<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 1, 1997)
2,400,000 SHARES
[LOGO]
9 3/8% CLASS B CUMULATIVE REDEEMABLE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
------------------
Distributions on the Class B Preferred Stock will be cumulative from the
date of original issuance and will be paid quarterly in arrears. The Class B
Preferred Stock will not be redeemable before May 25, 2004 except under limited
circumstances intended to preserve our status as a real estate investment trust
for federal and/or state income tax purposes. Beginning May 25, 2004, we may
redeem any or all shares of Class B Preferred Stock at $25 per share plus
accrued and unpaid dividends.
Realty Income Corporation 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. Through our
predecessors, we have been in the real estate investment business since 1969. As
of March 31, 1999, we owned a diversified portfolio of 1,004 properties located
in 45 states with over 8.1 million square feet of leasable space. As of March
31, 1999, 99.4% of our single-tenant properties were leased pursuant to leases
with an average remaining term (excluding extension options) of approximately
8.6 years.
We have applied to list the Class B Preferred Stock on the New York Stock
Exchange under the symbol "OPrB". If approved for listing, we expect that
trading on the New York Stock Exchange will commence within 30 days after
initial delivery of the Class B Preferred Stock.
INVESTING IN THE CLASS B PREFERRED STOCK INVOLVES RISKS WHICH ARE DESCRIBED
IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE S-8.
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PER SHARE TOTAL
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Public offering price(1)................................................. $25.00 $60,000,000
Underwriting discount.................................................... $.7875 $1,890,000
Proceeds, before expenses, to Realty Income Corporation.................. $24.2125 $58,110,000
</TABLE>
(1) Plus accrued dividends from May 25, 1999, if settlement occurs after
that date
The underwriters may also purchase up to an additional 360,000 shares of
Class B Preferred Stock at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus supplement to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus are truthful or complete.
Any representation to the contrary is a criminal offense.
The shares of Class B Preferred Stock will be ready for delivery in New
York, New York on or about May 25, 1999.
------------------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
A.G. EDWARDS & SONS, INC.
EVEREN SECURITIES, INC.
FIRST UNION CAPITAL MARKETS CORP.
PAINEWEBBER INCORPORATED
SUTRO & CO. INCORPORATED
------------------------
The date of this prospectus supplement is May 20, 1999.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
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PAGE
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Forward-Looking Statements................................................................................. S-3
Prospectus Supplement Summary.............................................................................. S-4
The Offering............................................................................................... S-5
Risk Factors............................................................................................... S-8
Selected Financial Information............................................................................. S-14
Use of Proceeds............................................................................................ S-16
Capitalization............................................................................................. S-17
Business and Properties.................................................................................... S-17
Management................................................................................................. S-28
Description of Class B Preferred Stock..................................................................... S-31
Material Federal Income Tax Considerations to Holders of Class B Preferred Stock........................... S-39
Where You Can Find More Information........................................................................ S-46
Incorporation of Information We File with the SEC.......................................................... S-46
Underwriting............................................................................................... S-47
Legal Matters.............................................................................................. S-49
PROSPECTUS
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PAGE
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Available Information...................................................................................... 2
Incorporation of Certain Documents by Reference............................................................ 2
The Company................................................................................................ 3
Use of Proceeds............................................................................................ 3
Ratios of Earnings to Fixed Charges........................................................................ 3
Description of Debt Securities............................................................................. 4
Description of Common Stock................................................................................ 14
Description of Preferred Stock............................................................................. 17
Restrictions on Ownership and Transfers of Capital Stock................................................... 22
Certain Federal Income Tax Considerations.................................................................. 25
Plan of Distribution....................................................................................... 31
Experts.................................................................................................... 32
Legal Matters.............................................................................................. 32
</TABLE>
S-2
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus supplement contains forward-looking statements. When used in
this prospectus supplement, the words estimated, anticipated and similar
expressions are intended to identify forward-looking statements. Such
forward-looking statements are subject to risks, uncertainties, and assumptions
about Realty Income Corporation, including, among other things:
- Our anticipated growth strategies;
- Our intention to acquire additional properties;
- Anticipated trends in our business, including trends in the market for
long-term net leases of freestanding, single tenant retail properties;
- Future expenditures for development projects; and
- Availability of capital to finance our business.
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 our failure to qualify as a real estate investment trust, general
business and economic conditions, competition, interest rates, accessibility of
debt and equity capital markets and other risks inherent in the real estate
business including tenant defaults, potential liability relating to
environmental matters and illiquidity of real estate investments.
Additional factors that may cause risks and uncertainties include those
discussed under "Risk Factors" in this prospectus supplement and in the sections
entitled "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Report on Form 10-Q for
the quarter ended March 31, 1999.
Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date hereof. We undertake 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
of this prospectus supplement or to reflect the occurrence of unanticipated
events. In light of these risks and uncertainties, the forward-looking events
discussed in this prospectus supplement might not occur.
S-3
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO
YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS AND THE DOCUMENTS INCORPORATED AND DEEMED TO BE INCORPORATED BY
REFERENCE THEREIN, INCLUDING THE FINANCIAL DATA AND RELATED NOTES, BEFORE MAKING
AN INVESTMENT DECISION. UNLESS THIS PROSPECTUS SUPPLEMENT OTHERWISE INDICATES OR
THE CONTEXT OTHERWISE REQUIRES, THE TERMS "REALTY INCOME," "OUR" AND "WE" AS
USED IN THIS PROSPECTUS SUPPLEMENT REFER TO REALTY INCOME CORPORATION AND ITS
SUBSIDIARIES ON A CONSOLIDATED BASIS SINCE AUGUST 15, 1994 AND TO OUR
PREDECESSOR PARTNERSHIPS FOR THE PERIOD OF TIME PRIOR TO AUGUST 15, 1994. UNLESS
OTHERWISE EXPRESSLY STATED OR THE CONTEXT OTHERWISE REQUIRES, ALL INFORMATION IN
THIS PROSPECTUS SUPPLEMENT ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION
IS NOT EXERCISED, AND ALL INFORMATION RELATING TO OUR PROPERTIES IS AS OF MARCH
31, 1999.
REALTY INCOME
Realty Income is organized to operate as an equity real estate investment
trust, commonly referred to as a 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 March 31, 1999, we owned a diversified portfolio of 1,004
properties located in 45 states with over 8.1 million square feet of leasable
space. As of March 31, 1999, 998 or 99.4% of our 1,004 properties were leased.
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.
Since 1970 and through December 31, 1998, we have acquired and leased back
to regional and national retail chains 944 properties (including 34 properties
that have been sold) and have collected in excess of 98% of the original
contractual rent obligations on those properties. We believe that the long-term
ownership of an actively managed, diversified portfolio of retail properties
leased under long-term, net lease agreements produces consistent, predictable
income. We believe that the income generated under long-term leases, coupled
with the retailer's responsibility for property expenses under the net lease
structure, generally produce a more predictable income stream than many other
types of real estate portfolios. Of the 1,004 properties in the portfolio as of
March 31, 1999, 997 were single-tenant properties and the remaining properties
were multi-tenant. As of March 31, 1999, 991 or 99.4% of our 997 single-tenant
properties were net leased pursuant to leases with an average remaining lease
term (excluding extension options) of approximately 8.6 years.
Our five senior officers have each managed our properties and operations for
between eight and 14 years. Our directors and five senior officers, as a group,
owned approximately 2.9% of our outstanding common stock as of May 12, 1999.
Realty Income had 49 employees as of May 12, 1999.
S-4
<PAGE>
RECENT DEVELOPMENTS
ACQUISITION OF 34 PROPERTIES DURING THE QUARTER ENDED MARCH 31,
1999. During the first three months of 1999, Realty Income acquired 34 retail
properties located in 16 states and invested approximately $40.8 million in new
properties and properties under development (excluding estimated unfunded
development costs on properties under construction at March 31, 1999). The
number of properties in our portfolio increased by 3.5% to 1,004 at March 31,
1999 from 970 at December 31, 1998. During the first three months of 1999, we
continued to diversify our portfolio with the addition of one new industry
segment, Entertainment, and five new retail chains. As of March 31, 1999, our
portfolio of 1,004 properties consisted of 70 separate retail chains doing
business in 22 separate retail segments.
The 34 new properties are leased to 11 separate retail chains operating in
ten different retail industries. The 34 properties acquired will contain
approximately 286,000 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 34 properties (including the estimated
unfunded development cost of the properties under development) is estimated to
be 10.3%, computed as estimated contractual net operating income (which in the
case of a net leased property is equal to the base rent or, in the case of
properties under construction, the estimated base rent under the lease) for the
first year of each lease, divided by total acquisition and estimated development
costs. Since it is possible that a tenant could default on the payment of
contractual rent, no assurance can be given that the actual return on the cost
of the 34 properties acquired in the first quarter of 1999 will not differ from
the foregoing percentage.
8% NOTES DUE 2009. On January 21, 1999, we completed the sale of $20
million principal amount of our 8% Notes due 2009. The notes were sold at
98.757% of par to yield 8.1%. The proceeds from the offering were used to pay
down outstanding indebtedness under our revolving credit agreement and for other
general corporate purposes.
THE OFFERING
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Issuer............................ Realty Income Corporation
Securities Offered................ 2,400,000 shares of 9 3/8% Class B Cumulative Redeemable
Preferred Stock, plus up to an additional 360,000 shares
if the underwriters' over-allotment option is exercised
in full.
Dividends......................... Investors will be entitled to receive cumulative cash
dividends on the Class B Preferred Stock at a rate of
9 3/8% per annum of the $25.00 per share liquidation
preference (equivalent to $2.34375 per annum per share).
Dividends on the Class B Preferred Stock will be payable
quarterly in arrears commencing June 30, 1999. Dividends
on the Class B Preferred Stock will be cumulative from
the date of original issuance, which is expected to be
May 25, 1999. Because the first dividend payment date is
June 30, 1999, the dividend payable on each share of
Class B Preferred Stock on that date will be $.22786 per
share, which is less than the amount of a full quarterly
dividend.
</TABLE>
S-5
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Maturity.......................... The Class B Preferred Stock does not have any maturity
date nor are we required to redeem the Class B Preferred
Stock. Accordingly, the Class B Preferred Stock will
remain outstanding unless we decide to redeem it. In
addition, we are not required to set aside funds to
redeem the Class B Preferred Stock.
Optional Redemption............... We may not redeem the Class B Preferred Stock prior to
May 25, 2004, except under limited circumstances
intended to preserve our status as a real estate
investment trust for federal and/or state income tax
purposes. On and after May 25, 2004, we may, at our
option, redeem the Class B Preferred Stock, in whole or
from time to time in part, for cash in the amount of
$25.00 per share, plus accrued and unpaid dividends to
the date of redemption. We may pay the redemption price
(other than the portion consisting of accrued and unpaid
dividends) only out of the sale proceeds of our other
stock, which may include other series of our preferred
stock.
Liquidation Preference............ If we liquidate, dissolve or wind up Realty Income,
holders of the Class B Preferred Stock will have the
right to receive $25.00 per share, plus accrued and
unpaid dividends to the date of payment, before any
payment is made to the holders of our common stock.
Ranking........................... The Class B Preferred Stock will rank senior to our
common stock with respect to the payment of dividends
and the distribution of assets in the event of our
liquidation, dissolution or winding up.
Voting Rights..................... Holders of Class B Preferred Stock will generally have
no voting rights. However, if we do not pay dividends on
the Class B Preferred Stock for six or more quarterly
dividend periods (whether or not consecutive), the
holders of the Class B Preferred Stock, voting as a
class with the holders of any other class or series of
our preferred stock which has similar voting rights,
will be entitled to vote for the election of two
additional directors to serve on our board of directors
until we pay all dividends which we owe on the Class B
Preferred Stock.
In addition, so long as any shares of Class B Preferred
Stock remain outstanding, we will not, without the
consent or the affirmative vote of the holders of
two-thirds of the shares of Class B Preferred Stock
outstanding at the time given in person or by proxy,
either in writing or at a meeting (with Class B
Preferred Stock voting separately as a class):
- Authorize, create or issue, or increase the
authorized or issued amount of, any class or series of
stock ranking prior to the Class B Preferred Stock
with respect to payment of dividends or the
distribution of assets on liquidation, dissolution or
winding up, or reclassify any of our authorized stock
into any such shares, or create, authorize or issue
any obligation or security convertible into,
exchangeable or exerciseable for, or evidencing the
right to purchase any such shares;
</TABLE>
S-6
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<S> <C>
- Amend, alter or repeal any of the provisions of our
Charter, including the articles supplementary creating
the Class B Preferred Stock, so as to materially and
adversely affect any right, preference, privilege or
voting power of the Class B Preferred Stock or the
holders thereof; or
- Enter into any share exchange that affects shares of
the Class B Preferred Stock or consolidate with or merge
into any other entity, or permit any other entity to
consolidate with or merge into us, unless in each such
case described in this clause each share of Class B
Preferred Stock remains outstanding without a material
adverse change to its terms and rights or is converted
into or exchanged for preferred stock of the surviving
or resulting entity having preferences, rights,
dividends, voting powers, restrictions, limitations as
to dividends, qualifications and terms and conditions
of redemption identical to those of the Class B
Preferred Stock;
provided that any amendment to our Charter to authorize
any increase in the amount of the authorized preferred
stock or common stock or the creation or issuance of any
other class or series of preferred stock or any increase
in the amount of authorized or outstanding shares of the
Class B Preferred Stock or any other class or series of
preferred stock, in each case ranking on a parity with
or junior to the Class B Preferred Stock with respect to
payment of dividends and the distribution of assets upon
liquidation, dissolution and winding up, shall not be
deemed to materially and adversely affect any right,
preference, privilege or voting power of the Class B
Preferred Stock or the holders thereof.
Listing........................... We have applied to list the Class B Preferred Stock on
the New York Stock Exchange under the symbol "OPrB." If
approved for listing, we expect that trading on the New
York Stock Exchange will commence within 30 days after
initial delivery of the Class B Preferred Stock.
Restrictions on Ownership and
Transfer........................ The Class B Preferred Stock will contain provisions
intended to assist us in maintaining our status as a
real estate investment trust for federal and/or state
income tax purposes. For example, the terms of the Class
B Preferred Stock will restrict any person from
acquiring actual or constructive ownership of more than
9.8% (in value or number of shares, whichever is more
restrictive) of the outstanding shares of Class B
Preferred Stock, as more fully described in the section
entitled "Description of Class B Preferred Stock."
Conversion........................ The Class B Preferred Stock will not be convertible into
or exchangeable for any other securities or property.
Use of Proceeds................... We will use the net proceeds from the offering of the
Class B Preferred Stock to repay outstanding
indebtedness under our revolving credit facility.
</TABLE>
S-7
<PAGE>
RISK FACTORS
In evaluating an investment in our preferred stock, you should carefully
consider the following factors, in addition to other matters set forth or
incorporated in this prospectus supplement or the accompanying prospectus.
COMPETITION FOR ACQUISITION OF REAL ESTATE
We face competition in the acquisition, operation and sale of property. We
expect competition from:
- Businesses;
- Individuals;
- Fiduciary accounts and plans; and
- Other entities engaged in real estate investment.
Some of these competitors are larger than we are and have greater financial
resources. This competition may result in a higher cost for properties that we
wish to purchase.
The retail chains leasing our properties generally face significant
competition from other operators. This competition may adversely impact:
- That portion, if any, of the rental stream to be paid to us based on a
retailer's revenues; and
- The retailer's results of operations or financial condition.
ENVIRONMENTAL LIABILITIES
Investments in real property can create a potential environmental liability.
An owner of property can face liability for environmental contamination created
by the presence or discharge of hazardous substances on the property. We may
face liability regardless of:
- Our knowledge of the contamination;
- The timing of the contamination;
- The cause of the contamination; or
- The party responsible for the contamination of the property.
There may be environmental problems associated with our properties that we
are unaware of. In that regard, a number of our properties are leased to
operators of oil change and tune-up facilities as well as convenience stores
that sell petroleum-based fuels. These facilities, or other of our properties,
utilize, or may have utilized in the past, underground tanks for the storage of
petroleum-based or waste products which could create a potential for release of
hazardous substances.
The presence of hazardous substances on a property may adversely affect our
ability to sell the property and we may incur substantial remediation costs.
Although our leases generally require our tenants to operate in compliance with
all applicable federal, state and local laws, ordinances and regulations and to
indemnify us against any environmental liabilities arising from the tenant's
activities on the property, we could nevertheless be subject to strict liability
by virtue of our ownership interest, and there can be no assurance that our
tenants would satisfy their indemnification obligations under the leases. The
discovery of environmental liabilities attached to our properties could have a
material adverse affect on our results of operations or financial condition and
on our ability to make distributions to stockholders.
S-8
<PAGE>
COMPLIANCE. We have not been notified by any governmental authority, nor
are we otherwise aware, of any material noncompliance, liability or claim
relating to hazardous or toxic substances or petroleum products in connection
with any of our present properties. Nevertheless, if environmental contamination
should exist, we could be subject to strict liability for the contamination by
virtue of our ownership interest.
INSURANCE. Since December 1996, we have maintained an environmental
insurance policy on the property portfolio. The limit on our current policy is
$10 million for each loss and $25 million in the aggregate, with a $100,000
deductible. There is a sublimit on properties with underground storage tanks of
$1 million per occurrence and $5 million in the aggregate, with a deductible of
$25,000. There can be no assurance that our insurance will be sufficient to
address any particular environmental situation or that we will be able to
continue to obtain insurance for environmental matters, at a reasonable cost or
at all, in the future.
ADVERSE IMPACT OF FAILURE TO QUALIFY AS A REIT
We believe that we have operated, and we intend to continue to operate, so
as to qualify as a REIT under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended (the "Code"), commencing with our taxable year ended
December 31, 1994. Although we believe that we are in compliance with all REIT
qualification rules and that we are organized and operate as a REIT, we can not
completely assure you that we have been or will continue to be so organized or
that we have been or will continue to be able to operate in a manner so as to
qualify or remain so qualified.
Qualification as a REIT involves the satisfaction of numerous requirements
under highly technical and complex Code provisions for which there are only
limited judicial and administrative interpretations, and the determination of
various factual matters and circumstances not entirely within our control.
For example, in order to qualify as a REIT, at least 95% of our gross income
in any year must be derived from qualifying sources and we must pay
distributions to stockholders aggregating annually at least 95% of our REIT
taxable income (determined without regard to the dividends paid deduction and by
excluding net capital gains).
We can not assure you that legislation, new regulations, administrative
interpretations or court decisions will leave unchanged the tax laws with
respect to qualification as a REIT or the federal income tax consequences of
such qualifications.
If we were to fail to qualify as a REIT in any taxable year:
- We would be subject to federal income tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate rates;
- We would not be allowed a deduction in computing our taxable income for
amounts distributed to our stockholders;
- We would be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification is lost. This
treatment would substantially reduce our net earnings available for
investment or distribution to stockholders because of the additional tax
liability for the years involved; and
- We would no longer be required to make distributions to stockholders.
Even if we qualify for and maintain our REIT status, we are subject to
certain federal, state and local taxes on our income and property. For example,
if we have net income from a prohibited transaction, that income will be subject
to a 100% tax.
S-9
<PAGE>
EFFECT OF DISTRIBUTION REQUIREMENTS
To maintain our status as a REIT for federal income tax purposes, we
generally are required to distribute to our stockholders at least 95% of our
REIT taxable income each year. This REIT taxable income is determined without
regard to the dividends paid deduction and by excluding net capital gains.
We are also subject to tax at regular corporate rates to the extent that we
distribute less than 100% of our taxable income (including net capital gains)
each year.
In addition, we are subject to a 4% nondeductible excise tax on the amount,
if any, by which certain distributions paid by us with respect to any calendar
year are less than the sum of 85% of our ordinary income for such calendar year,
95% of our capital gain net income for the calendar year, and any amount of that
income that was not distributed in prior years.
We intend to continue to make distributions to our stockholders to comply
with the distribution requirements of the Code and to reduce exposure to federal
income taxes and the nondeductible excise tax.
Differences in timing between the receipt of income and the payment of
expenses in arriving at REIT taxable income and the effect of required debt
amortization payments could require us to borrow funds on a short-term basis to
meet the distribution requirements that are necessary to achieve the tax
benefits associated with qualifying as a REIT.
REAL ESTATE OWNERSHIP
We are subject to all of the general risks associated with the ownership of
real estate. In particular we face the risk that rental revenue from the
properties will be insufficient to cover all corporate operating expenses, debt
service payments on indebtedness we incur and dividend payments on our stock.
Additional real estate ownership risks include:
- Adverse changes in general or local economic conditions;
- Changes in supply of or demand for similar or competing properties;
- Changes in interest rates and operating expenses;
- Competition for tenants;
- Changes in market rental rates;
- Inability to lease properties upon termination of existing leases;
- Renewal of leases at lower rental rates;
- Inability to collect rents from tenants due to financial hardship,
including bankruptcy;
- Changes in tax, real estate, zoning and environmental laws that may have
an adverse impact upon the value of real estate;
- Uninsured property liability;
- Property damage or casualty losses;
- Unexpected expenditures for capital improvements or to bring properties
into compliance with applicable federal, state and local laws; and
- Acts of God and other factors beyond the control of our management.
S-10
<PAGE>
YEAR 2000 COMPLIANCE ISSUE
Some computer programs identify a year by using only two digits instead of
four. This method of identification could cause these programs to fail or create
erroneous results in the year 2000. This situation has generally been referred
to as the Year 2000 issue.
The first essential component of our Year 2000 assessment program was to
determine if our internal mission-critical computer systems were compliant. We
have completed a review of our software and hardware and determined (through a
combination of internal testing and vendor representations that their products
have been tested and are compliant) that all internal mission-critical systems
(those systems that are necessary to conduct our principal business activities)
are Year 2000 compliant. We have also reviewed our non-mission critical software
and hardware and have identified a few third-party products that are not Year
2000 compliant. We have scheduled upgrades or replacement of these non-compliant
products before the end of the third quarter of 1999. We believe that the total
cost of remediation associated with our corporate level computer systems will be
less than $30,000. We anticipate that we will complete remediation of our
internal computer systems before the end of the third quarter of 1999.
The second essential component of our Year 2000 assessment program was to
ensure that our significant tenants are assessed for Year 2000 compliance. We
have had discussions with our significant tenants in order to assess their
readiness for the Year 2000 issue. Through April 30, 1999, tenants representing
approximately 95% of our annualized revenue had confirmed that they were Year
2000 compliant or anticipated being compliant by the end of the third 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 as a result of the Year 2000 issue could have a
material adverse effect on our results of operations or financial condition and
on our ability to make distributions to stockholders.
The third component of our Year 2000 assessment program was to ensure that
our mission-critical vendors are assessed for Year 2000 compliance. We have had
discussions with these significant vendors in order to assess their ability to
successfully resolve the Year 2000 issue. As of April 30, 1999, 100% of our
mission-critical vendors confirmed that they were Year 2000 compliant or
anticipated being compliant by the end of the third quarter of 1999. Our
transfer agent has advised us that it is Year 2000 compliant.
While we are continually reviewing the Year 2000 preparedness of our key
tenants and vendors, we rely on their representations and cannot be assured that
all of their computer systems will be Year 2000 compliant. It is possible that
relevant information has not been made available for our assessment, or that
potential solutions will not be within our control.
We have completed our assessment program and we are currently in the
implementation and replacement stage of our remediation program. We continue to
evaluate the Year 2000 issue and upon completion of our remediation program we
will consider the necessity of formulating and implementing a Year 2000 issue
contingency plan. Though we do not expect the Year 2000 issue to have a material
adverse effect on our results of operations or financial condition or our
ability to make distributions to stockholders, there can be no assurances in
that regard.
UNINSURED LOSS
Under the terms and conditions of the leases currently in force on our
properties, tenants generally are required to indemnify and hold us harmless
from any and all liabilities resulting from injury to persons, air, water, land,
or property, on or off the premises, due to activities conducted on the
properties, except for claims arising from the negligence or intentional
misconduct of us or our agents. Additionally, tenants are generally required, at
tenant's expense, to obtain and keep in full force during the term of the lease,
liability and property damage insurance policies issued by companies
S-11
<PAGE>
holding general policy holder ratings of at least "A" as set forth in the most
current issue of Best's Insurance Guide. Insurance policies for property damage
are generally in amounts not less than the full replacement cost of the
improvements less slab, foundations, supports and other customarily excluded
improvements, insured against all perils of fire, extended coverage, vandalism,
malicious mischief and special extended perils ("all risk," as such term is used
in the insurance industry). Insurance policies are generally obtained by the
tenant providing general liability coverage varying between $1,000,000 and
$10,000,000 depending on the facts and circumstances surrounding the tenant and
the industry in which it operates and include liability coverage for bodily
injury and property damage arising out of the ownership, use, occupancy or
maintenance of the properties and all of its appurtenant areas.
In addition to the indemnities and required insurance policies identified
above, most of our properties are also covered by flood and earthquake insurance
policies (subject to substantial deductibles) obtained by and paid for by the
tenants as part of their risk management programs. Additionally, we have
obtained blanket liability, flood and earthquake (subject to substantial
deductibles) and property damage insurance policies to protect us and our
properties against loss should the indemnities and insurance policies provided
by the tenants fail to restore the properties to their condition prior to a
loss. Should a loss occur that is uninsured or in an amount exceeding the
combined aggregate limits for the policies noted above, or in the event of a
loss which is subject to a substantial deductible under an insurance policy, we
could lose all or part of our capital invested in, and anticipated revenue from
one or more of the properties, which could have a material adverse effect on our
results of operations or financial condition and on our ability to make
distributions to stockholders.
COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND FIRE AND SAFETY REGULATIONS
All of our properties are required to comply with the Americans with
Disabilities Act, the ADA. The ADA has separate compliance requirements for
"public accommodations" and "commercial facilities," but generally requires that
buildings be made accessible to people with disabilities. Compliance with the
ADA requirements could require removal of access barriers and non-compliance
could result in imposition of fines by the U.S. government or an award of
damages to private litigants. The retailers to whom we lease properties are
obligated by law to comply with the ADA provisions, and we believe that these
retailers may be obligated to cover costs associated with such compliance. If
required changes involve greater expenditures than anticipated, or if the
changes must be made on a more accelerated basis than anticipated, the ability
of these retailers to cover costs could be adversely affected and we could be
required to expend our own funds to comply with the provisions of the ADA, which
could adversely affect our results of operations or financial condition and our
ability to make distributions to stockholders. In addition, we are required to
operate our properties in compliance with fire and safety regulations, building
codes and other land use regulations, as they may be adopted by governmental
agencies and bodies and become applicable to our properties. We may be required
to make substantial capital expenditures to comply with those requirements and
these expenditures could adversely affect our results of operations or financial
condition and our ability to make distributions to stockholders.
PROPERTY TAXES
Each of our properties is subject to real property taxes. The real property
taxes on our properties and any other properties that we develop or acquire in
the future may increase as property tax rates change and as such properties are
assessed or reassessed by tax authorities.
RESTRICTIONS ON OWNERSHIP AND TRANSFERS OF CLASS B PREFERRED STOCK
In order to qualify as a REIT, among other things, not more than 50% in
value of our outstanding stock may be owned, actually or constructively, by five
or fewer individuals (defined in the Code to
S-12
<PAGE>
include certain entities) during the last half of a taxable year, and such stock
must be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of 12 months or during a proportionate part of a shorter taxable
year. To ensure that we remain qualified as a REIT, the terms of the Class B
Preferred Stock will provide, subject to certain exceptions, that no stockholder
may actually own, or be deemed to own by virtue of the constructive ownership
provisions of the Code, in excess of 9.8% of the outstanding shares of our Class
B Preferred Stock.
OTHER GENERAL RISKS
RISKS OF DEBT FINANCING. Although we intend to apply the net proceeds from
the sale of the Class B Preferred Stock to repay borrowings outstanding under
our revolving credit facility (the "Credit Facility"), we intend to incur
additional indebtedness in the future, including additional borrowings under the
Credit Facility. In addition, at March 31, 1999, $110 million aggregate
principal amount of our 7 3/4% Notes due 2007, $100 million aggregate principal
amount of our 8 1/4% Monthly Income Senior Notes due 2008 and $20 million
aggregate principal amount of our 8% Notes due 2009 were outstanding. As a
result, we will be subject to risks associated with debt financing, including
the risk that our cash flow will be insufficient to meet required payments on
such debt, particularly in light of the fact that the interest rate on the
Credit Facility is variable and could increase over time, and the risk that we
may be unable to refinance or repay our debt as it comes due. In addition, the
Credit Facility provides that, in the event of a failure to pay principal or
interest on borrowings thereunder when due (subject to any applicable grace
period), we and our subsidiaries may not pay any dividends on our capital stock,
including the Class B Preferred Stock and our common stock.
DEPENDENCE ON KEY PERSONNEL. We are dependent on the efforts of our
executive officers and key employees. See "Management." The loss of the services
of our executive officers and key employees could have a material adverse effect
on our results of operations or financial condition and on our ability to make
distributions to stockholders. There can be no assurance that we would be able
to recruit additional personnel with equivalent experience in the retail, net
leasing industry.
ABSENCE OF A PRIOR PUBLIC MARKET FOR OUR CLASS B PREFERRED STOCK. One of
the factors that influences the price of the Class B Preferred Stock in public
trading markets is the absence of a prior public market for the shares of Class
B Preferred Stock. Although we have applied to list the Class B Preferred Stock
on the New York Stock Exchange, we can give no assurance that a public market
will develop or be sustained. In addition, fluctuations in equity markets or
rising market interest rates may negatively impact the price at which shares of
Class B Preferred Stock may be resold.
MATTERS PERTAINING TO PARTICULAR PROPERTIES AND TENANTS
Our two largest tenants are Children's World Learning Centers and La Petite
Academy which accounted for approximately 14.0% and 10.2%, respectively, of our
annualized rental revenue as of April 1, 1999. In general, a downturn in the
child care industry, whether nationwide or limited to specific sectors of the
United States, could adversely affect those tenants, which in turn could
materially adversely affect our financial position and results of operations and
our ability to make distributions to stockholders. In addition, a substantial
number of our properties are leased to middle market retail chains which
generally have more limited financial and other resources than certain upper
market retail chains and therefore are more likely to be adversely affected by a
downturn in their respective businesses or in the regional or national economy
generally.
Six of our properties were vacant as of April 1, 1999 and available for
lease. Three of the vacant properties were previously leased to a restaurant
operator, one to a convenience store operator, one to an automotive parts store
operator and one to a home furnishings store operator. As of April 1, 1999, 27
of our properties, which were under lease, were vacant and available for
sublease by the tenant. All of these tenants were current with their rent and
other lease obligations.
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<PAGE>
On September 5, 1997, Levitz Furniture filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code. Levitz occupies
two of our properties in California. The two California Levitz stores owned by
Realty Income are currently open and operating, and Levitz continues to be
current on its rental obligations to us. While Levitz has paid its most recent
rental payments, there can be no assurance that Levitz will continue to pay rent
for the remainder of the lease terms for the two California Levitz properties.
SELECTED FINANCIAL INFORMATION
The following information is unaudited and was derived from our financial
statements and the financial statements of our predecessor partnerships. The
information is only a summary and does not provide all of the information
contained in our financial statements, including the related notes, Management's
Discussion and Analysis of Financial Conditions and Results of Operations, and
Quantitative and Qualitative Disclosures about Market Risk, which are part of
our Annual Report on Form 10-K for the year ended December 31, 1998 and our
quarterly report on Form 10-Q for the quarter ended March 31, 1999. You should
read our financial statements and other information filed with the SEC.
Information as of and for the quarter ended March 31, 1999 does not purport to
be indicative of our financial condition or results of operations to be expected
as of and for the year ending December 31, 1999.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------------------------------------------
AS OF OR FOR THE
QUARTER
ENDED MARCH 31, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994(1)
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenue:
Rental................................. $ 23,948 $ 19,168 $ 84,876 $ 67,613 $ 56,777 $ 51,185 $ 47,905
Interest and other..................... 38 54 256 284 180 370 958
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue........................ 23,986 19,222 85,132 67,897 56,957 51,555 48,863
---------- ---------- ---------- ---------- ---------- ---------- ----------
Expenses:
Depreciation and amortization.......... 6,090 5,084 21,935 18,596 16,422 14,849 13,790
Interest............................... 5,880 2,491 13,723 8,226 2,367 2,642 396
General, administrative expenses and
advisor fees......................... 1,646 1,465 6,680 5,437 5,181 6,875 7,187
Property............................... 441 473 1,790 1,785 1,640 1,607 2,095
Provision for impairment losses........ -- -- -- 165 579 -- 135
Consolidation costs.................... -- -- -- -- -- -- 11,201
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses....................... 14,057 9,513 44,128 34,209 26,189 25,973 34,804
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations................... 9,929 9,709 41,004 33,688 30,768 25,582 14,059
Net gain on sales of properties.......... -- 215 526 1,082 1,455 18 1,165
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before cumulative effect of change
in accounting principle................ 9,929 9,924 41,530 34,770 32,223 25,600 15,224
Cumulative effect of change in accounting
principle.............................. -- -- (226) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............................... $ 9,929 $ 9,924 $ 41,304 $ 34,770 $ 32,223 $ 25,600 $ 15,224
---------- ---------- ---------- ---------- ---------- ---------- ----------
Ratio of earnings to fixed charges(2).... 2.6x 4.8x 3.8x 5.1x 13.7x 9.9x 39.4x
Ratio of earnings to combined fixed
charges and preferred stock
dividends(2)........................... 2.6x 4.8x 3.8x 5.1x 13.7x 9.9x 39.4x
Basic and diluted net income per share... $ 0.37 $ 0.38 $ 1.55 $ 1.48 $ 1.40 $ 1.27 $ 0.78
Weighted average common shares used for
basic net income per share
computation............................ 26,822,382 26,028,589 26,629,936 23,568,831 22,976,789 20,230,886 19,502,091
Weighted average common shares used for
diluted net income per share
computation............................ 26,825,412 26,037,595 26,638,284 23,572,715 22,977,837 20,230,963 19,502,091
</TABLE>
S-14
<PAGE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------------------------------------------
AS OF OR FOR THE
QUARTER
ENDED MARCH 31, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994(1)
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Properties, before accumulated
depreciation........................... $ 930,782 $ 749,078 $ 889,835 $ 699,797 $ 564,540 $ 515,426 $ 450,703
Total assets (book value)................ 796,539 620,641 759,234 577,021 454,097 417,639 352,768
Total liabilities........................ 350,018 161,304 309,025 143,706 79,856 36,218 17,352
Stockholders' equity..................... 446,521 459,337 450,209 433,315 374,241 381,421 335,416
OTHER DATA
FFO(3)................................... 15,998 14,754 62,799 52,353 47,718 40,414 39,185
Capital expenditures..................... 130 14 263 53 37 296 222
PORTFOLIO DATA (AT END OF PERIOD)
Number of properties..................... 1,004 845 970 826 740 685 630
Net rentable square feet................. 8,109,000 6,610,300 7,824,100 6,302,300 5,226,700 4,673,700 4,064,800
</TABLE>
- ------------------------------
(1) Realty Income commenced operations as a REIT on August 15, 1994 through the
merger of our predecessor partnerships with and into Realty Income, referred
to in this prospectus supplement as our consolidation. Our consolidation was
accounted for as a reorganization of affiliated entities under common
control in a manner similar to a pooling-of-interests. Under this method,
the assets and liabilities of the predecessor partnerships were carried over
at their historical book values and their operations have been recorded on a
combined historical cost basis. The pooling-of-interests method of
accounting also requires the reporting of the results of operations as
though the entities had been combined as of the beginning of the earliest
period presented. Accordingly, the results of operations for the year ended
December 31, 1994 comprise those of the separate predecessor partnerships
combined from January 1, 1994 through August 15, 1994 and those of Realty
Income from August 16, 1994 through December 31, 1994. Costs incurred to
effect our consolidation and integrate the continuing operations of the
separate predecessor partnerships were expenses in 1994, the year in which
our consolidation was consummated.
(2) Ratio of earnings to fixed charges is calculated by dividing earnings by
fixed charges. For this purpose, earnings consist of net income before
interest expense. Fixed charges are comprised of interest costs (including
capitalized interest) and the amortization of debt issuance costs. On a pro
forma basis, assuming that the Class B Preferred Stock was issued and the
proceeds therefrom were applied to repay our Credit Facility borrowings on
January 1, 1998, the ratio of earnings to combined fixed charges and
preferred stock dividends for the year ended December 31, 1998 would have
been 3.4x and the ratio of earnings to combined fixed charges and preferred
stock dividends for the quarter ended March 31, 1999 would have been 2.4x.
Our historical ratios of earnings to fixed charges are equivalent to our
historical ratios of earnings to combined fixed charges and preferred stock
dividends because we have not issued any preferred stock in the past.
(3) Funds from operations ("FFO") is calculated by adding (i) income before net
gain on sales of properties, (ii) depreciation and amortization, (iii)
provision for impairment losses and (iv) one-time consolidation costs. We
consider FFO to be an appropriate measure of the performance of an equity
REIT. FFO is used by financial analysts in evaluating REITs and can be one
measure of a REIT's ability to make cash distributions. Presentation of this
information will provide the reader with an additional measure to compare
the performance of different REITs; however, it should be noted that not all
REITs calculate FFO the same way so comparisons with these REITs may not be
meaningful. FFO is not necessarily indicative of cash flow available to fund
cash needs and should not be considered as an alternative to net income as
an indication of our performance or to cash flow from operating, investing
and financing activities as a measure of our liquidity or our ability to
make cash distributions to stockholders or pay debt service.
S-15
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the Class B Preferred Stock offered by
this prospectus supplement, after deducting the discount to the underwriters and
other estimated expenses of this offering payable by us, are estimated to be
approximately $57.9 million, and approximately $66.6 million if the
underwriters' over-allotment option is exercised in full. We intend to use the
net proceeds to pay down outstanding indebtedness under our Credit Facility
which had an outstanding balance at May 12, 1999 of $114.0 million. The Credit
Facility is a revolving, unsecured acquisition credit facility with a borrowing
capacity of $170 million. Borrowings under the Credit Facility currently bear
interest at a spread of 0.85% over the London Interbank Offered Rate. The Credit
Facility also offers us other interest rate options. Under the Credit Facility
$52 million expires in December 2000 and $118 million expires in December 2001.
The effective interest rate on the outstanding borrowings at May 12, 1999 was
5.8%.
S-16
<PAGE>
CAPITALIZATION
The following table sets forth our unaudited historical capitalization as of
March 31, 1999 and as adjusted to show the effect of this preferred stock
offering and the use of the estimated net proceeds to repay borrowings under our
Credit Facility.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------
HISTORICAL AS ADJUSTED
--------- -----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
DEBT
Credit Facility(1)..................................................... $ 103,900 $ 46,040
Notes due 2007......................................................... 110,000 110,000
Notes due 2008......................................................... 100,000 100,000
Notes due 2009......................................................... 20,000 20,000
--------- -----------
Total debt........................................................... 333,900 276,040
--------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value per share, 20,000,000 shares
authorized, no shares issued or outstanding, 2,400,000 shares issued
and outstanding as adjusted.......................................... -- 2,400
Common stock, $1.00 par value per share, 100,000,000 shares authorized,
26,822,326 issued and outstanding.................................... 26,822 26,822
Paid in capital in excess of par value................................. 609,794 665,256
Accumulated distributions in excess of net income...................... (190,095) (190,095)
--------- -----------
Total stockholders' equity........................................... 446,521 504,381
--------- -----------
Total capitalization................................................. $ 780,421 $ 780,421
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) The amount drawn on the Credit Facility was $114.0 million at May 12, 1999
and is expected to be approximately $122.6 million on the closing date of
this offering.
BUSINESS AND PROPERTIES
OVERVIEW
Realty Income is organized to operate as an equity 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 March 31, 1999, we owned a diversified
portfolio of 1,004 properties located in 45 states with over 8.1 million square
feet of leasable space. Over 99% of our properties were leased as of March 31,
1999. Unless otherwise indicated, information regarding our properties is as of
March 31, 1999.
Realty Income's investment strategy is to acquire freestanding,
single-tenant, retail properties leased to regional and national retail chains
under long-term, net lease agreements. We typically acquire, and then lease
back, retail store locations from chain store operators, providing capital to
the operators for continued expansion and other corporate purposes. Our net
lease agreements generally:
- Are for initial terms of 10 to 20 years;
- Require the retailer to pay a minimum monthly rent and property operating
expenses (taxes, insurance and maintenance); and
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<PAGE>
- 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 retailers's gross sales above a
specified level.
Since 1970 and through December 31, 1998, we have acquired and leased back
to regional and national retail chains 944 properties (including 34 properties
that have been sold) and have collected in excess of 98% of the original
contractual rent obligations on those properties. We believe that the long-term
ownership of an actively managed, diversified portfolio of retail properties
leased under long-term, net lease agreements produces consistent, predictable
income. We believe that the income generated under long-term leases, coupled
with the retailer's responsibility for property expenses under the net lease
structure, generally produce a more predictable income stream than many other
types of real estate portfolios. Of the 1,004 properties in the portfolio, as of
March 31, 1999, 997 were single-tenant properties and the remaining properties
were multi-tenant. As of March 31, 1999, 991 of our 997 single-tenant
properties, or 99.4%, were net leased pursuant to leases with an average
remaining term (excluding extension options) of approximately 8.6 years.
We were formed in September 1993 in the State of Delaware and subsequently
reincorporated in Maryland in May 1997. We commenced operations as a REIT in
August 1994 through the merger of 25 public and private real estate limited
partnerships (the "Partnerships") with and into our company (the
"Consolidation"). Each of the Partnerships was formed between 1970 and 1989 for
the purpose of acquiring and managing long-term, net leased properties.
BUSINESS OBJECTIVES AND STRATEGY
GENERAL. Our primary business objective is to generate dependable monthly
distributions from a consistent and predictable level of funds from operations
("FFO") per share. We generally will seek to increase FFO per share and
distributions to stockholders through both active portfolio management and the
acquisition of additional properties. We also intend to pay distributions at a
level greater than 95% of our taxable income (determined without regard to the
deduction for dividends paid and by excluding any net capital gain) in order to
meet REIT qualification requirements and to use undistributed cash flow to fund
additional property acquisitions and for other corporate purposes. Our portfolio
management focus includes:
- Contractual rent increases on existing leases;
- Rental increases at the termination of existing leases when market
conditions permit; and
- The active management of our property portfolio, including selective sales
of properties.
Our acquisition of additional properties adheres to a focused strategy of
acquiring primarily:
- Freestanding, single-tenant properties;
- Properties leased to regional and national retail chains; and
- Properties under long-term, net lease agreements.
INVESTMENT PHILOSOPHY. We believe that the long-term ownership of an
actively managed, diversified portfolio of retail properties under long-term,
net lease agreements produces consistent, predictable income. Under a net lease
agreement, the retailer agrees to pay a minimum monthly rent and property
expenses (taxes, maintenance, and insurance) plus, typically, future rent
increases (generally subject to ceilings) based on increases in the consumer
price index, fixed increases or additional rent calculated as a percentage of
the tenant's gross sales above a specified level. We believe that long-term
leases, coupled with the retailer's responsibility for property expenses,
generally produce a more predictable income stream than many other types of real
estate portfolios, while continuing to offer the opportunity for growth in
rental income.
S-18
<PAGE>
INVESTMENT STRATEGY. In identifying new properties for acquisition, we
focus on providing expansion capital to retail chains by acquiring, then leasing
back, their retail store locations. We classify retail tenants into three
categories: venture, middle market, and upper market. Venture companies are
those which typically offer a new retail concept in one geographic region of the
country and operate between five and 50 retail outlets. Middle market retail
chains are those which typically have 50 to 500 retail outlets, operations in
more than one geographic region, have been successful through one or more
economic cycles, have a proven, replicable concept, and an objective of further
expansion. The upper market retail chains typically consist of companies with
500 or more stores which operate nationally in a mature retail concept. Upper
market retail chains generally have strong operating histories and access to
several sources of capital.
Realty Income primarily focuses 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;
- They generally have provided us with attractive risk-adjusted returns over
time, since their financial strength has in many cases tended to improve
as their businesses have matured;
- Their relatively large size allows them to spread corporate expenses among
a greater number of stores; and
- Middle market retailers typically have the critical mass to survive if a
number of locations have to be closed due to underperformance.
In 1998, we expanded our investment focus to include upper market retail
chains. We believe upper market retail chains can be attractive for investment
because:
- They typically have higher overall quality;
- They are usually larger brand name, public and private retailers;
- They utilize a larger building ranging in size from 10,000 to 50,000
square feet; and
- Their ability to grow because of access to capital facilitates larger
transaction sizes.
While the Realty Income investment strategy focuses primarily on acquiring
properties leased to middle market retail chains and upper market retail chains,
we also selectively seek incremental investment opportunities with venture
market retail chains. Periodically, venture market opportunities arise where we
feel that the real estate used by the tenant is of high quality and can be
purchased at prices that are favorable in the marketplace. To meet our stringent
investment standards, however, venture retail companies must have a well-defined
retailing concept and strong financial prospects. These opportunities are
examined on a case by case basis and we are highly selective in making
investments in this area.
CREDIT STRATEGY. Realty Income principally provides sale leaseback
financing primarily to less than investment grade retail chains. Since 1970 and
through December 31, 1998, Realty Income has acquired and leased back to
regional and national retail chains 944 properties (including 34 properties that
have been sold) and has collected in excess of 98% of the original contractual
rent obligations on those properties. We believe that within this market we can
achieve an attractive risk adjusted return on the financing that we provide to
retailers.
We believe that the primary financial obligations of most retailers
typically include their bank and other debt, payment obligations to suppliers
and real estate lease obligations. Because we own the land and buildings on
which the retailer conducts its business, we believe that the risk of default on
the
S-19
<PAGE>
retailers' lease obligations is less than the retailers' unsecured general
obligations. It has been our experience that since retailers must retain their
profitable locations in order to survive, in the event of a bankruptcy
reorganization they are less likely to reject a lease for a profitable location,
which would terminate their right to use the property. Thus, as the property
owner, we believe we will fare better than unsecured creditors of the same
retailer in the event of reorganization. In addition, Realty Income believes
that the risk of default on the real estate leases can be further mitigated by
monitoring the performance of the retailers' individual unit locations and
selling those units that are weaker performers. For a description of a current
tenant that has filed for Chapter 11 bankruptcy, see "Risk Factors--Matters
Pertaining to Particular Properties and Tenants."
In order to qualify for inclusion in our portfolio, new acquisitions must
meet stringent investment and credit requirements. The properties must generate
attractive current yields, and the retail chain must meet our credit standards.
We have established a three part analysis that examines each potential
investment based on:
- Industry, company, market conditions, exposure to internet commerce and
credit profile;
- Location profitability, if available; and
- Overall real estate characteristics, value, and comparative rental rates.
Companies that have been approved for acquisitions are generally those with 50
or more retail stores which are located in highly visible areas, with easy
access to major thoroughfares and attractive demographics.
ACQUISITION STRATEGY. We seek to invest in industries in which several well
organized regional and national chains are capturing market share through
service, quality control, economies of scale, mass media advertising, and
selection of prime retail locations. We execute our acquisition strategy by
acting as a source of capital to regional and national retail chain stores in a
variety of industries by acquiring, then leasing back, their retail store
locations. Relying on executives from our acquisitions, retail and real estate
research, portfolio management, finance, accounting, operations, capital
markets, and legal departments, we undertake thorough research and analysis to
identify appropriate industries, tenants, and property locations for investment.
In selecting real estate for potential investment, we generally will seek to
acquire properties that have the following characteristics:
- Freestanding, commercially zoned property with a single tenant;
- Properties that are important retail locations for regional and national
retail chains;
- Properties that are located within attractive demographic areas relative
to the business of their tenants, with high visibility and easy access to
major thoroughfares; and
- Properties that can be purchased with the simultaneous execution or
assumption of long-term, net lease agreements, providing the opportunity
for both current income and future rent increases.
PORTFOLIO MANAGEMENT STRATEGY. The active management of the property
portfolio is an essential component of our long-term strategy. We continually
monitor our portfolio for changes that could affect the performance of the
industries, retail chains, and locations in which we have invested. The
portfolio is analyzed on an ongoing basis with a view towards optimizing
performance and returns. Realty Income's investment committee is made up of our
Chief Executive Officer, President, and three Senior Vice Presidents. Our
investment committee meets weekly to review industry research, retail chain
research and property due diligence, and significant portfolio management
activities. This monitoring typically includes ongoing review and analysis of:
- The performance of various retail industries;
S-20
<PAGE>
- The operation, management, business planning, and financial condition of
the tenants; and
- The health of the individual markets in which we own properties, from both
an economic and real estate standpoint.
While we generally intend to hold our net lease properties for long-term
investment, we actively manage our portfolio of net lease properties. We intend
to pursue a strategy of identifying properties that may be sold at attractive
prices, particularly where we believe reinvestment of the sales proceeds can
generate a higher cash flow to us than by retaining the property. While we
intend to pursue such a strategy, we will only do so within the constraints of
the income tax rules regarding REIT status.
CAPITAL MARKETS STRATEGY. We have a $170 million, three year, revolving,
unsecured acquisition credit facility of which $52 million expires in December
2000 and $118 million expires in December 2001. As of May 12, 1999, the
outstanding balance on the Credit Facility was $114.0 million with an effective
interest rate of approximately 5.8%. A commitment fee of 0.15% per annum accrues
on the total credit commitment. We are and have been in compliance with the
various leverage and interest coverage ratio limitations required by the Credit
Facility. The Credit Facility has been and is expected to be used to acquire
additional retail properties leased to regional and national retail chains under
long-term, net lease agreements.
We utilize our Credit Facility as a vehicle for the short-term financing of
the acquisition of new properties. When outstanding borrowings under the Credit
Facility reach a certain level (generally in the range of $75 to $150 million),
we intend to refinance those borrowings with the net proceeds of long-term or
permanent financing, which may include the issuance of common stock, preferred
stock or convertible preferred stock, debt securities or convertible debt
securities. However, there can be no assurance that we will be able to effect
the refinancing or that market conditions prevailing at the time of refinancing
will enable us to issue equity or debt securities upon acceptable terms. We
believe that we are best served by a conservative capital structure, with a
majority of our capital consisting of equity. As of May 12, 1999, on a pro forma
basis after giving effect to this offering and the application of net proceeds
therefrom to repay borrowings under the Credit Facility, our total outstanding
credit facility borrowings and outstanding notes would have been approximately
29.3% of our total market capitalization (defined as shares of our common stock
outstanding multiplied by the last reported sales price of the common stock on
the NYSE on May 12, 1999 of $23.50 per share plus the liquidation value of the
Class B Preferred Stock, the outstanding borrowings on the Credit Facility and
outstanding notes at May 12, 1999).
We believe that our cash and cash equivalents on hand, cash provided from
operating activities and borrowing capacity are sufficient to meet our liquidity
needs for the foreseeable future; however, we intend to utilize additional
sources of capital to fund property acquisitions and repay our Credit Facility.
COMPETITIVE STRATEGY. We believe that, to utilize our investment philosophy
and strategy most successfully, we must seek to maintain the following
competitive advantages:
- SIZE AND TYPE OF INVESTMENT PROPERTIES: We believe that smaller
($500,000 to $10,000,000) retail net leased properties represent an
attractive investment opportunity in today's real estate environment. Due to
the complexities of acquiring and managing a large portfolio of relatively
small assets, we believe that these types of properties have not experienced
significant institutional participation or the corresponding yield reduction
experienced by larger income producing properties. We believe the less
intensive day to day property management required by net lease agreements,
coupled with the active management of a large portfolio of smaller
properties by us, is an effective investment strategy.
The tenants of Realty Income's freestanding retail properties generally
provide goods and services which satisfy basic consumer needs. In order to grow
and expand, they generally need capital. Since the
S-21
<PAGE>
acquisition of real estate is typically the single largest capital expenditure
of many of these retailers, Realty Income's method of purchasing the property
and then leasing it back under a net lease arrangement allows the retail chain
to free up capital.
- INVESTMENT IN NEW INDUSTRIES: Though we specialize in single-tenant
properties, we will seek to further diversify our portfolio among a variety
of industries. We believe that diversification will allow us to invest in
industries that are currently growing and have characteristics we find
attractive. These characteristics include, but are not limited to,
industries dominated by local operators where regional and national chain
operators can gain market share and dominance through more efficient
operations, as well as industries taking advantage of major demographic
shifts in the population base. For example, in the early 1970s, Realty
Income targeted the fast food industry to take advantage of the country's
increasing desire to dine away from home, and in the early 1980s, we
targeted the child daycare industry, responding to the need for professional
child care as more women entered the work force. During 1998 and the first
quarter of 1999, nine new industries were added to our portfolio. The nine
new industries are Business Services, Craft and Novelty, Drug Stores,
Entertainment, General Merchandise, Grocery Stores, Health and Fitness, Home
Improvement and Private Education, bringing the total number of industries
in our portfolio to 22.
- DIVERSIFICATION: Diversification of the portfolio by industry type,
retail chain and geographic location is key to our objective of providing
predictable investment results for our stockholders. As we expand we will
seek to further diversify our portfolio. During 1998 and the first quarter
of 1999, 25 new retail chains and two new states were added to Realty
Income's portfolio, bringing the total number of retail chains in our
portfolio to 70 and the total number of states to 45.
- MANAGEMENT SPECIALIZATION: We believe that our management's
specialization in single-tenant properties operated under net lease
agreements is important to meeting our objectives. We plan to maintain this
specialization and will seek to employ and train high quality professionals
in this specialized area of real estate ownership, finance and management.
- TECHNOLOGY: We intend to stay at the forefront of technology in our
efforts to efficiently and economically carry out our operations. We
maintain a sophisticated information system that allows us to analyze our
portfolio's performance and actively manage our investments. We believe that
technology and information based systems will play an increasingly important
role in our competitiveness as an investment manager and source of capital
to a variety of industries and tenants.
PROPERTIES
As of March 31, 1999, we owned a diversified portfolio of 1,004 properties
located in 45 states with over 8.1 million square feet of leasable space. At
March 31, 1999, approximately 99% of the properties were under net lease
agreements. Net leases typically require the tenant to be responsible for
minimum monthly rent and property operating expenses including property taxes,
insurance and maintenance.
Our net leased retail properties are primarily leased to regional and
national retail chain store operators. The average leasable retail space of the
1,004 properties is approximately 8,100 square feet
S-22
<PAGE>
on approximately 49,300 square feet of land. Generally, buildings are
single-story properties with adequate parking on site to accommodate peak retail
traffic periods. The properties tend to be on major thoroughfares with
relatively high traffic counts and adequate access, egress and proximity to a
sufficient population base to constitute a suitable market or trade area for the
retailer's business.
The following table sets forth certain information regarding our properties
classified according to the business of the respective tenants (dollars in
thousands):
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL RENTAL
ANNUALIZED RENT AS OF REVENUE FOR THE YEARS
APRIL 1, 1999(1) ENDED DECEMBER 31,
------------------------ -------------------------------
NUMBER OF RENTAL PERCENT OF
INDUSTRY PROPERTIES REVENUE TOTAL 1998 1997 1996
- --------------------------------------- ----------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Apparel Stores......................... 5 $ 3,927 3.8% 4.1% 0.7% --%
Automotive Parts....................... 136 9,350 9.0 7.8 9.1 10.5
Automotive Service..................... 105 7,176 6.9 7.5 6.4 4.8
Book Stores............................ 1 450 0.4 0.6 0.5 --
Business Services...................... 1 120 0.1 * -- --
Child Care............................. 324 26,311 25.4 29.2 35.9 42.0
Consumer Electronics................... 37 4,431 4.3 5.4 6.5 0.9
Convenience Stores..................... 61 5,429 5.2 6.1 5.5 4.6
Craft and Novelty...................... 2 425 0.4 * -- --
Drug Stores............................ 1 235 0.2 0.1 -- --
Entertainment.......................... 2 940 0.9 -- -- --
General Merchandise.................... 11 687 0.7 * -- --
Grocery Stores......................... 2 789 0.8 * -- --
Health and Fitness..................... 2 1,202 1.2 0.1 -- --
Home Furnishings....................... 35 6,872 6.6 7.8 5.6 4.4
Home Improvement....................... 33 4,059 3.9 * -- --
Office Supplies........................ 8 2,476 2.4 3.0 1.7 --
Pet Supplies and Services.............. 8 1,537 1.5 0.6 0.2 --
Private Education...................... 5 1,497 1.5 0.9 -- --
Restaurants............................ 175 14,170 13.7 16.2 19.8 24.4
Shoe Stores............................ 3 890 0.9 0.8 0.2 --
Video Rental........................... 35 4,501 4.3 3.8 0.6 --
Other.................................. 12 6,148 5.9 6.0 7.3 8.4
----- ----------- ----- --------- --------- ---------
Totals................................. 1,004 $ 103,622 100.0% 100.0% 100.0% 100.0%
----- ----------- ----- --------- --------- ---------
----- ----------- ----- --------- --------- ---------
</TABLE>
- ------------------------
* Less than 0.1%
(1) Annualized rental revenue is calculated by multiplying the monthly
contractual base rent as of April 1, 1999 for each of the properties by 12
and adding the previous 12 month's historic percentage rent (i.e.,
additional rent calculated as a percentage of the tenant's gross sales above
a specified level), 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.
Of the 1,004 properties in the portfolio at March 31, 1999, 997 were
single-tenant properties with the remaining properties being multi-tenant
properties. As of March 31, 1999, 991 of the 997 single-tenant properties, or
99.4%, were net leased with an average remaining lease term (excluding extension
options) of approximately 8.6 years. The following table sets forth certain
information
S-23
<PAGE>
regarding the timing of the lease term expirations (excluding extension options)
on our 991 net leased, single-tenant retail properties as of April 1, 1999.
<TABLE>
<CAPTION>
ANNUALIZED
RENT(1)(2) PERCENT OF
NUMBER OF LEASES (IN ANNUALIZED
YEAR EXPIRING(1) THOUSANDS) RENT
- ---------------------------------------------------------------------- --------------------- ----------- -------------
<S> <C> <C> <C>
1999.................................................................. 31 $ 1,570 1.6%
2000.................................................................. 35 1,837 1.9
2001.................................................................. 47 3,918 4.0
2002.................................................................. 79 6,597 6.7
2003.................................................................. 68 5,651 5.7
2004.................................................................. 110 9,269 9.4
2005.................................................................. 81 6,005 6.1
2006.................................................................. 28 2,474 2.5
2007.................................................................. 94 6,396 6.5
2008.................................................................. 67 5,758 5.8
2009.................................................................. 23 2,794 2.8
2010.................................................................. 41 3,273 3.3
2011.................................................................. 38 5,483 5.6
2012.................................................................. 53 5,935 6.0
2013.................................................................. 101 16,016 16.2
2014.................................................................. 18 2,287 2.3
2015.................................................................. 31 4,042 4.1
2016.................................................................. 13 1,986 2.0
2017.................................................................. 11 4,124 4.2
2018.................................................................. 16 1,585 1.6
2019.................................................................. 4 729 0.7
2033.................................................................. 2 940 1.0
--- ----------- -----
Totals................................................................ 991 $ 98,669 100.0%
--- ----------- -----
--- ----------- -----
</TABLE>
- ------------------------
(1) This table does not include seven multi-tenant properties and six 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.
(2) Annualized rent is calculated by multiplying the monthly contractual base
rent as of April 1, 1999 for each of the properties by 12 and adding the
previous 12 month's historic percentage rent (i.e., additional rent
calculated as a percentage of the tenant's gross sales above a specified
level), which totaled $1.7 million. For the properties under construction,
an estimated contractual base rent is used based upon the estimated total
costs of each property.
S-24
<PAGE>
The following table sets forth certain state-by-state information regarding
Realty Income's property portfolio as of April 1, 1999.
<TABLE>
<CAPTION>
APPROXIMATE PERCENT OF
NUMBER OF PERCENT LEASABLE SQUARE ANNUALIZED RENT(1) ANNUALIZED
STATE PROPERTIES LEASED FEET (IN THOUSANDS) RENT
- ------------------------------------------- ----------- ----------- --------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Alabama.................................... 9 100% 63,300 $ 609 0.6%
Arizona.................................... 31 99 211,800 3,003 2.9
Arkansas................................... 5 100 36,700 614 0.6
California................................. 62 95 1,096,100 13,622 13.1
Colorado................................... 42 100 250,700 3,477 3.4
Connecticut................................ 10 100 223,800 2,976 2.9
Delaware................................... 1 100 5,400 72 0.1
Florida.................................... 74 99 753,900 8,369 8.1
Georgia.................................... 49 100 306,400 4,393 4.2
Idaho...................................... 12 100 58,500 789 0.8
Illinois................................... 30 100 209,000 2,707 2.6
Indiana.................................... 29 100 170,400 2,155 2.1
Iowa....................................... 10 100 67,900 688 0.7
Kansas..................................... 22 100 231,000 2,469 2.4
Kentucky................................... 13 100 43,500 1,087 1.0
Louisiana.................................. 5 100 39,600 509 0.5
Maryland................................... 8 100 48,300 698 0.7
Massachusetts.............................. 8 100 57,500 1,059 1.0
Michigan................................... 11 100 73,700 1,005 1.0
Minnesota.................................. 24 100 244,700 2,501 2.4
Mississippi................................ 15 100 148,500 1,139 1.1
Missouri................................... 31 100 184,300 2,336 2.2
Montana.................................... 2 100 30,000 276 0.3
Nebraska................................... 10 100 98,700 1,228 1.2
Nevada..................................... 7 100 86,400 1,277 1.2
New Hampshire.............................. 1 100 6,400 147 0.1
New Jersey................................. 3 100 39,800 359 0.3
New Mexico................................. 5 100 46,000 350 0.3
New York................................... 18 94 223,100 4,168 4.0
North Carolina............................. 32 100 171,400 2,913 2.8
North Dakota............................... 1 100 22,000 65 0.1
Ohio....................................... 66 100 331,200 5,351 5.2
Oklahoma................................... 17 100 102,600 1,303 1.3
Oregon..................................... 17 100 92,400 1,114 1.1
Pennsylvania............................... 22 100 161,600 2,187 2.1
South Carolina............................. 23 100 93,000 1,564 1.5
South Dakota............................... 1 100 6,100 95 0.1
Tennessee.................................. 24 96 214,400 2,546 2.4
Texas...................................... 149 99 1,210,700 12,752 12.3
Utah....................................... 9 100 58,200 811 0.8
Virginia................................... 29 100 133,200 2,806 2.7
Washington................................. 43 100 252,600 3,464 3.3
West Virginia.............................. 2 100 16,800 147 0.1
Wisconsin.................................. 18 100 167,300 2,153 2.1
Wyoming.................................... 4 100 20,100 269 0.3
----- --- --------------- -------- -----
Totals/Average............................. 1,004 99% 8,109,000 $ 103,622 100.0%
----- --- --------------- -------- -----
----- --- --------------- -------- -----
</TABLE>
- ------------------------
(1) Annualized rent is calculated by multiplying the monthly contractual base
rent as of April 1, 1999
S-25
<PAGE>
for each of the properties by 12 and adding the previous 12 month's historic
percentage rent (i.e., additional rent calculated as a percentage of the
tenant's gross sales above a specified level), which totaled $1.7 million.
For the properties under construction, an estimated contractual base rent is
used based upon the estimated total costs of each property.
The following table sets forth certain information regarding the properties
owned by Realty Income as of April 1, 1999, classified according to the retail
business types and the level of services they provide (dollars in thousands).
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF ANNUALIZED ANNUALIZED
INDUSTRY PROPERTIES RENT(1) RENT
- ---------------------------------------------------------- ----------- ----------- ---------------
<S> <C> <C> <C>
TENANTS SELLING GOODS
Apparel Stores............................................ 5 $ 3,927 3.8%
Automotive Parts.......................................... 81 4,705 4.5
Book Stores............................................... 1 450 0.4
Consumer Electronics...................................... 37 4,431 4.3
Craft and Novelty......................................... 2 425 0.4
Drug Stores............................................... 1 235 0.2
General Merchandise....................................... 11 687 0.7
Grocery Stores............................................ 2 789 0.8
Home Furnishings.......................................... 35 6,872 6.6
Home Improvement.......................................... 12 1,333 1.3
Office Supplies........................................... 8 2,476 2.4
Pet Supplies and Services................................. 2 455 0.4
Shoe Stores............................................... 3 890 0.9
----- ----------- -----
200 27,675 26.7
----- ----------- -----
TENANTS SELLING GOODS AND SERVICES
Automotive Parts.......................................... 55 4,645 4.5
Business Services......................................... 1 120 0.1
Convenience Stores........................................ 61 5,429 5.2
Home Improvement.......................................... 21 2,726 2.6
Pet Supplies and Services................................. 6 1,082 1.1
Restaurants............................................... 175 14,170 13.7
Video Rental.............................................. 35 4,501 4.3
----- ----------- -----
354 32,673 31.5
----- ----------- -----
TENANTS PROVIDING SERVICES
Automotive Service........................................ 105 7,176 6.9
Child Care................................................ 324 26,311 25.4
Entertainment............................................. 2 940 0.9
Health and Fitness........................................ 2 1,202 1.2
Private Education......................................... 5 1,497 1.5
Other..................................................... 12 6,148 5.9
----- ----------- -----
450 43,274 41.8
----- ----------- -----
Totals.................................................... 1,004 $ 103,622 100.0%
----- ----------- -----
----- ----------- -----
</TABLE>
- ------------------------
(1) Annualized rent is calculated by multiplying the monthly contractual base
rent as of April 1, 1999 for each of the properties by 12 and adding the
previous 12 month's historic percentage rent (i.e., additional rent
calculated as a percentage of the tenant's gross sales above a specified
level), which
S-26
<PAGE>
totaled $1.7 million. For the properties under construction, an estimated
contractual base rent is used based upon the estimated total costs of each
property.
DESCRIPTION OF LEASING STRUCTURE. At April 1, 1999, approximately 99% of
our properties were leased pursuant to net leases. In most cases, the leases are
for initial terms of from 10 to 20 years and the tenant has an option to extend
the initial term. The leases generally provide for a minimum base rent plus
future increases (typically subject to ceilings) based on increases in the
consumer price index, fixed increases or additional rent calculated as a
percentage of the retailer's gross sales above a specified level (I.E.,
percentage rent). Where leases provide for rent increases based on increases in
the consumer price index, typically these increases permanently become part of
the base rent. Where leases provide for percentage rent, this additional rent is
typically payable only if the retailer's gross sales for a given period (usually
one year) exceed a specified level, and then is typically calculated as a
percentage of only the amount of gross sales in excess of that level. In
general, the leases require the tenant to pay property taxes, insurance, and
expenses of maintaining the property.
DEVELOPMENT OF CERTAIN PROPERTIES
Of the 34 properties we acquired during the first three months of 1999, 23
were occupied as of May 1, 1999 and the remaining 11 were pre-leased and under
construction pursuant to contracts under which the tenants have agreed to
develop the properties (with development costs funded by us) and to begin paying
rent when the premises open for business. In the case of development properties,
we typically enter into an agreement with a tenant pursuant to which the tenant
retains a contractor to construct the property and we fund the costs of the
development. The tenant is contractually obligated to complete the construction
on a timely basis, generally within eight months after we purchase the land and
to pay construction costs overruns to the extent they exceed the construction
budget by more than a predetermined amount. We also enter into a lease with the
tenant at the time we purchase the land, which generally requires that the
tenant begin paying base rent, calculated as a percentage of our acquisition
cost for the property, including construction cost and capitalized interest,
when the premises opens for business. During the first three months of 1999, we
acquired 15 development properties, four of which have been completed and were
operating and paying rent as of May 1, 1999. We will continue to seek to acquire
land for development under similar arrangements.
S-27
<PAGE>
MANAGEMENT
The following table sets forth the senior officers and members of the Board
of Directors of Realty Income:
<TABLE>
<CAPTION>
NAME AGE TITLE AND BUSINESS EXPERIENCE
- --------------------------------- --- ------------------------------------------------------------------------
<S> <C> <C>
Thomas A. Lewis.................. 46 CHIEF EXECUTIVE OFFICER AND VICE CHAIRMAN OF THE BOARD
Chief Executive Officer (May 1997-present).
Vice Chairman of the Board of Directors, and a Director of the Company
(September 1993-present).
Vice President, Capital Markets (September 1993-May 1997).
With R.I.C. Advisor, Inc. ("R.I.C. Advisor") from 1987 until the merger
of R.I.C. Advisor with the Company on August 17, 1995 (the "Merger").
Senior Vice President with Johnstown Capital, a real estate management
and syndication company (1982-1987); Investment Specialist with Sutro
& Co. Inc., a member of the New York Stock Exchange (1979-1982);
Procter & Gamble Company (1974-1979).
Richard J. VanDerhoff............ 45 PRESIDENT, CHIEF OPERATING OFFICER AND DIRECTOR
President and Chief Operating Officer (November 1994-present).
Director (July 1996-present).
General Counsel (August 1994-November 1994).
With R.I.C. Advisor from 1987 until the Merger.
Vice President, General Counsel and Secretary of FNCO Corporation, an
owner and operator of community newspaper companies located throughout
the midwest United States (1984-1987).
Private law practice specializing in real property and business law
(1980-1984).
Gary M. Malino................... 41 SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER
Senior Vice President (August 1997-present).
Treasurer of the Company (August 1995-present).
Chief Financial Officer (August 1994-present).
Vice President of the Company (August 1995-August 1997).
With R.I.C. Advisor from May 1985 until the Merger.
Certified Public Accountant with Kendall & Forman, an accountancy
corporation (1981-1985).
Assistant Controller with McMillin Development Company, a real estate
development company (1979-1981).
Michael R. Pfeiffer.............. 39 SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
Senior Vice President (August 1997-present).
General Counsel and Secretary (August 1995-present).
Vice President (August 1995-August 1997).
With R.I.C. Advisor from 1990 until the Merger.
Private practice specializing in real estate transactional law
(1987-1990).
Associate Counsel with First American Title Insurance Company
(1986-1987).
He is a licensed attorney and member of the State Bar of California and
the State Bar of Florida.
</TABLE>
S-28
<PAGE>
<TABLE>
<CAPTION>
NAME AGE TITLE AND BUSINESS EXPERIENCE
- --------------------------------- --- ------------------------------------------------------------------------
<S> <C> <C>
Richard G. Collins............... 51 SENIOR VICE PRESIDENT, PORTFOLIO ACQUISITIONS
Senior Vice President, Portfolio Acquisitions August 1997-present).
Vice President, Portfolio Acquisitions (June 1997-August 1997).
Vice President, Portfolio Management (August 1995-June 1997).
With R.I.C. Advisor from 1990 until the Merger.
Principal in the acquisition and sale of land and commercial real estate
and a general partner for land and commercial real estate partnerships
(1979-1990).
Leasing and sales specialist in the Office Properties Division for Grubb
& Ellis Commercial Real Estate Services (1974-1979).
William E. Clark................. 61 CHAIRMAN OF THE BOARD
Chairman of the Board of Directors and a Director (September
1993-present).
Chief Executive Officer (September 1993-May 1997).
Co-founder and a director and an officer of R.I.C. Advisor from 1969
until the Merger.
A principal in commercial real estate acquisition, development,
management and sales for over 30 years. His involvement includes land
acquisition, tenant lease negotiations, construction and sales of
prime commercial properties for regional and national fast-food
restaurant, automotive and retail chain store operations throughout
the United States.
Member of the Audit Committee, the Compensation Committee and the
Corporate Governance Committee.
Donald R. Cameron................ 59 DIRECTOR
Director (August 1994-present).
Co-founder and President of Cameron, Murphy & Spangler, Inc., a
securities broker-dealer firm located in Pasadena, California.
Worked at the securities brokerage firm of Glore Forgan Staats, Inc. and
its successors (1969-1975).
Chairman of the Compensation Committee and a member of the Audit
Committee, the Special Committee and the Corporate Governance
Committee.
Roger P. Kuppinger............... 58 DIRECTOR
Director (August 1994-present).
Self-employed investment banker and financial advisor and an active
investor in both private and public companies.
Managing Director at the investment banking firm Sutro & Co. Inc. from
1969 to March 1994.
Prior to joining Sutro & Co. Inc. in 1969, he worked at First Interstate
Bank, formerly named United California Bank (1964-1969).
He has served on over ten boards of directors for both public and
private companies, and currently serves on the board of directors of
BRE Properties, Inc.
Chairman of the Audit Committee and a member of the Compensation
Committee, the Special Committee and the Corporate Governance
Committee.
</TABLE>
S-29
<PAGE>
<TABLE>
<CAPTION>
NAME AGE TITLE AND BUSINESS EXPERIENCE
- --------------------------------- --- ------------------------------------------------------------------------
<S> <C> <C>
Michael D. McKee................. 53 DIRECTOR
Director (August 1994-present).
Executive Vice President of The Irvine Company (March 1994-present).
Chief Financial Officer of The Irvine Company (January 1997-present).
Former partner in the law firm of Latham & Watkins (1987-March 1994).
His business and legal experience includes numerous acquisition and
disposition transactions, as well as a variety of public and private
offerings of equity and debt securities.
Currently a member of the board of directors of The Irvine Company,
Health Care Property Investors, Inc., Circus Circus Enterprises, Inc.
and Irvine Apartment Communities, Inc.
Chairman of the Special Committee and a member of the Compensation
Committee, the Audit Committee and the Corporate Governance Committee.
Willard H. Smith Jr.............. 62 DIRECTOR
Director (July 1996-present).
Managing Director, Equity Capital Markets Division, of Merrill Lynch &
Co. (1983-1996).
F. Eberstadt & Co. (1971-1979).
Serves on the board of directors of five investment companies: Cohen &
Steers Realty Shares; Cohen & Steers Realty Income Fund; Cohen &
Steers Total Return Realty Fund; Cohen & Steers Special Equity Fund,
Inc.; and Cohen & Steers Equity Income Fund.
Member of the board of directors of Essex Property Trust and Highwoods
Property Trust, two NYSE listed real estate investment trusts, and
Willis Lease Finance Corporation, a Nasdaq-listed company.
Chairman of the Corporate Governance Committee and a member of the Audit
Committee, the Special Committee and the Compensation Committee.
</TABLE>
S-30
<PAGE>
DESCRIPTION OF CLASS B PREFERRED STOCK
This description of the particular terms of the Class B Preferred Stock
supplements, and to the extent inconsistent therewith replaces, the description
of the general terms and provisions of our preferred stock set forth in the
accompanying prospectus, to which description reference is hereby made.
GENERAL
Pursuant to our Charter, we are authorized to issue up to 20,000,000 shares
of preferred stock, $1.00 par value per share, in one or more series, with such
designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms and conditions of redemption as the Board of Directors may determine
without any vote or action by our shareholders. As of the date of this
prospectus supplement, no shares of preferred stock are outstanding, although
the Board of Directors has authorized the issuance of 1,000,000 shares of our
Class A Junior Participating Preferred Stock (the "Class A Preferred Stock")
pursuant to our shareholder rights plan.
We have authorized the issuance of a class of our preferred stock,
consisting of 2,400,000 shares, plus up to an additional 360,000 shares which
may be issued upon exercise of the underwriters' over-allotment options,
designated as 9 3/8% Class B Cumulative Redeemable Preferred Stock. The
following summary of the material terms and provisions of the Class B Preferred
Stock does not purport to be complete and is qualified in its entirety by
reference to the pertinent sections in the Articles Supplementary creating the
Class B Preferred Stock (the "Articles Supplementary"), our Charter and our
Bylaws, all of which we will make available, and applicable laws.
The registrar, transfer agent and dividend and redemption price disbursement
agent in respect of the Class B Preferred Stock will be The Bank of New York.
The Articles Supplementary fixing the terms of the Class B Preferred Stock will
provide that we will maintain a registrar, paying agent and transfer agent for
the Class B Preferred Stock in New York City.
The certificates representing the Class B Preferred Stock will initially be
issued in the form of temporary certificates. Holders of temporary certificates
will be entitled to exchange them for definitive certificates as soon as they
are available, which we anticipate will be within 150 days after the date of
original issuance.
MATURITY
The Class B Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption.
RANK
The Class B Preferred Stock will rank, with respect to rights to the payment
of dividends and the distribution of assets upon our liquidation, dissolution or
winding up:
(i) Senior to all classes or series of our common stock, to the Class A
Preferred Stock and to all other equity securities issued by us other than
equity securities referred to in clauses (ii) and (iii) below;
(ii) On a parity with all equity securities issued by us with terms
specifically providing that those equity securities rank on a parity with the
Class B Preferred Stock with respect to rights to the payment of dividends and
the distributon of assets upon our liquidation, dissolution or winding up; and
(iii) Junior to all equity securities issued by us with terms specifically
providing that those equity securities rank senior to the Class B Preferred
Stock with respect to rights to the payment of dividends and the distributon of
assets upon our liquidation, dissolution or winding up.
S-31
<PAGE>
See "--Voting Rights" below. The term "equity securities" does not include
convertible debt securities, which will rank senior to the Class B Preferred
Stock prior to conversion.
DIVIDENDS
Holders of shares of the Class B Preferred Stock are entitled to receive,
when, as, and if authorized by the Board of Directors and declared by the
Company, out of funds we have legally available for the payment of dividends,
cumulative cash dividends at the rate of 9 3/8% of the liquidation preference
per annum (equivalent to $2.34375 per annum per share).
Dividends on the Class B Preferred Stock shall be cumulative from the date
of original issue and shall be payable quarterly in arrears on the dividend
payment dates, which shall be the last day of each March, June, September and
December or, if not a business day, the next succeeding business day in which
case no interest or additional dividends will accrue on the amount payable. The
first dividend on the Class B Preferred Stock is scheduled to be paid on June
30, 1999 and will be for less than a full quarter. Any dividend payable on the
Class B Preferred Stock, including dividends payable for any partial dividend
period, will be computed on the basis of a 360-day year consisting of twelve
30-day months. Dividends will be payable to holders of record as they appear in
our stock records at the close of business on the applicable dividend record
date, which shall be the 15th day of the calendar month in which the applicable
dividend payment date falls or on another date designated by our Board of
Directors that is not more than 30 nor less than 10 days prior to the dividend
payment date.
No dividends on shares of Class B Preferred Stock shall be authorized by the
Board of Directors or paid or set apart for payment by us at any time when the
terms and provisions of any agreement of ours, including any agreement relating
to our indebtedness, prohibits the authorization, payment or setting apart for
payment or provides that the authorization, payment or setting apart for payment
would constitute a breach of the agreement or a default under the agreement, or
if the authorization or payment shall be restricted or prohibited by law.
Notwithstanding the foregoing, dividends on the Class B Preferred Stock will
accrue whether or not we have earnings, whether or not there are funds legally
available for the payment of those dividends and whether or not those dividends
are declared. Accrued but unpaid dividends on the Class B Preferred Stock will
not bear interest or any sum in lieu of interest and holders of the Class B
Preferred Stock will not be entitled to any dividends in excess of full
cumulative dividends described above. Any dividend payment made on the Class B
Preferred Stock shall first be credited against the earliest accrued but unpaid
dividend due with respect to those shares.
If, for any taxable year, we elect to designate as a "capital gain
dividend," as defined in Section 857 of the Internal Revenue Code of 1986, as
amended, any portion of the dividends, as determined for federal income tax
purposes, paid or made available for the year to holders of our stock, then the
portion of the total capital gain dividends paid or made available for the year
to holders of all classes of our stock that shall be allocable to the holders of
Class B Preferred Stock shall be in proportion to the amount that the total
dividends, as determined for federal income tax purposes, paid or made available
for the year to the holders of the Class B Preferred Stock bears to the total
dividends paid or made available to holders of all classes of our stock for the
year. In addition, we will make a similar allocation with respect to any
undistributed long-term capital gains which are to be included in our
stockholders' long-term capital gains, based on the allocation of the capital
gains amount which would have resulted if those undistributed long-term capital
gains had been distributed as "capital gain dividends" by us to our
stockholders. See "Material Federal Income Tax Considerations to Holders of
Class B Preferred Stock--Taxation of Taxable U.S. Stockholders."
No full dividends will be declared or paid or set apart for payment on any
class or series of preferred stock ranking, as to dividends, on a parity with or
junior to the Class B Preferred Stock for any period unless full cumulative
dividends have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof is set apart for that payment on the
Class B
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Preferred Stock for all past dividend periods and the then current dividend
period. When dividends are not paid in full, or a sum sufficient for full
payment is not so set apart, upon the Class B Preferred Stock and the shares of
any other class or series of preferred stock ranking on a parity as to dividends
with the Class B Preferred Stock, all dividends declared upon the Class B
Preferred Stock and any other class or series of preferred stock ranking on a
parity as to dividends with the Class B Preferred Stock shall be declared pro
rata so that the amount of dividends declared per share of Class B Preferred
Stock and the other class or series of preferred stock shall in all cases bear
to each other the same ratio that accrued and unpaid dividends per share on the
Class B Preferred Stock and the other class or series of preferred stock (which
shall not include any accrual in respect of unpaid dividends for prior dividend
periods if the other preferred stock does not have a cumulative dividend) bear
to each other.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Class B Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for payment for all past dividend periods and the
then current dividend period, no dividends (other than in shares of common stock
or other shares of stock ranking junior to the Class B Preferred Stock as to
dividends and upon liquidation, dissolution and winding up) shall be declared or
paid or set aside for payment nor shall any other distribution be declared or
made upon the common stock or any other shares of our stock ranking junior to or
on a parity with the Class B Preferred Stock as to dividends or upon
liquidation, dissolution or winding up, nor shall any shares of common stock or
any other shares of our stock ranking junior to or on a parity with the Class B
Preferred Stock as to dividends or upon liquidation, dissolution or winding up
be redeemed, purchased or otherwise acquired for any consideration (or any
moneys be paid to or made available for a sinking fund for the redemption of any
of those shares of stock) by us (except by conversion into or exchange for our
other stock ranking junior to the Class B Preferred Stock as to dividends and
upon liquidation, dissolution and winding up or except for purchases of our
stock for the purpose of preserving our qualification as a REIT for federal
and/or state income tax purposes). See "--Restrictions on Ownership and
Transfer."
LIQUIDATION PREFERENCES
In the event we liquidate, dissolve or wind up our affairs, voluntarily or
involuntarily, the holders of shares of Class B Preferred Stock will be entitled
to be paid out of the assets we have legally available for distribution to our
shareholders, subject to the preferential rights of the holders of any of our
stock ranking prior to the Class B Preferred Stock as to liquidation rights, a
liquidation preference of $25 per share, plus an amount equal to any accrued and
unpaid dividends to the date of payment, before any distribution of assets is
made to holders of common stock or any other class or series of our stock that
ranks junior to the Class B Preferred Stock as to liquidation rights. After
payment of the full amount of the liquidating distributions to which they are
entitled, holders of Class B Preferred Stock, as such, will have no further
right or claim to any of our remaining assets. For further information regarding
the rights of the holders of the Class B Preferred Stock upon our liquidation,
dissolution or winding up, see "Description of Preferred Stock--Liquidation
Preference" in the accompanying Prospectus.
In determining whether a distribution (other than upon voluntary or
involuntary liquidation, dissolution or winding up) by dividend, redemption or
other acquisition of shares of our stock or otherwise is permitted under the
Maryland General Corporation Law, no effect shall be given to amounts that would
be needed if we would be dissolved at the time of the distribution, to satisfy
the preferential rights upon distribution of holders of shares of our Class B
Preferred Stock.
OPTIONAL REDEMPTION
The Class B Preferred Stock is not redeemable prior to May 25, 2004.
However, we will be entitled, pursuant to the Articles Supplementary, to
purchase shares of the Class B Preferred Stock in
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order to preserve our status as a REIT for federal and/or state income tax
purposes. See "--Restrictions on Ownership and Transfer."
On and after May 25, 2004, we, at our option, upon not less than 30 nor more
than 60 days' written notice, may redeem shares of the Class B Preferred Stock,
in whole or in part, at any time or from time to time, for cash at a redemption
price of $25 per share, plus accrued and unpaid dividends thereon to the date
fixed for redemption. The redemption price (other than the portion thereof
consisting of accrued and unpaid dividends) is payable solely out of the sale
proceeds of our other stock, which may include shares of other classes or series
of preferred stock. For purposes of the preceding sentence, "stock" means any
common stock, preferred stock (other than Class B Preferred Stock), interests,
participations or other ownership interests (however designated), depositary
shares representing any of the foregoing, and any rights (other than debt
securities convertible into or exchangeable for equity securities) or options to
purchase any of the foregoing.
Holders of Class B Preferred Stock to be redeemed shall surrender the Class
B Preferred Stock at the place designated in the notice and shall be entitled to
the redemption price and any accrued and unpaid dividends payable upon the
redemption following the surrender. If notice of redemption of any shares of
Class B Preferred Stock has been given and if we have set aside the funds
necessary for redemption in trust for the benefit of the holders of any shares
of Class B Preferred Stock so called for redemption, then from and after the
redemption date, dividends will cease to accrue on those shares of Class B
Preferred Stock, those shares of Class B Preferred Stock shall no longer be
deemed outstanding and all rights of the holders of those shares will terminate,
except the right to receive the redemption price plus accrued dividends. If any
redemption date is not a business day, then the redemption price and accrued
dividends may be paid on the next business day and no interest, additional
dividends or other sums will accrue on the amount payable. If less than all of
the outstanding Class B Preferred Stock is to be redeemed, the Class B Preferred
Stock to be redeemed shall be selected pro rata (as nearly as may be practicable
without creating fractional shares) or by any other equitable method we
determine. See "Description of Preferred Stock--Redemption" in the accompanying
Prospectus.
Notwithstanding the foregoing, the persons who were the holders of record of
shares of Class B Preferred Stock at the close of business on a record date for
the payment of dividends will be entitled to receive the dividend payable on the
corresponding dividend payment date notwithstanding the redemption of those
shares after the record date and on or prior to the dividend payment date or our
default in the payment of the dividend due on that dividend payment date. In
that case, the amount payable on redemption of those shares will not include
that dividend.
Unless full cumulative dividends on all shares of Class B Preferred Stock
shall have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past dividend
periods and the then current dividend period, no shares of Class B Preferred
Stock shall be redeemed unless all outstanding shares of Class B Preferred Stock
are simultaneously redeemed; provided that the foregoing will not prevent our
purchase of Class B Preferred Stock to preserve our status as a REIT for federal
and/or state income tax purposes or the purchase or acquisition of shares of
Class B Preferred Stock pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding shares of Class B Preferred Stock. In
addition, unless full cumulative dividends on all shares of Class B Preferred
Stock shall have been or contemporaneously are declared and paid or declared and
a sum sufficient for the payment thereof set apart for payment for all past
dividend periods and the then current dividend period, we will not purchase or
otherwise acquire, directly or indirectly, any shares of Class B Preferred Stock
(except by conversion into or exchange for stock ranking junior to the Class B
Preferred Stock as to dividends and upon liquidation, dissolution and winding
up); provided, however, that the foregoing shall not prevent our purchase of
shares of Class B Preferred Stock to preserve our status as a REIT for federal
and/or state income tax purposes, or the purchase or acquisition of shares of
Class B Preferred Stock pursuant
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to a purchase or exchange offer made on the same terms to holders of all
outstanding shares of Class B Preferred Stock. See "--Restrictions on Ownership
and Transfer" below. So long as no dividends are in arrears, we shall be
entitled at any time and from time to time to repurchase shares of Class B
Preferred Stock in open-market transactions duly authorized by the Board of
Directors and effected in compliance with applicable laws.
Notice of redemption will be given by publication in a newspaper of general
circulation in The City of New York. The publication will be made once a week
for two successive weeks commencing not less than 30 nor more than 60 days prior
to the redemption date. We will mail a similar notice, postage prepaid, not less
than 30 nor more than 60 days prior to the redemption date, addressed to the
holders of record of the Class B Preferred Stock to be redeemed at their
addresses as they appear on the stock transfer records of the transfer agent. No
failure to give this notice or any defect in the notice or in the mailing of the
notice shall affect the validity of the proceedings for the redemption of any
shares of Class B Preferred Stock except as to the holder to whom notice was
defective or not given. Each notice shall state:
(i) the redemption date;
(ii) the redemption price;
(iii) the number of shares of Class B Preferred Stock to be redeemed;
(iv) the place or places where the Class B Preferred Stock is to be
surrendered for payment of the redemption price; and
(v) that dividends on the shares to be redeemed will cease to accrue on the
redemption date.
If less than all of the Class B Preferred Stock held by any holder is to be
redeemed, the notice mailed to that holder shall also specify the number of
shares of Class B Preferred Stock held by that holder to be redeemed.
VOTING RIGHTS
Holders of the Class B Preferred Stock will not have any voting rights,
except as set forth below.
Whenever dividends on any shares of Class B Preferred Stock shall be in
arrears for six or more quarterly dividend periods, whether or not consecutive,
the number of directors constituting our Board of Directors will be
automatically increased by two (if not already increased by two by reason of the
election of directors by the holders of any other class or series of our
preferred stock with similar voting rights and with which the Class B Preferred
Stock is entitled to vote as a class with respect to the election of those two
directors) and the holders of Class B Preferred Stock (voting separately as a
class with all other classes or series of preferred stock upon which like voting
rights have been conferred and are exercisable and which are entitled to vote as
a class with the Class B Preferred Stock in the election of those two directors)
will be entitled to vote for the election of a total of two additional directors
to our Board of Directors at a special meeting called by the Company at the
request of the holders of record of at least 10% of the outstanding shares of
Class B Preferred Stock or the holders of any other class or series of preferred
stock upon which like voting rights have been conferred and are exercisable and
which is entitled to vote as a class with the Class B Preferred Stock as
aforesaid (unless the request is received less than 90 days before the date
fixed for the next annual or special meeting of shareholders, in which case such
vote will be held at the earlier of the next annual or special meeting of
shareholders), and at each subsequent annual meeting until all dividends
accumulated on those shares of Class B Preferred Stock for all past dividend
periods and the then current dividend period shall have been fully paid or
declared and a sum sufficient for the payment thereof set aside for payment. In
that case, the right of the Class B Preferred Stock to elect those two directors
will cease and, unless there are other classes or series of our stock upon which
like voting rights have been conferred and are exercisable, the term of office
of the two directors shall
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automatically terminate and the number of directors constituting the Board of
Directors shall be reduced accordingly.
If a special meeting is not called by us within 30 days after request from
the holders of Class B Preferred Stock as described above, then the holders of
record of at least 10% of the outstanding Class B Preferred Stock may designate
a holder to call the meeting at our expense.
So long as any shares of Class B Preferred Stock remain outstanding, we
shall not, without the consent or the affirmative vote of the holders of at
least two-thirds of the shares of Class B Preferred Stock outstanding at the
time given in person or by proxy, either in writing or at a meeting (with the
Class B Preferred Stock voting separately as a class):
- Authorize, create or issue, or increase the authorized or issued
amount of, any class or series of stock ranking prior to the Class B
Preferred Stock with respect to payment of dividends or the distribution of
assets on liquidation, dissolution or winding up, or reclassify any of our
authorized stock into any such shares, or create, authorize or issue any
obligation or security convertible into, exchangeable or exerciseable for,
or evidencing the right to purchase any such shares;
- Amend, alter or repeal any of the provisions of our Charter, including
the articles supplementary creating the Class B Preferred Stock, so as to
materially and adversely affect any right, preference, privilege or voting
power of the Class B Preferred Stock or the holders thereof; or
- Enter into any share exchange that affects shares of the Class B
Preferred Stock or consolidate with or merge into any other entity, or
permit any other entity to consolidate with or merge into us, unless in each
such case described in this clause each share of Class B Preferred Stock
remains outstanding without a material adverse change to its terms and
rights or is converted into or exchanged for preferred stock of the
surviving or resulting entity having preferences, rights, dividends, voting
powers, restrictions, limitations as to dividends, qualifications and terms
and conditions of redemption identical to those of the Class B Preferred
Stock;
provided that any amendment to our Charter to authorize any increase in the
amount of the authorized preferred stock or common stock or the creation or
issuance of any other class or series of preferred stock or any increase in the
amount of authorized or outstanding shares of the Class B Preferred Stock or any
other class or series of preferred stock, in each case ranking on a parity with
or junior to the Class B Preferred Stock with respect to payment of dividends
and the distribution of assets upon liquidation, dissolution and winding up,
shall not be deemed to materially and adversely affect any right, preference,
privilege or voting power of the Class B Preferred Stock or the holders thereof.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which the vote would otherwise be required shall be
effected, all outstanding shares of Class B Preferred Stock shall have been
redeemed or called for redemption upon proper notice and sufficient funds shall
have been deposited in trust to effect the redemption.
Each share of Class B Preferred Stock will be entitled to one vote, except
when shares of any other class or series of our preferred stock have the right
to vote with the Class B Preferred Stock as a single class on any matter, the
Class B Preferred Stock and the shares of each other class or series will have
one vote for each $25 of liquidation preference (excluding accrued dividends).
Except as expressly stated in the Articles Supplementary, the Class B
Preferred Stock will not have any relative, participating, optional or other
special voting rights and powers, and the consent of the holders thereof shall
not be required for the taking of any corporate action.
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CONVERSION
The Class B Preferred Stock is not convertible into or exchangeable for any
of our other property or securities.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
In order for us to qualify as a REIT under the Internal Revenue Code, no
more than 50% in value of our outstanding shares of stock may be owned, actually
or constructively, by five or fewer individuals (as defined in the Internal
Revenue Code to include certain entities) during the last half of a taxable year
(other than the first year for which an election to be treated as a REIT has
been made). In addition, if we, or an owner of 10% or more of us, actually or
constructively owns 10% or more of one of our tenants (or a tenant of any
partnership in which we are a partner), the rent we receive (either directly or
through any partnership) from that tenant will not be qualifying income for
purposes of the REIT gross income tests of the Internal Revenue Code. A REIT's
stock must also be beneficially owned by 100 or more persons during at least 335
days of a taxable year of twelve months or during a proportionate part of a
shorter taxable year (other than the first year for which an election to be
treated as a REIT has been made).
The Articles Supplementary relating to the Class B Preferred Stock contain
restrictions on the ownership and transfer of Class B Preferred Stock which are
intended to assist us in complying with these requirements. The Articles
Supplementary establish an ownership limit which provides that, subject to
certain specified exceptions, no person or entity may own, or be deemed to own
by virtue of the applicable constructive ownership provisions of the Internal
Revenue Code, more than 9.8% (by number or value, whichever is more restrictive)
of the outstanding shares of Class B Preferred Stock. The constructive ownership
rules are complex, and may cause shares of Class B Preferred Stock owned
actually or constructively by a group of related individuals and/or entities to
be constructively owned by one individual or entity. As a result, the
acquisition of less than 9.8% of the shares of Class B Preferred Stock (or the
acquisition of an interest in an entity that owns, actually or constructively,
Class B Preferred Stock) by an individual or entity, could, nevertheless cause
that individual or entity, or another individual or entity, to own
constructively in excess of 9.8% of the outstanding Class B Preferred Stock and
thus violate the ownership limit, or any other limit as permitted by the Board
of Directors. The Board of Directors may, but in no event will be required to,
waive the ownership limit with respect to a particular stockholder if it
determines that the ownership will not jeopardize our status as a REIT and the
Board of Directors otherwise decides the action would be in our best interest.
As a condition of the waiver, the Board of Directors may require an opinion of
counsel satisfactory to it, a ruling from the Internal Revenue Service and/or
undertakings or representations from the applicant with respect to preserving
our REIT status.
The Articles Supplementary further prohibit:
- any person from actually or constructively owning shares of our Class
B Preferred Stock that would result in our being "closely held" under
Section 856(h) of the Internal Revenue Code or otherwise cause us to fail to
qualify as a REIT; and
- any person from transferring shares of our Class B Preferred Stock if
the transfer would result in shares of our stock being beneficially owned by
fewer than 100 persons (determined without reference to any rules of
attribution).
Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of Class B Preferred Stock that will or may
violate any of the foregoing restrictions on transferability and ownership is
required to give us notice immediately and provide us with any other information
we may request in order to determine the effect of a transfer on our status as a
REIT. The foregoing restrictions on transferability and ownership will not apply
if the Board of Directors determines that it is no longer in our best interest
to attempt to qualify, or to continue to qualify, as a
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REIT and such determination is approved by a two-thirds vote of our stockholders
as required by the Charter.
Pursuant to the Articles Supplementary, if any purported transfer of Class B
Preferred Stock or any other event would otherwise result in any person
violating the ownership limit or would result in our being "closely held" under
Section 856(h) of the Internal Revenue Code or otherwise failing to qualify as a
REIT, then any purported transfer will be void and of no force or effect with
respect to the purported transferee as to that number of shares of Class B
Preferred Stock in excess of the ownership limit, and the purported transferee
shall acquire no right or interest (or, in the case of any event other than a
purported transfer, the person or entity holding record title to any excess
shares shall cease to own any right or interest) in those excess shares. Any
excess shares described above will be transferred automatically, by operation of
law, to a trust, the beneficiary of which will be a qualified charitable
organization selected by us. The automatic transfer shall be deemed to be
effective as of the close of business on the business day prior to the date of
the violative transfer. Within 20 days of receiving notice from us of the
transfer of shares to the trust, the trustee of the trust (who shall be
designated by us and be unaffiliated with us and any purported transferee or
other person or entity holding title to the excess shares) will be required to
sell those excess shares to a person or entity who could own those shares
without violating the ownership limit, and distribute to the purported
transferee or other person or entity holding title to the excess shares, as
applicable, an amount equal to the lesser of the price paid by the purported
transferee or other person or entity holding title to the excess shares for
those excess shares or the net sales proceeds received by the trust for those
excess shares. In the case of any excess shares resulting from any event other
than a purchase for fair value, the trustee will be required to sell the excess
shares to a qualified person or entity and distribute to the person or entity
holding title to those shares an amount equal to the lesser of the market price
of those excess shares as of the date of the event or the net sales proceeds
received by the trust for the excess shares. In either case, any proceeds in
excess of the amount distributable to the purported transferee or other
prohibited owner, as applicable, will be distributed to the qualified charitable
organization acting as beneficiary. Prior to a sale of any excess shares by the
trust, the trustee will be entitled to receive, in trust for the beneficiary,
all dividends and other distributions we have paid with respect to those excess
shares, and also will be entitled to exercise all voting rights with respect to
those excess shares. Subject to Maryland law, effective as of the date that
those shares have been transferred to the trust, the trustee shall have the
authority (at the trustee's sole discretion):
- to rescind as void any vote cast by a purported transferee or other
prohibited owner, as applicable, prior to our discovery that the shares have
been transferred to the trust; and
- to recast the vote in accordance with the desires of the trustee
acting for the benefit of the beneficiary.
However, if we have already taken irreversible corporate action, then the
trustee shall not have the authority to rescind and recast its vote. Any
dividend or other distribution paid to the purported transferee or other
prohibited owner (prior to our discovery that the shares had been automatically
transferred to a trust as described above) will be required to be repaid to the
trustee upon demand for distribution to the beneficiary. In the event that the
transfer to the trust as described above is not automatically effective (for any
reason) to prevent violation of the ownership limit then the Articles
Supplementary provide that the transfer of the excess shares will be void ab
initio.
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In addition, shares of our Class B Preferred Stock held in the trust shall
be deemed to have been offered for sale to us, or our designee, at a price per
share equal to the lesser of:
- the price per share in the transaction that resulted in the transfer
to the trust (or, if the event which resulted in the transfer to the trust
did not involve a purchase of Class B Preferred Stock for fair value, the
market price as of the date of the event); or
- the market price on the date we, or our designee, accepts the offer.
We shall have the right to accept the offer until the trustee has sold the
shares of stock held in the trust.
Upon a sale to us, the interest of the beneficiary in the shares sold shall
terminate and the trustee shall distribute the net proceeds of the sale to the
purported transferee or other prohibited owner.
If any purported transfer of shares of Class B Preferred Stock would cause
us to be beneficially owned by fewer than 100 persons, that transfer will be
null and void ab initio in its entirety and the intended transferee will acquire
no rights to the stock. In addition, the Articles Supplementary permit the Board
of Directors to take such action as it deems necessary or advisable to preserve
our status as a REIT, including redeeming Class B Preferred Stock whose
ownership or transfer violates the restrictions described above.
All certificates representing shares of Class B Preferred Stock will bear a
legend referring to the restrictions described above. The foregoing ownership
limitations could delay, defer or prevent a transaction or a change in our
control that might involve a premium price for the Class B Preferred Stock or
otherwise be in the best interest of stockholders.
Each holder of Class B Preferred Stock shall, upon demand, be required to
disclose to us in writing any information we may request in order to determine
the effect, if any, of a stockholder's actual and constructive ownership of
Class B Preferred Stock on our status as a REIT and to ensure compliance with
the ownership limit.
The provisions set forth herein under "--Restrictions on Ownership and
Transfer" shall apply to the Class B Preferred Stock notwithstanding any
contrary provisions of the Class B Preferred Stock described elsewhere in this
prospectus supplement or the accompanying prospectus.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS TO HOLDERS
OF CLASS B PREFERRED STOCK
THE FOLLOWING IS A SUMMARY OF THE FEDERAL INCOME TAX CONSIDERATIONS
ANTICIPATED TO BE MATERIAL TO PURCHASERS OF CLASS B PREFERRED STOCK. THIS
SUMMARY IS BASED ON CURRENT LAW, IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX
ADVICE. YOUR TAX TREATMENT WILL VARY DEPENDING UPON YOUR PARTICULAR SITUATION
AND THIS DISCUSSION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF TAXATION THAT
MAY BE RELEVANT TO A HOLDER OF CLASS B PREFERRED STOCK IN LIGHT OF HIS OR HER
PERSONAL INVESTMENTS OR TAX CIRCUMSTANCES, OR TO STOCKHOLDERS WHO RECEIVE
SPECIAL TREATMENT UNDER THE FEDERAL INCOME TAX LAWS EXCEPT TO THE EXTENT
DISCUSSED UNDER THE HEADINGS "--TAXATION OF TAX-EXEMPT STOCKHOLDERS" AND
"--TAXATION OF NON-U.S. STOCKHOLDERS". STOCKHOLDERS RECEIVING SPECIAL TREATMENT
INCLUDE, WITHOUT LIMITATION:
- INSURANCE COMPANIES;
- FINANCIAL INSTITUTIONS OR BROKER-DEALERS;
- TAX-EXEMPT ORGANIZATIONS;
- STOCKHOLDERS HOLDING SECURITIES AS PART OF A CONVERSION TRANSACTION, OR A
HEDGE OR HEDGING TRANSACTION OR AS A POSITION IN A STRADDLE FOR TAX
PURPOSES; AND
- FOREIGN CORPORATIONS OR PARTNERSHIPS AND PERSONS WHO ARE NOT CITIZENS OR
RESIDENTS OF THE UNITED STATES.
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IN ADDITION, THE SUMMARY BELOW DOES NOT CONSIDER THE EFFECT OF ANY FOREIGN,
STATE, LOCAL OR OTHER TAX LAWS THAT MAY BE APPLICABLE TO YOU AS A HOLDER OF
CLASS B PREFERRED STOCK. THIS PROSPECTUS SUPPLEMENT DOES NOT ADDRESS THE
TAXATION OF US OR THE IMPACT ON US OF OUR ELECTION TO BE TAXED AS A REAL ESTATE
INVESTMENT TRUST. A DISCUSSION OF OUR FEDERAL INCOME TAX TREATMENT IS SET FORTH
IN THE PROSPECTUS UNDER THE HEADING ENTITLED "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS." THE DISCUSSION SET FORTH BELOW ASSUMES THAT WE QUALIFY AS A
REAL ESTATE INVESTMENT TRUST UNDER THE INTERNAL REVENUE CODE. IF IN ANY TAXABLE
YEAR WE WERE TO FAIL TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST, WE WOULD NOT
BE ALLOWED A DEDUCTION FOR DIVIDENDS PAID TO STOCKHOLDERS IN COMPUTING TAXABLE
INCOME AND WOULD BE SUBJECT TO FEDERAL INCOME TAX ON OUR TAXABLE INCOME AT
REGULAR CORPORATE RATES. AS A RESULT, THE FUNDS AVAILABLE FOR DISTRIBUTION TO
OUR STOCKHOLDERS WOULD BE REDUCED. SEE "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS--FAILURE TO QUALIFY" IN THE PROSPECTUS.
The information in this section is based on:
- the Internal Revenue Code;
- current, temporary and proposed treasury regulations promulgated under the
Internal Revenue Code;
- the legislative history of the Internal Revenue Code;
- current administrative interpretations and practices of the Internal
Revenue Service; and
- court decisions, all as of the date of this prospectus supplement.
In addition, the administrative interpretations and practices of the
Internal Revenue Service include its practices and policies as expressed in
private letter rulings which are not binding on the Internal Revenue Service,
except with respect to the particular taxpayers who requested and received such
rulings. Future legislation, treasury regulations, administrative
interpretations and practices and/or court decisions may adversely affect,
perhaps retroactively, the tax considerations contained in this discussion. Any
change could apply retroactively to transactions preceding the date of the
change. We have not requested, and do not plan to request, any rulings from the
Internal Revenue Service concerning our tax treatment and the statements in this
prospectus supplement are not binding on the Internal Revenue Service or a
court. Thus, we can provide no assurance that the tax considerations contained
in this discussion will not be challenged by the Internal Revenue Service or
sustained by a court if challenged by the Internal Revenue Service.
YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE SPECIFIC TAX
CONSEQUENCES TO YOU OF:
- THE ACQUISITION, OWNERSHIP AND SALE OR OTHER DISPOSITION OF OUR CLASS B
PREFERRED STOCK, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX CONSEQUENCES;
- OUR ELECTION TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST FOR FEDERAL
INCOME TAX PURPOSES; AND
- POTENTIAL CHANGES IN THE TAX LAWS.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
When we use the term "U.S. stockholder," we mean a holder of shares of Class
B Preferred Stock who is, for United States federal income tax purposes:
- a citizen or resident of the United States;
- a corporation, partnership, or other entity treated as a corporation or
a partnership for United States federal income tax purposes, created or
organized in or under the laws of the
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<PAGE>
United States or of any state or in the District of Columbia, unless,
in the case of a partnership, treasury regulations are enacted that
provide otherwise;
- an estate which is required to pay United States federal income tax
regardless of the source of its income; or
- a trust whose administration is under the primary supervision of a
United States court and which has one or more United States persons who
have the authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in the treasury
regulations, some trusts in existence on August 20, 1996, and treated as United
States persons prior to this date that elect to continue to be treated as United
States persons shall also be considered U.S. stockholders.
DISTRIBUTIONS GENERALLY. Distributions out of our current or accumulated
earnings and profits, other than capital gain dividends discussed below, will
constitute dividends taxable to our taxable U.S. stockholders as ordinary
income. As long as we qualify as a real estate investment trust, these
distributions will not be eligible for the dividends-received deduction in the
case of U.S. stockholders that are corporations. For purposes of determining
whether distributions are out of current or accumulated earnings and profits,
our earnings and profits will be allocated first to the Class B Preferred Stock
and then to our common stock.
To the extent that we make distributions, other than capital gain dividends
discussed below, in excess of our current and accumulated earnings and profits,
these distributions will be treated first as a tax-free return of capital to
each U.S. stockholder. This treatment will reduce the adjusted tax basis which
each U.S. stockholder has in his Class B Preferred Stock by the amount of the
distribution in excess of earnings and profits, but not below zero.
Distributions in excess of a U.S. stockholder's adjusted tax basis in his shares
will be taxable as capital gain, provided that the shares have been held as
capital assets. Such gain will be taxable as long-term capital gain if the
shares have been held for more than one year. Dividends we declare in October,
November, or December of any year and payable to a stockholder of record on a
specified date in any of these months will be treated as both paid by us and
received by the stockholder on December 31 of that year, provided we actually
pay the dividend on or before January 31 of the following year. Stockholders may
not include in their own income tax returns any of our net operating losses or
capital losses.
CAPITAL GAIN DISTRIBUTIONS. Distributions that we properly designate as
capital gain dividends will be taxable to our taxable U.S. stockholders as gain,
to the extent that such gain does not exceed our actual net capital gain for the
taxable year from the sale or disposition of capital assets. Depending on the
characteristics of the assets which produced these gains, and on specified
designations, if any, which we may make, these gains may be taxable to
non-corporate U.S. stockholders at a 20% or 25% rate. U.S. stockholders that are
corporations may, however, be required to treat up to 20% of some capital gain
dividends as ordinary income. If we properly designate any portion of a dividend
as a capital gain dividend, then any portion of the total capital gain dividends
paid or made available to holders of all classes of our stock for the year shall
be allocable to the holders of Class B Preferred Stock in proportion to the
amount that the total dividends, as determined for federal income tax purposes,
paid or made available to the holders of the Class B Preferred Stock for the
year bears to the total dividends paid or made available to holders of all
classes of our stock for the year.
PASSIVE ACTIVITY LOSSES AND INVESTMENT INTEREST LIMITATIONS. Distributions
we make and gain arising from the sale or exchange by a U.S. stockholder of
shares of Class B Preferred Stock will not be treated as passive activity
income. As a result, U.S. stockholders generally will not be able to apply any
"passive losses" against this income or gain. Distributions we make, to the
extent they do not constitute a return of capital, generally will be treated as
investment income for purposes of computing the investment interest limitation.
Gain arising from the sale or other disposition of shares of Class B
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Preferred Stock, however, may not be treated as investment income depending upon
your particular situation.
RETENTION OF NET LONG-TERM CAPITAL GAINS. We may elect to retain, rather
than distribute as a capital gain dividend, our net long-term capital gains. If
we make this election, we would pay tax on our retained net long-term capital
gains. In addition, to the extent we designate, a U.S. stockholder generally
would:
- include its proportionate share of our undistributed long-term capital
gains in computing its long-term capital gains in its return for its
taxable year in which the last day of our taxable year falls;
- be deemed to have paid the capital gains tax imposed on us on the
designated amounts included in the U.S. stockholder's long-term capital
gains;
- receive a credit or refund for the amount of tax deemed paid by it;
- increase the adjusted basis of its shares of Class B Preferred Stock by
the difference between the amount of includable gains and the tax deemed
to have been paid by it; and
- in the case of a U.S. stockholder that is a corporation, appropriately
adjust its earnings and profits for the retained capital gains as required
by treasury regulations to be prescribed by the Internal Revenue Service.
DISPOSITIONS OF CLASS B PREFERRED STOCK. If you are a U.S. stockholder and
you sell or dispose of your shares of Class B Preferred Stock to a person other
than the Company, you will recognize gain or loss for federal income tax
purposes in an amount equal to the difference between (i) the amount of cash and
the fair market value of any property you receive on the sale or other
disposition, less any portion thereof attributable to accumulated and declared
but unpaid distributions that you are entitled to receive, which would have been
characterized as a dividend to the extent of our current and accumulated
earnings and profits, and (ii) your adjusted basis in the shares of Class B
Preferred Stock for tax purposes. This gain or loss will be capital gain or loss
if you have held the Class B Preferred Stock as a capital asset. This gain or
loss, except as provided below, will be long-term capital gain or loss if you
have held the Class B Preferred Stock for more than one year. In general, if you
are a U.S. stockholder and you recognize loss upon the sale or other disposition
of shares of Class B Preferred Stock that you have held for six months or less,
the loss you recognize will be treated as a long-term capital loss, to the
extent you received distributions from us which were required to be treated as
long-term capital gains.
REDEMPTION OF CLASS B PREFERRED STOCK. A redemption of shares of the Class
B Preferred Stock will be treated under Section 302 of the Internal Revenue Code
as a distribution taxable as a dividend, to the extent of the Company's current
and accumulated earnings and profits, at ordinary income rates unless the
redemption satisfies one of the tests set forth in Section 302(b) of the
Internal Revenue Code and is therefore treated as a sale or exchange of the
redeemed shares. The redemption will be treated as a sale or exchange if it (i)
is "substantially disproportionate" with respect to the holder, (ii) results in
a "complete termination" of the holder's stock interest in us, or (iii) is "not
essentially equivalent to a dividend" with respect to the holder, all within the
meaning of Section 302(b) of the Internal Revenue Code. In determining whether
any of these tests have been met, shares of capital stock, including our common
stock and our other equity interests, considered to be owned by the holder by
reason of certain constructive ownership rules set forth in the Internal Revenue
Code, as well as shares of capital stock actually owned by the holder, must
generally be taken into account. Because the determination as to whether any of
the alternative tests of Section 302(b) of the Internal Revenue Code will be
satisfied with respect to any particular holder of the Class B Preferred Stock
depends
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upon the facts and circumstances at the time that the determination must be
made, you are advised to consult your own tax advisors to determine your tax
treatment.
If a redemption of shares of the Class B Preferred Stock is not treated as a
distribution taxable as a dividend to a particular holder, it will be treated,
as to that holder, as a taxable sale or exchange. See "--Dispositions of Class B
Preferred Stock" above for the tax treatment of a sale or exchange.
If a redemption of shares of the Class B Preferred Stock is treated as a
distribution taxable as a dividend, the amount of the distribution will be
measured by the amount of cash and the fair market value of any property
received by the holder. The holder's adjusted basis in the redeemed shares of
the Class B Preferred Stock for tax purposes will be transferred to the holder's
remaining shares of our capital stock, if any. If the holder owns no other
shares of our capital stock, such basis may, under certain circumstances, be
transferred to a related person or it may be lost entirely.
BACKUP WITHHOLDING
We report to our U.S. stockholders and the Internal Revenue Service the
amount of dividends paid during each calendar year, and the amount of any tax
withheld. Under the backup withholding rules, a stockholder may be subject to
backup withholding at the rate of 31% with respect to dividends paid unless the
holder is a corporation or is otherwise exempt and, when required, demonstrates
this fact, or provides a taxpayer identification number, certifies as to no loss
of exemption from backup withholding, and otherwise complies with the backup
withholding rules. A U.S. stockholder that does not provide us with his correct
taxpayer identification number may also be subject to penalties imposed by the
Internal Revenue Service. Backup withholding is not an additional tax. Any
amount paid as backup withholding will be creditable against the stockholder's
income tax liability. In addition, we may be required to withhold a portion of
capital gain distributions to any stockholders who fail to certify their
non-foreign status. See "--Taxation of Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
The Internal Revenue Service has ruled that amounts distributed as dividends
by a qualified real estate investment trust do not constitute unrelated business
taxable income when received by a tax-exempt entity. Based on that ruling,
except as described below, dividend income from us and gain arising upon your
sale of shares generally will not be unrelated business taxable income to a
tax-exempt stockholder. This income or gain will be unrelated business taxable
income, however, if the tax-exempt stockholder holds its shares as "debt
financed property" within the meaning of the Internal Revenue Code or if the
shares are used in a trade or business of the tax-exempt stockholder. Generally,
debt financed property is property, the acquisition or holding of which was
financed through a borrowing by the tax-exempt stockholder.
For tax-exempt stockholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Sections
501(c)(7), (c)(9), (c)(17) and (c)(20) of the Internal Revenue Code,
respectively, income from an investment in our shares will constitute unrelated
business taxable income unless the organization is able to properly claim a
deduction for amounts set aside or placed in reserve for specific purposes so as
to offset the income generated by its investment in our shares. These
prospective investors should consult their tax advisors concerning these "set
aside" and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension-held real estate investment trust" shall be treated as unrelated
business taxable income as to any trust which:
- is described in Section 401(a) of the Internal Revenue Code;
- is tax-exempt under Section 501(a) of the Internal Revenue Code; and
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- holds more than 10%, by value, of the interests in the real estate
investment trust.
Tax-exempt pension funds that are described in Section 401(a) of the
Internal Revenue Code and exempt from tax under Section 501(a) of the Internal
Revenue Code are referred to below as "qualified trusts."
A real estate investment trust is a "pension-held real estate investment
trust" if:
- it would not have qualified as a real estate investment trust but for
the fact that Section 856(h)(3) of the Internal Revenue Code provides that
stock owned by qualified trusts shall be treated, for purposes of the "not
closely held" requirement, as owned by the beneficiaries of the trust,
rather than by the trust itself; and
- either at least one such qualified trust holds more than 25%, by
value, of the interests in the real estate investment trust, or one or more
such qualified trusts, each of which owns more than 10%, by value, of the
interests in the real estate investment trust, holds in the aggregate more
than 50%, by value, of the interests in the real estate investment trust.
The percentage of any real estate investment trust dividend treated as
unrelated business taxable income is equal to the ratio of:
- the unrelated business taxable income earned by the real estate
investment trust, treating the real estate investment trust as if it were a
qualified trust and therefore required to pay tax on unrelated business
taxable income, to
- the total gross income of the real estate investment trust.
A DE MINIMIS exception applies where the percentage is less than 5% for any
year. The provisions requiring qualified trusts to treat a portion of real
estate investment trust distributions as unrelated business taxable income will
not apply if the real estate investment trust is able to satisfy the "not
closely held" requirement without relying upon the "look-through" exception with
respect to qualified trusts. As a result of limitations on the transfer and
ownership of stock contained in the charter, we are not and do not expect to be
classified as a "pension-held real estate investment trust."
TAXATION OF NON-U.S. STOCKHOLDERS
The preceding discussion does not address the rules governing United States
federal income taxation of the ownership and disposition of Class B Preferred
Stock by persons that are non-U.S. stockholders. When we use the term "non-U.S.
stockholder" we mean stockholders who are not U.S. stockholders. In general,
non-U.S. stockholders may be subject to special tax withholding requirements on
distributions from us and with respect to their sale or other disposition of our
Class B Preferred Stock, except to the extent reduced or eliminated by an income
tax treaty between the United States and the non-U.S. stockholder's country. A
non-U.S. stockholder who is a stockholder of record and is eligible for
reduction or elimination of withholding must file an appropriate form with us in
order to claim such treatment. Non-U.S. stockholders should consult their own
tax advisors concerning the federal income tax consequences to them of an
acquisition of shares of Class B Preferred Stock, including the federal income
tax treatment of dispositions of interests in and the receipt of distributions
from us.
OTHER TAX CONSEQUENCES
Your state and local tax treatment may not conform to the federal income tax
consequences summarized above. Consequently, you should consult your tax advisor
regarding the effect of state and local tax laws on an investment in our shares.
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LEGISLATIVE PROPOSALS
President Clinton's Year 2000 Federal Budget Proposal includes a number of
provisions regarding real estate investment trusts. One provision would
eliminate our ability to make an election pursuant to IRS Notice 88-19, as
described in the prospectus under the heading entitled "Certain Federal Income
Tax Considerations--Taxation of the Company as a REIT." In addition, another
provision would result in the immediate taxation of all gain inherent in a C
corporation's assets upon an election by the corporation to become a real estate
investment trust in taxable years beginning after January 1, 2000. If enacted,
this provision could effectively preclude us from re-electing to be taxed as a
real estate investment trust following a loss of our status as a real estate
investment trust. We cannot predict whether any legislation regarding real
estate investment trusts will be adopted or, if adopted, what its terms will be.
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WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC. Our
SEC filings are also available over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for more information on the
public reference rooms and their copy charges. You may also inspect our SEC
reports and other information at the New York Stock Exchange, 20 Broad Street,
New York, New York 10005.
We have filed a registration statement on Form S-3 with the SEC covering our
preferred stock. For further information on Realty Income and our preferred
stock, you should refer to our registration statement and its exhibits. This
prospectus supplement and the accompanying prospectus summarize material
provisions of contracts and other documents that we refer you to. Since the
prospectus supplement and the accompanying prospectus may not contain all the
information that you may find important, you should review the full text of
these documents. We have included copies of these documents as exhibits to our
registration statement.
INCORPORATION OF INFORMATION WE FILE WITH THE SEC
The SEC allows us to "incorporate by reference" the information we file with
them, which means:
- Incorporated documents are considered part of this prospectus supplement
and the accompanying prospectus;
- We can disclose important information to you by referring you to those
documents; and
- Information that we file with the SEC will automatically update and
supersede this prospectus supplement and the accompanying prospectus.
We incorporate by reference the documents listed below which were filed with
the SEC under the Securities Exchange Act of 1934 (the "Exchange Act"):
- Annual Report on Form 10-K for the year ended December 31, 1998;
- Quarterly Report on Form 10-Q for the quarter ended March 31, 1999
- Information relating to executive compensation in our Definitive Proxy
Statement on Schedule 14A dated March 30, 1999;
- Current Report on Form 8-K dated January 22, 1999;
We also incorporate by reference each of the following documents that we
will file with the SEC after the date of this prospectus supplement but before
the end of the preferred stock offering:
- Reports filed under Sections 13(a) and (c) of the Exchange Act;
- Definitive proxy or information statements filed under Section 14 of the
Exchange Act in connection with any subsequent stockholders' meeting; and
- Any reports filed under Section 15(d) of the Exchange Act.
You may request a copy of any filings referred to above (excluding
exhibits), at no cost, by contacting us at the following address:
Realty Income Corporation
Attention: Investor Relations
220 West Crest Street
Escondido, CA 92025-1707
(760) 741-2111
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UNDERWRITING
GENERAL
Based on the terms and conditions of a purchase agreement, we have agreed to
sell to each of the underwriters named below, and each of the underwriters, for
whom Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Donaldson, Lufkin & Jenrette Securities Corporation, A.G. Edwards & Sons, Inc.,
EVEREN Securities, Inc., First Union Capital Markets Corp., PaineWebber
Incorporated and Sutro & Co. Incorporated are acting as representatives, has
severally and not jointly agreed to purchase from us, the number of shares of
Class B Preferred Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................................... 320,000
Donaldson, Lufkin & Jenrette Securities Corporation.............................. 305,000
A.G. Edwards & Sons, Inc......................................................... 305,000
EVEREN Securities, Inc........................................................... 305,000
First Union Capital Markets Corp................................................. 305,000
PaineWebber Incorporated......................................................... 305,000
Sutro & Co. Incorporated......................................................... 305,000
Robert W. Baird & Co. Incorporated............................................... 25,000
CIBC World Markets Corp.......................................................... 25,000
Dain Rauscher Incorporated....................................................... 25,000
Fahnestock & Co. Inc............................................................. 25,000
Legg Mason Wood Walker, Incorporated............................................. 25,000
Raymond James & Associates, Inc.................................................. 25,000
The Robinson-Humphrey Company, LLC............................................... 25,000
SG Cowen Securities Corporation.................................................. 25,000
Tucker Anthony Incorporated...................................................... 25,000
U.S. Bancorp Piper Jaffray Inc................................................... 25,000
----------
Total................................................................. 2,400,000
----------
----------
</TABLE>
The underwriters are obligated to purchase all of the shares of Class B
Preferred Stock, if any shares of Class B Preferred Stock are purchased. The
underwriters' obligations to purchase are subject to terms and conditions
contained in the purchase agreement.
We have agreed with the underwriters to indemnify them against specified
liabilities, including liabilities under the Securities Act of 1933. We have
also agreed to contribute to payments which the underwriters may be required to
make in respect of those liabilities.
Certain of the underwriters have in the past and may in the future engage in
transactions with, or perform services for, us in the ordinary course of their
businesses.
COMMISSIONS AND DISCOUNTS
The underwriters have advised us that they propose initially to offer the
Class B Preferred Stock to the public at the public offering price set forth on
the cover page of this prospectus supplement, and to selected dealers at that
price less a concession not in excess of $.50 per share of Class B Preferred
Stock. The underwriters may allow, and those dealers may reallow, a discount not
in excess of $.45 per share of Class B Preferred Stock to other dealers. After
the initial public offering, the public offering price, concession and discount
may be changed.
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The following table shows the per share and total public offering price, the
underwriting discount to be paid by us to the underwriters and the proceeds of
the sale of the Class B Preferred Stock to us before deducting expenses payable
by us. This information is presented assuming either no exercise or full
exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
---------- ------------- -------------
<S> <C> <C> <C>
Public offering price.................................................. $25.00 $60,000,000 $69,000,000
Underwriting discount.................................................. $.7875 $1,890,000 $2,173,500
Proceeds, before expenses, to us....................................... $24.2125 $58,110,000 $66,826,500
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $250,000 and are payable by us.
OVER-ALLOTMENT OPTION
We have granted to the underwriters an option, exerciseable for 30 days
after the date of this prospectus supplement to purchase up to 360,000
additional shares of Class B Preferred Stock at the public offering price
appearing on the cover of this prospectus supplement, less the underwriting
discount. The underwriters may exercise this option solely to cover
over-allotments, if any, made on the sale of Class B Preferred Stock offered by
this prospectus supplement. If the underwriters exercise this option, each
underwriter will have a firm commitment, subject to some conditions, to purchase
approximately the same percentage of any additional shares of Class B Preferred
Stock as the percentage of the shares of Class B Preferred Stock initially
offered that the underwriter has agreed to purchase.
NEW YORK STOCK EXCHANGE LISTING
Before this offering, there has been no public trading market for the Class
B Preferred Stock. We have submitted an application to list the Class B
Preferred Stock on the NYSE. If approved for listing, trading of the Class B
Preferred Stock is expected to begin within 30 days of the original issuance of
the Class B Preferred Stock. The representatives have advised us that they
intend to make a market in the Class B Preferred Stock prior to the commencement
of trading on the NYSE. However, the representatives are not obligated to do so
and may discontinue market making at any time without notice. We cannot give any
assurance about the liquidity of any trading market for the Class B Preferred
Stock which may exist.
PRICE STABILIZATION AND SHORT POSITIONS
Until the sale of the Class B Preferred Stock is completed, SEC rules may
limit the ability of the underwriters and selling group members to bid for and
purchase the Class B Preferred Stock. As an exception to these rules, the
underwriters are permitted to engage in transactions that stabilize the price of
the Class B Preferred Stock. These transactions may consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Class B
Preferred Stock.
If the underwriters create a short position in the Class B Preferred Stock
in connection with this offering, which would occur if they sell more shares of
Class B Preferred Stock than are set forth on the cover page of this prospectus
supplement, the underwriters may reduce that short position by purchasing Class
B Preferred Stock in the open market. The underwriters may also elect to reduce
any short position by exercising all or part of the over-allotment option
described above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of those purchases.
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Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the Class B Preferred Stock. In addition, neither
we nor any of the underwriters make any representation that the underwriters
will engage in those transactions or that those transactions, once commenced,
will not be discontinued without notice.
PENALTY BIDS
The representatives also may impose a penalty bid on certain underwriters
and selling group members. This means that, if the representatives purchase
Class B Preferred Stock in the open market to reduce the underwriters' short
position or to stabilize the price of the Class B Preferred Stock, they may
reclaim the amount of the selling concession from the underwriters and selling
group members who sold those shares of Class B Preferred Stock as part of this
offering.
LEGAL MATTERS
We will have Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland
pass upon the validity of the Class B Preferred Stock to be issued in connection
with the offering. We will have Latham & Watkins, Costa Mesa, California, pass
upon certain legal matters relating to the offering. Brown & Wood LLP, San
Francisco, California will act as counsel for the underwriters.
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<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,400,000 SHARES
[LOGO]
9 3/8% CLASS B CUMULATIVE REDEEMABLE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
A.G. EDWARDS & SONS, INC.
EVEREN SECURITIES, INC.
FIRST UNION CAPITAL MARKETS CORP.
PAINEWEBBER INCORPORATED
SUTRO & CO. INCORPORATED
MAY 20, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
