nebraska 9 100 93,700 1,134,000 1.2
Nevada 7 100 86,400 1,333,000 1.4
New Hampshire 1 100 6,400 125,000 0.1
New Jersey 3 100 39,800 533,000 0.6
New Mexico 3 100 12,000 107,000 0.1
New York 9 100 170,600 3,596,000 3.8
North Carolina 29 100 151,100 2,466,000 2.7
Ohio 65 100 324,200 5,218,000 5.6
Oklahoma 16 100 94,200 1,167,000 1.3
Oregon 17 100 92,400 1,258,000 1.4
Pennsylvania 19 100 140,900 1,950,000 2.1
South Carolina 23 100 93,000 1,523,000 1.6
South Dakota 1 100 6,100 84,000 0.1
Tennessee 21 100 195,100 2,326,000 2.5
Texas 141 100 1,136,700 11,552,000 12.4
Utah 7 100 45,400 594,000 0.6
Virginia 29 100 133,200 2,744,000 3.0
Washington 43 100 252,600 3,409,000 3.7
</TABLE>
(continued on next page)
Page 32
(continued)
<TABLE>
<CAPTION>
Approximate Percent of
Number of Percent Leasable Annualized Annualized
State Properties Leased Square Feet Rent (1) Rent
- -------------- ---------- ------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
West Virginia 2 100 16,800 147,000 0.2
Wisconsin 17 100 161,000 1,979,000 2.1
Wyoming 4 100 20,100 268,000 0.3
- -------------- ---------- ------- ----------- ----------- ----------
Totals 920 99% 7,294,400 $92,935,000 100.0%
============== ========== ======= =========== =========== ==========
</TABLE>
[FN]
(1) Annualized Rent is calculated by multiplying the monthly
contractual base rent as of October 1, 1998 for each of the
properties by 12 and adding the previous 12 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 each property.
</FN>
The following table sets forth certain information regarding the
properties owned by the Company as of October 1, 1998, classified
according to the business of the respective tenants.
<TABLE>
<CAPTION>
Number of Annualized Percent of
Properties Rent (1) Revenue
---------- ---------- ----------
<S> <C> <C> <C>
GOODS
Apparel Stores 5 $ 3,927,000 4.2%
Automotive Parts 80 4,808,000 5.2
Book Stores 1 450,000 0.5
Consumer Electronics 37 4,431,000 4.8
Drug Stores 1 235,000 0.2
Grocery 2 742,000 0.8
Home Furnishings 35 8,064,000 8.7
Office Supplies 8 2,476,000 2.7
Pet Supplies 2 455,000 0.5
Shoe Stores 3 890,000 0.9
---------- ---------- ----------
174 26,478,000 28.5
---------- ---------- ----------
</TABLE>
(continued on next page)
Page 33
(continued)
<TABLE>
<CAPTION>
Number of Annualized Percent of
Properties Rent (1) Revenue
---------- ---------- ----------
<S> <C> <C> <C>
GOODS WITH SERVICES
Automotive Parts 41 3,460,000 3.7
Business Services 1 120,000 0.1
Convenience Stores 61 5,390,000 5.8
Pet Supplies & Services 5 920,000 1.0
Restaurants 173 14,304,000 15.4
Video Rental 29 3,707,000 4.0
---------- ---------- ----------
310 27,901,000 30.0
---------- ---------- ----------
SERVICES
Automotive Service 98 6,845,000 7.4
Child Care 321 25,298,000 27.2
Health & Fitness 2 1,239,000 1.3
Other 11 3,878,000 4.2
Private Education 4 1,296,000 1.4
---------- ---------- ----------
436 38,556,000 41.5
---------- ---------- ----------
TOTALS 920 $92,935,000 100.0%
========== ========== ==========
</TABLE>
[FN]
(1) Annualized Rent is calculated by multiplying the monthly
contractual base rent as of October 1, 1998 for each of the
properties by 12 and adding the previous 12 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 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, increases
in the consumer price index, and/or fixed increases. 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.
Page 34
Approximately 99% 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.
IMPACT OF ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET ADOPTED
- --------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" ("Statement No. 131"). Statement No. 131
establishes standards for the way that public business
enterprises report information about operating segments in
annual financial statements and requires that enterprises
selected information about operating segments in interim
financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers, and is effective for
fiscal periods beginning after December 15, 1997.
In April 1998, the AICPA Accounting Standards Executive
Committee issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires
that costs incurred during start-up activities, including
organization costs, be expense as incurred. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("Statement
No. 133"). Statement No. 133 establishes accounting and
reporting standards for derivative instruments. Statement No.
133 is effective for all fiscal quarters beginning after
June 15, 1999.
The Company anticipates that the adoption of SOP 98-5 and
Statement Nos. 131 and 133 will not have a material effect on the
financial position, results of operations or liquidity of the
Company.
Page 35
PART II. OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
Exhibit No. Description
=========== ===========
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 Articles Supplementary of the Class A Junior
Participating Preferred Stock of Realty Income
Corporation (filed as an exhibit to Realty Income's
registration statement on Form 8-A, dated June 26,
1998, and incorporated herein by reference).
3.3 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).
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).
4.4 Rights Agreement, dated as of June 25, 1998, between
Realty Income Corporation and The Bank of New York
(filed as an exhibit to the Company's registration
statement on Form 8-A, dated June 26, 1998, and
incorporated herein by reference).
4.5 Pricing Committee Resolutions (filed as an exhibit
to Realty Income's Form 8-K, dated October 27, 1998
and incorporated herein by reference).
4.6 Form of 8.25% Notes due 2008 (filed as an exhibit to
Realty Income's Form 8-K, dated October 27, 1998
and incorporated herein by reference).
Page 36
4.7 Form of Indenture dated as of October 28, 1998
between Realty Income and The Bank of New York
(filed as an exhibit to Realty Income's Form 8-K,
dated October 27, 1998 and incorporated herein by
reference).
27 Financial Data Schedule, filed herein
B. No reports on Form 8-K were filed by registrant during
the quarter for which this report is filed.
A report on Form 8-K dated October 27, 1998 was filed on
October 28, 1998 reporting the issuance of $100.0
million, 8.25%, 10-year notes due in November 2008.
A report on Form 8-K dated October 15, 1998 was filed on
October 16, 1998 setting forth risks associated with the
Company.
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: November 12, 1998 -------------------------------------
Gary M. Malino, Senior Vice President
Chief Financial Officer (Principal
Financial and Accounting Officer)
EXHIBIT INDEX
</TABLE>
<TABLE>
<CAPTION>
Exhibit No. Description
=========== ===========
<S> <C>
27 Financial Data Schedule
</TABLE>
Page 37
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE>5
<LEGEND>
This Schedule contains summary financial information extracted
from the registrant's Balance Sheet as of September 30, 1998 and
Income Statement for the nine months ended September 30, 1998 and
is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER>1
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,788,000
<SECURITIES> 0
<RECEIVABLES> 1,374,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> <F1> 0
<PP&E> 836,428,000
<DEPRECIATION> (165,980,000)
<TOTAL-ASSETS> 697,599,000
<CURRENT-LIABILITIES> <F1> 0
<BONDS> 227,000,000
<COMMON> 26,817,000
0
0
<OTHER-SE> 426,364,000
<TOTAL-LIABILITY-AND-EQUITY> 697,599,000
<SALES> 0
<TOTAL-REVENUES> 61,558,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 22,322,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,037,000
<INCOME-PRETAX> 30,725,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 30,725,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,725,000
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.16
<FN>
Current assets and current liabilities are not applicable to
the Company under current industry standards.
/FN
Page 38
<PAGE>
</TABLE>
