<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED MAY 13, 1999
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 1, 1997)
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. THIS PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND
IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
<PAGE>
2,000,000 SHARES
[LOGO]
% 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 , 2004 except under limited
circumstances intended to preserve our status as a real estate investment trust
for federal income tax purposes. Beginning May , 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 will apply 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.
---------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------ ------------------
<S> <C> <C>
Public offering price(1).................................. $25.00 $50,000,000
Underwriting discount..................................... $ $
Proceeds, before expenses, to Realty Income Corporation... $ $
</TABLE>
(1) Plus accrued dividends from May , 1999, if settlement occurs after that
date
The underwriters may also purchase up to an additional 300,000 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 , 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 , 1999.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
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
<CAPTION>
PAGE
---------
<S> <C>
Available Information...................................................................................... 2
Incorporation of Certain Documents by Reference............................................................ 2
The Company................................................................................................ 3
Use of Proceeds............................................................................................ 3
Ratios of Earnings to Fixed Charges........................................................................ 3
Description of Debt Securities............................................................................. 4
Description of Common Stock................................................................................ 14
Description of Preferred Stock............................................................................. 17
Restrictions on Ownership and Transfers of Capital Stock................................................... 22
Certain Federal Income Tax Considerations.................................................................. 25
Plan of Distribution....................................................................................... 31
Experts.................................................................................................... 32
Legal Matters.............................................................................................. 32
</TABLE>
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
<TABLE>
<S> <C>
Issuer............................ Realty Income Corporation
Securities Offered................ 2,000,000 shares of % Class B Cumulative Redeemable
Preferred Stock, plus up to an additional 300,000 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
% per annum of the $25.00 per share liquidation
preference (equivalent to $ 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 , 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 $ per share, which is less than the
amount of a full quarterly dividend.
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
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 , 2004, except under limited circumstances
intended to preserve our status as a real estate
investment trust for federal income tax purposes. On and
after May , 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 capital
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 prior 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
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
<PAGE>
<TABLE>
<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, 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 or winding up, shall not be deemed to
materially and adversely affect such rights,
preferences, privileges or voting powers.
Listing........................... We will apply 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 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 capital stock may be owned, actually or constructively,
by five or fewer individuals (defined in the Code
S-12
<PAGE>
to include certain entities) during the last half of a taxable year, and such
capital 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 intend to apply 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.
S-13
<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, 1998 and 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, we estimate that the ratio of earnings to combined fixed
charges and preferred stock dividends for the year ended December 31, 1998
would have been 3.5x 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 ratio of earnings to fixed charges are equivalent
to our historical ratio 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 $48.2 million, and approximately $55.4 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 $ 55,725
Notes due 2007......................................................... 110,000 110,000
Notes due 2008......................................................... 100,000 100,000
Notes due 2009......................................................... 20,000 20,000
--------- -----------
Total debt........................................................... 333,900 285,725
--------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value per share, 20,000,000 shares
authorized, no shares issued or outstanding, 2,000,000 shares issued
and outstanding as adjusted.......................................... -- 2,000
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................................. 609,794 655,969
Accumulated distributions in excess of net income...................... (190,095) (190,095)
--------- -----------
Total stockholders' equity........................................... 446,521 494,696
--------- -----------
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 $123.4 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
S-17
<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 our borrowings under the Credit Facility, our total
outstanding credit facility borrowings and outstanding notes would have been
approximately 30.3% 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 transferability, 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 we have authorized the issuance of 1,000,000 shares of our
Series A Junior Participating Preferred Stock (the "Series A Preferred Stock")
pursuant to our shareholder rights plan.
We have authorized the issuance of a class of our preferred stock,
consisting of 2,000,000 shares, plus up to an additional 300,000 shares which
may be issued upon exercise of the underwriters' over-allotment options,
designated as % 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 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 evidencing 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 Series 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 declared by the Board of Directors, out of funds we have
legally available for the payment of dividends, cumulative cash dividends at the
rate of % of the liquidation preference per annum (equivalent to $
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 and 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 declared by the
Board of Directors or paid or set apart for payment by us at any time as the
terms and provisions of any agreement of ours, including any agreement relating
to our indebtedness, prohibits a declaration, payment or setting apart for
payment or provides that a declaration, payment or setting apart for payment
would constitute a breach of the agreement or a default under the agreement, or
if a declaration 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 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 that
portion of the total capital gain dividends paid or made available for the year
to holders of all classes of our stock 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 for the year
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. 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 capital 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 of our capital 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 capital 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 capital 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 capital stock for the purpose of preserving our
qualification as a REIT). 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 capital
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, 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 will not
be added to our liabilities.
OPTIONAL REDEMPTION
The Class B Preferred Stock is not redeemable prior to May , 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 , 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 all 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 capital stock, which may include shares of other classes
or series of preferred stock. For purposes of the preceding sentence, "capital
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 or additional
dividends 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
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 capital 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 to a
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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
respective 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 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), or at the next annual meeting of shareholders, and at each
subsequent annual meeting until all dividends accumulated on those shares of
Class B Preferred Stock for 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
automatically terminate.
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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 (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, 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 or winding up, shall not be deemed to materially and adversely
affect such rights, preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which 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.
CONVERSION
The Class B Preferred Stock is not convertible into or exchangeable for any
of our other property or securities.
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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 REIT and such
determination is approved by a two-thirds vote of our stockholders as required
by the Charter. Except as otherwise described above, any change in the ownership
limit would require an amendment to the Articles Supplementary. Amendments to
the Articles Supplementary that materially and adversely affect the holders of
the Class B Preferred Stock require the consent or the affirmative
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vote of the holders of two-thirds of the shares of Class B Preferred Stock
outstanding at the time. See "--Voting Rights."
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 any other limit as permitted by the Board of
Directors, 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 or any other 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, or any other limit as permitted by the
Board of Directors, 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 transfer, or from a transfer
for no consideration (such as a gift), 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 or any other limit as
permitted by the Board of Directors, 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, in the case of a devise or gift or other transfer for no
consideration, the market price at the time of the devise or gift or other
transfer); 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.
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 or any other limit as permitted by the Board of Directors.
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.
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
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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 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;
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<PAGE>
- 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 that portion of the total capital gain
dividends paid or made available to holders of all classes of our stock 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.
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 Preferred
Stock, however, may not be treated as investment income depending upon your
particular situation.
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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 the selling stockholder is 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 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.
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<PAGE>
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
- holds more than 10%, by value, of the interests in the real estate
investment trust.
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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.
S-45
<PAGE>
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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<PAGE>
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...........................................................
Donaldson, Lufkin & Jenrette Securities Corporation..............................
A.G. Edwards & Sons, Inc.........................................................
EVEREN Securities, Inc...........................................................
First Union Capital Markets Corp.................................................
PaineWebber Incorporated.........................................................
Sutro & Co. Incorporated.........................................................
----------
Total................................................................. 2,000,000
----------
----------
</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 $ per share of Class B Preferred
Stock. The underwriters may allow, and those dealers may reallow, a discount not
in excess of $ 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.
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
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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
PER SHARE OPTION WITH OPTION
--------------- ------------- -------------
<S> <C> <C> <C>
Public offering price.............................................................. $ $ $
Underwriting discount.............................................................. $ $ $
Proceeds, before expenses, to us................................................... $ $ $
</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 300,000
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.
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
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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, 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>
PROSPECTUS
$300,000,000
REALTY INCOME CORPORATION
DEBT SECURITIES, PREFERRED STOCK AND COMMON STOCK
------------------------
Realty Income Corporation, a Maryland corporation (the "Company"), may from
time to time offer in one or more series (i) its debt securities (the "Debt
Securities"), (ii) shares of its Preferred Stock, $1.00 par value per share (the
"Preferred Stock"), or (iii) shares of its Common Stock, $1.00 par value per
share (the "Common Stock"), with an aggregate public offering price of up to
$300,000,000 on terms to be determined at the time of offering. The Debt
Securities, the Preferred Stock and the Common Stock (collectively, the
"Securities") may be offered, separately or together, in separate series, in
amounts, at prices and on terms to be set forth in one or more supplements to
this Prospectus (each, a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Debt Securities, the specific
title, aggregate principal amount, currency, form (which may be registered or
bearer, or certificated or global), authorized denominations, maturity, rate (or
manner of calculation thereof) and time of payment of interest, terms for
redemption at the Company's option or repayment at the holder's option, terms
for sinking fund payments, terms for conversion into shares of Preferred Stock
or Common Stock, covenants and any initial public offering price; (ii) in the
case of Preferred Stock, the specific designation, preferences, conversion and
other rights, voting powers, restrictions, limitations as to transferability,
dividends and other distributions and terms and conditions of redemption and any
initial public offering price; and (iii) in the case of Common Stock, any
initial public offering price. In addition, such specific terms may include
limitations on actual, beneficial or constructive ownership and restrictions on
transfer of the Securities, in each case as may be appropriate to preserve the
status of the Company as a real estate investment trust ("REIT") for federal
income tax purposes. See "Restrictions on Ownership and Transfers of Capital
Stock." The applicable Prospectus Supplement will also contain information,
where applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Securities covered
by such Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time by the Company, or to or through underwriters or dealers. If any agents
or underwriters are involved in the sale of any of the Securities, their names,
and any applicable purchase price, fee, commission or discount arrangement
between or among them, will be set forth, or will be calculable from the
information set forth, in the applicable Prospectus Supplement. See "Plan of
Distribution." No Securities may be sold without delivery of the applicable
Prospectus Supplement describing the method and terms of the offering of such
Securities.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is October 1, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The registration
statement on Form S-3 (of which this Prospectus is a part) (the "Registration
Statement"), the exhibits and schedules forming a part thereof and the reports,
proxy statements and other information filed by the Company with the Commission
in accordance with the Exchange Act can be inspected and copied at the
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following regional offices of the Commission: Seven World
Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the
Common Stock is currently listed on the New York Stock Exchange ("NYSE") and
similar information concerning the Company can be inspected and copied at the
offices of the NYSE, 20 Broad Street, New York, New York 10005. Electronic
filings made through the Commission's EDGAR filing system are publicly available
through the Commission's web site (http://www.sec.gov).
The Company has filed with the Commission the Registration Statement under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Securities. This Prospectus does not contain all the information set forth
in the Registration Statement, certain portions of which have been omitted as
permitted by the Commission's rules and regulations. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed or incorporated by reference as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference and the exhibits and schedules thereto. For further
information regarding the Company and the Securities, reference is hereby made
to the Registration Statement and such exhibits and schedules, which may be
obtained from the Commission at its principal office in Washington, D.C. upon
payment of the fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the Exchange
Act with the Commission and are incorporated herein by reference:
(i) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
(ii) the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997;
(iii) the Company's Current Report on Form 8-K dated May 5, 1997; and
(iv) the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Securities shall be deemed to be
incorporated by reference in this Prospectus and to be part hereof from the date
of filing such documents. Any statement contained herein or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein (or in the applicable Prospectus Supplement) or in
any other subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus. Copies of all documents
that are incorporated herein by reference (not including the exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
the information that this Prospectus incorporates) will be provided without
charge to each person, including any beneficial owner, to whom this Prospectus
is delivered, upon written or oral request. Requests should be directed to the
Corporate Secretary of the Company, 220 West Crest Street, Escondido, California
92025 (telephone number: (760) 741-2111).
2
<PAGE>
THE COMPANY
Realty Income Corporation, a Maryland corporation (the "Company"), is a
fully integrated, self-administered and self-managed real estate investment
trust ("REIT") that focuses on the acquisition of long-term net lease
properties. The Company's philosophy is to employ a strategy of acquiring,
owning and managing properties that are preleased on a long-term net lease basis
to national and regional chain operators in a variety of consumer service and
retail industries throughout the United States. As of August 19, 1997, the
Company directly owned controlling interests in 771 properties located
throughout the United States.
The Company commenced operations as a REIT on August 15, 1994 through the
merger and consolidation of 25 public and private real estate limited
partnerships (the "Consolidation"). From September 1993 until May 28, 1997, the
Company existed as a corporation formed under the laws of the State of Delaware
(the "Delaware Company"). In March 1997, the Company formed Realty Income of
Maryland, Inc., a Maryland corporation and wholly-owned subsidiary of the
Delaware Company (the "Maryland Company"), specifically for the purpose of
reincorporating the Company under the laws of the State of Maryland (the
"Reincorporation"). The Maryland Company conducted no business and had no
material assets or liabilities prior to May 28, 1997. On May 28, 1997, the
Delaware Company was merged into the Maryland Company pursuant to an Agreement
and Plan of Merger approved by the Company's stockholders. Upon completion of
the merger, the Maryland Company changed its name to Realty Income Corporation.
The Reincorporation did not result in any change in the Company's business,
assets or liabilities and did not result in any relocation of management or
other employees. For a more complete description of the potential effects of the
Reincorporation, reference is hereby made to the section entitled,
"Reincorporation of the Company in Maryland and Related Changes to the Rights of
Stockholders" of the Company's Proxy Statement filed with the Commission on
March 28, 1997 in connection with its 1997 Annual Meeting of Stockholders, which
section is incorporated by reference herein.
The Company's executive offices are located at 220 West Crest Street,
Escondido, California 92025, and the telephone number is (760) 741-2111.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Securities for
general corporate purposes, which may include the construction and acquisition
of additional properties and other acquisition transactions, the expansion and
improvement of certain properties in the Company's portfolio, and the repayment
of indebtedness.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth ratios of earnings to fixed charges for the
periods shown. The years ended December 31, 1996 and 1995 and the six months
ended June 30, 1997 are for the Company. The results of operations used to
compute the ratio for the year ended December 31, 1994 are comprised of those of
the combined 10 private and 15 publicly held real estate limited partnerships
that were included in the Consolidation (collectively, the "Predecessor") from
January 1, 1994 through August 15, 1994 and those of the Company from August 16,
1994 through December 31, 1994. The ratio shown for the year ended December 31,
1993 is derived from the combined historical financial information of the
Predecessor. Ratios are not shown for the year ended December 31, 1992 because
the Predecessor did not have any fixed charges for such period.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED JUNE 30, ------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
6x 14x 10x 39x 5,865x
</TABLE>
3
<PAGE>
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of net income before
extraordinary items plus fixed charges (excluding interest costs capitalized).
Fixed charges consist of interest expense (including interest costs capitalized)
and the amortization of debt issuance costs. To date, the Company has not issued
any Preferred Stock; therefore, the ratios of earnings to fixed charges and
preferred share dividends are the same as the ratios presented above.
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities will be direct obligations of the Company, which may be
secured or unsecured, and which may be senior or subordinated indebtedness of
the Company. The Debt Securities may be issued under one or more indentures,
each dated as of a date on or before the issuance of the Debt Securities to
which it relates and in the form that has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part or incorporated by
reference herein by means of a post-effective amendment to the Registration
Statement or a Form 8-K, subject to such amendments or supplements as may be
adopted from time to time. Each such indenture (collectively, the "Indenture")
will be entered into between the Company and a trustee (the "Trustee"), which
may be the same Trustee. The Indenture will be subject to, and governed by, the
Trust Indenture Act of 1939, as amended. The statements made hereunder relating
to the Indenture and the Debt Securities are summaries of certain anticipated
provisions thereof, do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all provisions of the Indenture and
such Debt Securities. Capitalized terms used but not defined herein shall have
the respective meanings set forth in the Indenture.
TERMS
The particular terms of the Debt Securities offered by a Prospectus
Supplement will be described in the particular Prospectus Supplement, along with
any applicable modifications of or additions to the general terms of the Debt
Securities as described herein and in the applicable Indenture. Accordingly, for
a description of the terms of any series of Debt Securities, reference must be
made to both the Prospectus Supplement relating thereto and the description of
the Debt Securities set forth in this Prospectus. To the extent that any
particular terms of the Debt Securities described in a Prospectus Supplement
differ from any of the terms described herein, then such terms described herein
shall be deemed to have been superseded by such Prospectus Supplement.
Except as set forth in any Prospectus Supplement, the Debt Securities may be
issued without limit as to aggregate principal amount, in one or more series, in
each case as established from time to time by the Company's Board of Directors
or as set forth in the applicable Indenture or one or more indentures
supplemental to the Indenture. All Debt Securities of one series need not be
issued at the same time and, unless otherwise provided, a series may be
reopened, without the consent of the holders of the Debt Securities of such
series, for issuances of additional Debt Securities of such series.
Each Indenture will provide that the Company may, but need not, designate
more than one Trustee thereunder, each with respect to one or more series of
Debt Securities. Any Trustee under an Indenture may resign or be removed with
respect to one or more series of Debt Securities, and a successor Trustee may be
appointed to act with respect to such series. If two or more persons are acting
as Trustee with respect to different series of Debt Securities, each such
Trustee shall be a Trustee of a trust under the applicable Indenture separate
and apart from the trust administered by any other Trustee and, except as
otherwise indicated herein, any action described herein to be taken by a Trustee
may be taken by each such Trustee with respect to, and only with respect to, the
one or more series of Debt Securities for which it is Trustee under the
applicable Indenture.
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<PAGE>
The following summaries set forth certain general terms and provisions of
the Indenture and the Debt Securities. The Prospectus Supplement relating to the
series of Debt Securities being offered will contain further terms of such Debt
Securities, including the following specific terms:
(1) the title of such Debt Securities;
(2) the aggregate principal amount of such Debt Securities and any limit
on such aggregate principal amount;
(3) the price (expressed as a percentage of the principal amount
thereof) at which such Debt Securities will be issued and, if other than the
principal amount thereof, the portion of the principal amount thereof
payable upon declaration of acceleration of the maturity thereof, or (if
applicable) the portion of the principal amount of such Debt Securities that
is convertible into Common Stock or Preferred Stock, or the method by which
any such portion shall be determined;
(4) if convertible, the terms on which such Debt Securities are
convertible, including the initial conversion price or rate and conversion
period and, in connection with the preservation of the Company's status as a
REIT, any applicable limitations on the ownership or transferability of the
Common Stock or the Preferred Stock into which such Debt Securities are
convertible;
(5) the date or dates, or the method for determining such date or dates,
on which the principal of such Debt Securities will be payable;
(6) the rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which such Debt Securities
will bear interest, if any;
(7) the date or dates, or the method for determining such date or dates,
from which any interest will accrue, the dates upon which any such interest
will be payable, the record dates for payment of such interest, or the
method by which any such dates shall be determined, the persons to whom such
interest shall be payable, and the basis upon which interest shall be
calculated if other than that of a 360-day year of twelve 30-day months;
(8) the place or places where the principal of (and premium, if any) and
interest, if any, on such Debt Securities will be payable, where such Debt
Securities may be surrendered for conversion or registration of transfer or
exchange and where notices or demands to or upon the Company in respect of
such Debt Securities and the Indenture may be served;
(9) the period or periods, if any, within which, the price or prices at
which and the terms and conditions upon which such Debt Securities may be
redeemed, as a whole or in part, at the Company's option;
(10) the obligation, if any, of the Company to redeem, repay or purchase
such Debt Securities pursuant to any sinking fund or analogous provision or
at the option of a holder thereof, and the period or periods within which,
the price or prices at which and the terms and conditions upon which such
Debt Securities will be redeemed, repaid or purchased, as a whole or in
part, pursuant to such obligation;
(11) if other than U.S. dollars, the currency or currencies in which
such Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite currency
or currencies, and the terms and conditions relating thereto;
(12) whether the amount of payments of principal of (and premium, if
any) or interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula or
method may, but need not, be based on a currency, currencies, currency unit
or units or composite currency or currencies) and the manner in which such
amounts shall be determined;
5
<PAGE>
(13) whether such Debt Securities will be issued in certificated and/or
book-entry form, and, if so, the identity of the depositary for such Debt
Securities;
(14) whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the denominations
thereof and terms and conditions relating thereto;
(15) the applicability, if any, of the defeasance and covenant
defeasance provisions described herein or set forth in the applicable
Indenture, or any modification thereof;
(16) any deletions from, modifications of or additions to the events of
default or covenants of the Company with respect to such Debt Securities;
(17) whether and under what circumstances the Company will pay any
Additional Amounts on such Debt Securities in respect of any tax, assessment
or governmental charge and, if so, whether the Company will have the option
to redeem such Debt Securities in lieu of making such payment;
(18) the subordination provisions, if any, relating to such Debt
Securities;
(19) the provisions, if any, relating to any security provided for such
Debt Securities; and
(20) any other terms of such Debt Securities.
If so provided in the applicable Prospectus Supplement, the Debt Securities
may be issued at a discount below their principal amount and provide for less
than the entire principal amount thereof to be payable upon declaration of
acceleration of the maturity thereof ("Original Issue Discount Securities"). In
such cases, any material U.S. federal income tax, accounting and other
considerations applicable to Original Issue Discount Securities will be
described in the applicable Prospectus Supplement.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the Debt
Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof.
Unless otherwise described in the applicable Prospectus Supplement, the
principal of (and premium, if any) and interest on any series of Debt Securities
will be payable at the applicable Trustee's corporate trust office, the address
of which will be set forth in the applicable Prospectus Supplement; PROVIDED,
HOWEVER, that, unless otherwise provided in the applicable Prospectus
Supplement, at the Company's option, payment of interest may be made by check
mailed to the address of the person entitled thereto as it appears in the
applicable register for such Debt Securities or by wire transfer of funds to
such person at an account maintained within the United States.
Subject to certain limitations imposed on Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for any
authorized denomination of other Debt Securities of the same series and of a
like aggregate principal amount and tenor upon surrender of such Debt Securities
at the office of any transfer agent designated by the Company for such purpose.
In addition, subject to certain limitations imposed on Debt Securities issued in
book-entry form, the Debt Securities of any series may be surrendered for
conversion or registration of transfer thereof at the office of any transfer
agent designated by the Company for such purpose. Every Debt Security
surrendered for conversion, registration of transfer or exchange shall be duly
endorsed or accompanied by a written instrument of transfer and the person
requesting such transfer must provide evidence of title and identity
satisfactory to the Company and the applicable transfer agent. No service charge
will be made for any registration of transfer or exchange of any Debt
Securities, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith. The Company
may at any time rescind the designation of any transfer agent appointed with
respect to the Debt Securities of any series or approve a change in the location
through which any such transfer agent acts, except that the Company will be
6
<PAGE>
required to maintain a transfer agent in each place of payment for such series.
The Company may at any time designate additional transfer agents with respect to
any series of Debt Securities.
Neither the Company nor any Trustee shall be required to (a) issue, register
the transfer of or exchange Debt Securities of any series if such Debt Security
may be among those selected for redemption during a period beginning at the
opening of business 15 days before the mailing or first publication, as the case
may be, of notice of redemption of such Debt Securities and ending at the close
of business on (i) if the Debt Securities of such series are issuable only in
registered form, the day of mailing of the relevant notice of redemption or (ii)
if the Debt Securities of such series are issuable in bearer form, the day of
the first publication of the relevant notice of redemption or, if such Debt
Securities are also issuable in registered form and there is no such
publication, the day of mailing of the relevant notice of redemption; (b)
register the transfer of or exchange any Debt Security in registered form, or
portion thereof, so selected for redemption, in whole or in part, except the
unredeemed portion of any Debt Security being redeemed in part; or (c) exchange
any Debt Security in bearer form so selected for redemption, except in exchange
for a Debt Security of such series in registered form that is simultaneously
surrendered for redemption; or (d) issue, register the transfer of or exchange
any Debt Security that has been surrendered for repayment at the holder's
option, except the portion, if any, of such Debt Security not to be so repaid.
MERGER, CONSOLIDATION OR SALE OF ASSETS
Each Indenture will provide that the Company will not consolidate with, or
sell, lease or convey all or substantially all of its assets to, or merge with
or into, any person unless (a) either the Company shall be the continuing
entity, or the successor person (if other than the Company) formed by or
resulting from any such consolidation or merger or which shall have received the
transfer of such assets shall be a corporation organized and existing under the
laws of the United States or any State thereof and shall expressly assume the
Company's obligation to pay the principal of (and premium, if any) and interest
on all the Debt Securities issued under such Indenture and the due and punctual
performance and observance of all the covenants and conditions contained in such
Indenture and in such Debt Securities; (b) immediately after giving effect to
such transaction and treating any indebtedness that becomes an obligation of the
Company or any Subsidiary as a result thereof as having been incurred, and any
liens on any property or assets of the Company or any Subsidiary that are
incurred, created or assumed as a result thereof as having been created,
incurred or assumed, by the Company or such Subsidiary at the time of such
transaction, no event of default under the Indenture, and no event that, after
notice or the lapse of time, or both, would become such an event of default,
shall have occurred and be continuing; and (c) an officers' certificate and
legal opinion covering such conditions shall be delivered to the Trustee.
CERTAIN COVENANTS
EXISTENCE. Except as permitted under "--Merger, Consolidation or Sale of
Assets," each Indenture will require the Company to do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, all material rights (by certificate of incorporation, by-laws and
statute) and all material franchises; PROVIDED, HOWEVER, that the Company shall
not be required to preserve any right or franchise if its Board of Directors
determines that the preservation thereof is no longer desirable in the conduct
of its business.
MAINTENANCE OF PROPERTIES. Each Indenture will require the Company to cause
all of its material properties used or useful in the conduct of its business or
the business of any Subsidiary to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment and to cause
to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the Company's judgment may be necessary so that
the business carried on in connection therewith may be properly and
advantageously conducted at all times; PROVIDED, HOWEVER, that the Company and
its Subsidiaries shall not be prevented from selling or otherwise disposing of
their properties for value in the ordinary course of business.
7
<PAGE>
INSURANCE. Each Indenture will require the Company to, and to cause each of
its Subsidiaries to, keep in force upon all of its properties and operations
policies of insurance carried with responsible companies in such amounts and
covering all such risks as shall be customary in the industry in accordance with
prevailing market conditions and availability.
PAYMENT OF TAXES AND OTHER CLAIMS. Each Indenture will require the Company
to pay or discharge or cause to be paid or discharged, before the same shall
become delinquent, (a) all taxes, assessments and governmental charges levied or
imposed on it or any Subsidiary or on the income, profits or property of the
Company or any Subsidiary and (b) all lawful claims for labor, materials and
supplies that, if unpaid, might by law become a lien upon the property of the
Company or any Subsidiary; PROVIDED, HOWEVER, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim the amount, applicability or validity of which is
being contested in good faith by appropriate proceedings.
PROVISION OF FINANCIAL INFORMATION. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, each Indenture will require the
Company, within 15 days after each of the respective dates by which the Company
would have been required to file annual reports, quarterly reports and other
documents with the Commission if the Company were so subject, (a) to transmit by
mail to all holders of Debt Securities issued under such Indenture, as their
names and addresses appear in the applicable register for such Debt Securities,
without cost to such holders, copies of the annual reports, quarterly reports
and other documents that the Company would have been required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act if the Company
were subject to such Sections, (b) to file with the applicable Trustee copies of
the annual reports, quarterly reports and other documents that the Company would
have been required to file with the Commission pursuant to Section 13 or 15(d)
of the Exchange Act if the Company were subject to such Sections, and (c) to
supply, promptly upon written request and payment of the reasonable cost of
duplication and delivery, copies of such documents to any prospective holder of
such Debt Securities.
Except as may otherwise be provided in the Prospectus Supplement relating to
any series of Debt Securities, the term "Subsidiary", as used in the Indenture,
means with respect to the Company, any other Person of which more than 50% of
(i) the equity or other ownership interests or (ii) the total voting power of
shares of capital stock or other ownership interests entitled (without regard to
the occurrence of any contingency) to vote in the election of directors,
managers, trustees or general or managing partners thereof is at the time owned
by the Company or one or more of the other Subsidiaries of the Company or a
combination thereof.
ADDITIONAL COVENANTS. Any additional covenants of the Company with respect
to any of the series of Debt Securities will be set forth in the Prospectus
Supplement relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Unless otherwise provided in the applicable Indenture, each Indenture will
provide that the following events are "events of default" with respect to any
series of Debt Securities issued thereunder: (a) default for 30 days in the
payment of any installment of interest on any Debt Security of such series; (b)
default in the payment of the principal of (or premium, if any, on) any Debt
Security of such series when due, whether at stated maturity or by declaration
of acceleration, notice of redemption, notice of option to elect repayment or
otherwise; (c) default in making any sinking fund payment as required for any
Debt Security of such series; (d) default in the performance of any other
covenant of the Company contained in the Indenture (other than a covenant added
to the Indenture solely for the benefit of a series of Debt Securities issued
thereunder other than such series), continued for 60 days after written notice
to the Company by the Trustee or the holders of at least 25% in principal amount
of the outstanding Debt Securities of such series; (e) a default under any bond,
debenture, note or other evidence of indebtedness for money borrowed by the
Company or any of its Subsidiaries (including obligations under leases required
8
<PAGE>
to be capitalized on the balance sheet of the lessee under generally accepted
accounting principles, but not including any indebtedness or obligations for
which recourse is limited to property purchased) in an aggregate principal
amount in excess of $25,000,000 or under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any indebtedness for money borrowed by the Company or any of its Subsidiaries
(including such leases, but not including such indebtedness or obligations for
which recourse is limited to property purchased) in an aggregate principal
amount in excess of $25,000,000, whether such indebtedness exists at the date of
the relevant Indenture or shall thereafter be created, which default shall have
resulted in such indebtedness becoming or being declared due and payable prior
to the date on which it would otherwise have become due and payable or such
obligations being accelerated, without such acceleration having been rescinded
or annulled; (f) certain events of bankruptcy, insolvency or reorganization, or
court appointment of a receiver, liquidator or trustee of the Company or any
Significant Subsidiary of the Company; and (g) any other Event of Default
provided with respect to a particular series of Debt Securities. The term
"Significant Subsidiary" has the meaning ascribed to such term in Regulation S-X
promulgated under the Securities Act, as such Regulation was in effect on
January 1, 1996.
If an event of default under any Indenture with respect to Debt Securities
of any series at the time outstanding occurs and is continuing, then in every
such case the applicable Trustee or the holders of not less than 25% in
principal amount of the outstanding Debt Securities of that series may declare
the principal amount (or, if the Debt Securities of that series are Original
Issue Discount Securities or Indexed Securities, such portion of the principal
amount as may be specified in the terms thereof) of all the Debt Securities of
that series to be due and payable immediately by written notice thereof to the
Company (and to the applicable Trustee if given by the holders). However, at any
time after such a declaration of acceleration with respect to Debt Securities of
such series has been made, but before a judgment or decree for payment of the
money due has been obtained by the applicable Trustee, the holders of not less
than a majority of the principal amount of the outstanding Debt Securities of
such series may rescind and annul such declaration and its consequences if (a)
the Company shall have deposited with the applicable Trustee all required
payments of the principal of (and premium, if any) and interest on the Debt
Securities of such series (other than principal and premium, if any, and
interest which have become due solely as a result of such acceleration), plus
certain fees, expenses, disbursements and advances of the applicable Trustee and
(b) all events of default, other than the nonpayment of accelerated principal
(or specified portion thereof), premium, if any, and interest with respect to
Debt Securities of such series have been cured or waived as provided in the
Indenture. Each Indenture will also provide that the holders of not less than a
majority in principal amount of the outstanding Debt Securities of any series
may waive any past default with respect to such series and its consequences,
except a default (y) in the payment of the principal of (or premium, if any) or
interest on any Debt Security of such series or (z) in respect of a covenant or
provision contained in such Indenture that cannot be modified or amended without
the consent of the holder of each outstanding Debt Security of such series
affected thereby.
Each Indenture will require each Trustee to give notice to the holders of
Debt Securities within 90 days of a default under the Indenture unless such
default shall have been cured or waived, subject to certain exceptions;
PROVIDED, HOWEVER, that such Trustee may withhold notice to the holders of any
series of Debt Securities of any default with respect to such series (except a
default in the payment of the principal of (or premium, if any) or interest on
any Debt Security of such series or in the payment of any sinking fund
installment in respect of any Debt Security of such series) if specified
Responsible Officers of the Trustee consider such withholding to be in such
holders' interest.
Each Indenture will provide that no holders of Debt Securities of any series
may institute any proceedings, judicial or otherwise, with respect to the
Indenture or for any remedy thereunder, except in the case of failure of the
Trustee, for 60 days, to act after it has received a written request to
institute proceedings in respect of an event of default from the holders of not
less than 25% in principal amount of the outstanding Debt Securities of such
series, as well as an offer of indemnity reasonably satisfactory to it,
9
<PAGE>
and no direction inconsistent with such written request has been given to the
Trustee during such 60-day period by holders of a majority in principal amount
of the outstanding Debt Securities of such series. This provision will not
prevent, however, any holder of Debt Securities from instituting suit for the
enforcement of payment of the principal of (and premium, if any) and interest on
such Debt Securities at the respective due dates thereof.
Each Indenture will provide that, subject to provisions in the Trust
Indenture Act of 1939 relating to its duties in case of default, the Trustee is
under no obligation to exercise any of its rights or powers under the Indenture
at the request or direction of any holders of any series of Debt Securities then
outstanding under the Indenture, unless such holders shall have offered to the
Trustee reasonable security or indemnity. The holders of not less than a
majority in principal amount of the outstanding Debt Securities of any series
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or of exercising any trust
or power conferred upon the Trustee; provided that such direction shall not
conflict with any rule of law or the Indenture and the Trustee may refuse to
follow any direction that may involve the Trustee in personal liability or that
may be unduly prejudicial to the holders of Debt Securities of such series not
joining therein.
Within 120 days after the close of each fiscal year, the Company will be
required to deliver to the Trustee a certificate, signed by one of several
specified officers, stating whether or not such officer has knowledge of any
default under the Indenture and, if so, specifying each such default and the
nature and status thereof.
MODIFICATION OF THE INDENTURE
Modifications and amendments of any Indenture will be permitted with the
consent of the holders of not less than a majority in principal amount of all
outstanding Debt Securities of each series issued under such Indenture affected
by such modification or amendment; PROVIDED, HOWEVER, that no such modification
or amendment may, without the consent of the holder of each Debt Security
affected thereby, (a) change the stated maturity of the principal of, or any
installment of principal, interest (or premium, if any) on, any such Debt
Security; (b) reduce the principal amount of, or the rate or amount of interest
on, or any premium payable on redemption of, any such Debt Security, or reduce
the amount of principal of an Original Issue Discount Security that would be due
and payable upon declaration of acceleration of the maturity thereof or would be
provable in bankruptcy, or adversely affect any right of repayment at the option
of the holder of any Debt Security (or reduce the amount of premium payable upon
any such repayment); (c) change the place of payment, or the coin or currency,
for payment of principal of (or premium, if any) or interest on any such Debt
Security; (d) impair the right to institute suit for the enforcement of any
payment on or with respect to any such Debt Security when due; (e) reduce the
above-stated percentage of outstanding Debt Securities of any series necessary
to modify or amend the Indenture, to waive compliance with certain provisions
thereof or certain defaults and consequences thereunder or to reduce the quorum
or voting requirements set forth in the Indenture; or (f) modify any of the
foregoing provisions or any of the provisions relating to the waiver of certain
past defaults or certain covenants, except to increase the required percentage
to effect such action or to provide that certain other provisions may not be
modified or waived without the consent of the holder of each outstanding Debt
Security affected thereby.
The holders of a majority in aggregate principal amount of outstanding Debt
Securities of any series may, on behalf of all holders of Debt Securities of
that series waive, insofar as that series is concerned, compliance by the
Company with certain restrictive covenants in the applicable Indenture.
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Modifications and amendments of an Indenture will be permitted to be made by
the Company and the Trustee without the consent of any holder of Debt Securities
for any of the following purposes: (a) to evidence the succession of another
person to the Company as obligor under the Indenture; (b) to add to the
covenants of the Company for the benefit of the holders of all or any series of
Debt Securities or to surrender any right or power conferred upon the Company in
the Indenture; (c) to add events of default for the benefit of the holders of
all or any series of Debt Securities; (d) to add or change any provisions of the
Indenture to facilitate the issuance of, or to liberalize certain terms of, Debt
Securities in bearer form, or to permit or facilitate the issuance of Debt
Securities in uncertificated form, PROVIDED that such action shall not adversely
affect the interests of the holders of the Debt Securities of any series in any
material respect; (e) to change or eliminate any provisions of the Indenture,
PROVIDED that any such change or elimination does not apply to any outstanding
Debt Securities of a series created prior to the date of such amendment or
supplement that are entitled to the benefit of such provision; (f) to secure the
Debt Securities; (g) to establish the form or terms of Debt Securities of any
series, including the provisions and procedures, if applicable, for the
conversion of such Debt Securities into Common Stock or Preferred Stock; (h) to
provide for the acceptance of appointment by a successor Trustee or facilitate
the administration of the trusts under the Indenture by more than one Trustee;
(i) to cure any ambiguity, defect or inconsistency in the Indenture or to make
any other provisions with respect to matters or questions arising under the
Indenture PROVIDED, HOWEVER, that such action shall not adversely affect the
interests of holders of Debt Securities of any series in any material respect;
or (j) to supplement any of the provisions of the Indenture to the extent
necessary to permit or facilitate defeasance, covenant defeasance and discharge
of any series of such Debt Securities, PROVIDED, HOWEVER, that such action shall
not adversely affect the interests of the holders of the Debt Securities of any
series in any material respect.
Each Indenture will provide that in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (a) the principal amount of an Original Issue Discount Security that
shall be deemed to be outstanding shall be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (b) the principal amount of
any Debt Security denominated in a foreign currency that shall be deemed
outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (a) above), (c) the
principal amount of an Indexed Security that shall be deemed outstanding shall
be the principal face amount of such Indexed Security at original issuance,
unless otherwise provided with respect to such Indexed Security in the
applicable Indenture, and (d) Debt Securities owned by the Company or any other
obligor upon the Debt Securities or any affiliate of the Company or of such
other obligor shall be disregarded.
Each Indenture will contain provisions for convening meetings of the holders
of Debt Securities of a series. A meeting may be permitted to be called at any
time by the Trustee, and also, upon request, by the Company or the holders of at
least 10% in principal amount of the outstanding Debt Securities of such series,
in any such case upon notice given as provided in the Indenture. Except for any
consent or waiver that must be given by the holder of each Debt Security
affected thereby, any resolution presented at a meeting or adjourned meeting
duly reconvened at which a quorum is present may be adopted by the affirmative
vote of the holders of a majority in principal amount of the outstanding Debt
Securities of that series; PROVIDED, HOWEVER, that, except as referred to above,
any resolution with respect to any request, demand, authorization, direction,
notice, consent, waiver or other action that may be made, given or taken by the
holders of a specified percentage, which is less than a majority, in principal
amount of the outstanding Debt Securities of a series may be adopted at a
meeting or adjourned meeting duly reconvened at which a quorum is present by the
affirmative vote of the holders of such specified percentage in principal amount
of the outstanding Debt Securities of that series. Any resolution passed or
decision taken at any meeting of holders of Debt Securities of any series duly
held in accordance with the
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Indenture will be binding on all holders of Debt Securities of that series. The
persons holding or representing a majority in principal amount of the
outstanding Debt Securities of a series shall constitute a quorum for a meeting
of holders of such series; PROVIDED, HOWEVER, that if any action is to be taken
at such meeting with respect to a consent or waiver that may be given by the
holders of not less than a specified percentage in principal amount of the
outstanding Debt Securities of a series, the persons holding or representing
such specified percentage in principal amount of the outstanding Debt Securities
of such series will constitute a quorum.
Notwithstanding the foregoing provisions, each Indenture will provide that
if any action is to be taken at a meeting of holders of Debt Securities of any
series with respect to any request, demand, authorization, direction, notice,
consent, waiver or other action that the Indenture expressly provides may be
made, given or taken by the holders of such series and one or more additional
series: (a) there shall be no minimum quorum requirement for such meeting and
(b) the principal amount of the outstanding Debt Securities of all such series
that are entitled to vote in favor of such request, demand, authorization,
direction, notice, consent, waiver or other action shall be taken into account
in determining whether such request, demand, authorization, direction, notice,
consent, waiver or other action has been made, given or taken under the
Indenture.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless otherwise indicated in the applicable Prospectus Supplement, upon
request of the Company any Indenture shall cease to be of further effect with
respect to any series of Debt Securities issued thereunder specified in such
Company request (except as to certain limited provisions of such Indenture which
shall survive) when either (i) all Debt Securities of such series have been
delivered to the Trustee for cancellation or (ii) all Debt Securities of such
series have become due and payable or will become due and payable within one
year (or are scheduled for redemption within one year) and the Company has
irrevocably deposited with the applicable Trustee, in trust, funds in such
currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are payable in an amount sufficient to
pay the entire indebtedness on such Debt Securities in respect of principal (and
premium, if any) and interest to the date of such deposit (if such Debt
Securities have become due and payable) or to the stated maturity or redemption
date, as the case may be.
Each Indenture will provide that, unless otherwise indicated in the
applicable Prospectus Supplement, the Company may elect either to (a) defease
and be discharged from any and all obligations with respect to any series of
Debt Securities (except for the obligation to pay Additional Amounts, if any,
upon the occurrence of certain events of tax with respect to payments on such
Debt Securities and the obligations to register the transfer or exchange of such
Debt Securities, to replace temporary or mutilated, destroyed, lost or stolen
Debt Securities, to maintain an office or agency in respect of such Debt
Securities and to hold money for payment in trust) ("defeasance") or (b) be
released from its obligations with respect to certain covenants (which will be
described in the relevant Prospectus Supplement) applicable to such Debt
Securities under the applicable Indenture (which may include, subject to a
limited exception, the covenants described under "--Certain Covenants"), and any
omission to comply with such obligations shall not constitute a default or an
event of default with respect to such Debt Securities ("covenant defeasance"),
in either case upon the irrevocable deposit by the Company with the applicable
Trustee, in trust, of an amount, in such currency or currencies, currency unit
or units or composite currency or currencies in which such Debt Securities are
payable at stated maturity, or Government Obligations (as defined below), or
both, applicable to such Debt Securities that through the scheduled payment of
principal and interest in accordance with their terms will provide money in an
amount sufficient to pay the principal of (and premium, if any) and interest on
such Debt Securities, and any mandatory sinking fund or analogous payments
thereon, on the scheduled due dates therefor.
Such a trust may only be established if, among other things, the Company has
delivered to the applicable Trustee an opinion of counsel (as specified in the
applicable Indenture) to the effect that the
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holders of such Debt Securities will not recognize income, gain or loss for U.S.
federal income tax purposes as a result of such defeasance or covenant
defeasance and will be subject to U.S. federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if such
defeasance or covenant defeasance had not occurred, and such opinion of counsel,
in the case of defeasance, must refer to and be based on a ruling of the
Internal Revenue Service (the "IRS") or a change in applicable U.S. federal
income tax law occurring after the date of the applicable Indenture. In the
event of such defeasance, the holders of such Debt Securities would thereafter
be able to look only to such trust fund for payment of principal (and premium,
if any) and interest.
"Government Obligations" means securities that are (a) direct obligations of
the United States of America or the government which issued the foreign currency
in which the Debt Securities of a particular series are payable, for the payment
of which its full faith and credit is pledged, or (b) obligations of a person
controlled or supervised by and acting as an agency or instrumentality of the
United States of America or such government which issued the foreign currency in
which the Debt Securities of such series are payable, the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America or such other government, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such Government Obligation or a specific payment of interest on
or principal of any such Government Obligation held by such custodian for the
account of the holder of a depository receipt; PROVIDED, HOWEVER, that (except
as required by law) such custodian is not authorized to make any deduction from
the amount payable to the holder of such depository receipt from any amount
received by the custodian in respect of the Government Obligation or the
specific payment of interest on or principal of the Government Obligation
evidenced by such depository receipt.
Unless otherwise provided in the applicable Prospectus Supplement, if after
the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any series,
(a) the holder of a Debt Security of such series is entitled to, and does, elect
pursuant to the applicable Indenture or the terms of such Debt Security to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Debt Security or (b)
a Conversion Event (as defined below) occurs in respect of the currency,
currency unit or composite currency in which such deposit has been made, the
indebtedness represented by such Debt Security will be deemed to have been, and
will be, fully discharged and satisfied through the payment of the principal of
(and premium, if any) and interest on such Debt Security as they become due out
of the proceeds yielded by converting the amount so deposited in respect of such
Debt Security into the currency, currency unit or composite currency in which
such Debt Security becomes payable as a result of such election or Conversion
Event based on the applicable market exchange rate. "Conversion Event" means the
cessation of use of (i) a currency, currency unit or composite currency both by
the government of the country which issued such currency and for the settlement
of transactions by a central bank or other public institution of or within the
international banking community, (ii) the ECU both within the European Monetary
System and for the settlement of transactions by public institutions of or
within the European Communities, or (iii) any currency unit or composite
currency other than the ECU for the purposes for which it was established.
Unless otherwise provided in the applicable Prospectus Supplement, all payments
of principal of (and premium, if any) and interest on any Debt Security that is
payable in a foreign currency that ceases to be used by its government of
issuance shall be made in U.S. dollars.
In the event the Company effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because of
the occurrence of any event of default, other than the event of default
described in clause (d) under "--Events of Default, Notice and Waiver" with
respect to the specified sections of the applicable Indenture (which sections
would no longer be applicable to such Debt Securities) or clause (g) thereunder
with respect to any other covenant as to which there has been covenant
defeasance, the amount in such currency, currency unit or composite currency in
which such
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Debt Securities are payable, and Government Obligations on deposit with the
applicable Trustee, may not be sufficient to pay amounts due on such Debt
Securities at the time of the acceleration resulting from such event of default.
The Company would, however, remain liable to make payment of such amounts due at
the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions, if
any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock or Preferred Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include
whether such Debt Securities are convertible into Common Stock or Preferred
Stock, the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the holders
or the Company, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such Debt
Securities and any restrictions on conversion, including restrictions directed
at maintaining the Company's REIT status.
UNCLAIMED PAYMENTS
All amounts paid by the Company to a paying agent or a Trustee for the
payment of the principal of or any premium or interest on any Debt Security that
remain unclaimed at the end of two years after such principal, premium or
interest has become due and payable will be repaid to the Company, and the
holder of such Debt Security thereafter may look only to the Company for payment
thereof.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary identified in the applicable
Prospectus Supplement relating to such series. Global Securities may be issued
in either registered or bearer form and in either temporary or permanent form.
The specific terms of the depositary arrangement with respect to a series of
Debt Securities will be described in the applicable Prospectus Supplement
relating to such series.
DESCRIPTION OF COMMON STOCK
The Company has authority to issue 100,000,000 shares of Common Stock, $1.00
par value per share. As of August 19, 1997, the Company had outstanding
22,994,964 shares of Common Stock.
GENERAL
The following description of the Common Stock sets forth certain general
terms and provisions of the Common Stock to which any Prospectus Supplement may
relate, including a Prospectus Supplement providing that the Common Stock will
be issuable upon conversion of Debt Securities or Preferred Stock. The
statements below describing the Common Stock are in all respects subject to and
qualified in their entirety by reference to the applicable provisions of the
Company's charter (the "Charter") and Bylaws (the "Bylaws").
TERMS
Subject to the preferential rights of any other shares or series of stock
and to the provisions of the Charter regarding the restrictions on transfer of
stock, holders of Common Stock are entitled to receive dividends when, as and if
authorized and declared by the Company's Board of Directors out of assets
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legally available therefor. Payment and authorization of dividends on the Common
Stock and purchases of shares thereof by the Company may be subject to certain
restrictions if the Company fails to pay dividends on the Preferred Stock. See
"Description of Preferred Stock." Upon any liquidation, dissolution or winding
up of the Company, holders of Common Stock are entitled to share equally and
ratably in any assets available for distribution to them, after payment or
adequate provision for payment of the debts and other liabilities of the Company
and the preferential amounts owing with respect to any outstanding Preferred
Stock. Subject to the provisions of the Charter regarding the restrictions on
transfer of stock, each outstanding share of Common Stock entitles the holder to
one vote on all matters submitted to a vote of stockholders, including the
election of directors and, except as provided with respect to any other class or
series of stock, the holders of such shares will possess the exclusive voting
power. The Company's Board of Directors is divided into three classes of
directors. The initial terms of the Class I, Class II and Class III directors
will expire in 1998, 1999 and 2000, respectively. Beginning in 1998, directors
of each class will be chosen for three-year terms upon the expiration of their
current terms and each year one class of directors will be elected by the
stockholders. The staggered terms of directors may reduce the possibility of a
tender offer or an attempt to change control of the Company even though a tender
offer or change in control might involve a premium price for the Common Stock or
otherwise be in the best interest of the stockholders. Holders of Common Stock
do not have cumulative voting rights in the election of directors, which means
that holders of more than 50% of all the shares of the Company's Common Stock
voting for the election of directors can elect all the directors of the class
standing for election at the time if they choose to do so and the holders of the
remaining shares cannot elect any directors of such class. Holders of shares of
Common Stock do not have preemptive rights, which means they have no right under
the Charter, Bylaws or Maryland law to acquire any additional shares of Common
Stock that may be issued by the Company at a subsequent date. Holders of shares
of Common Stock have no preference, conversion, exchange, sinking fund,
redemption or appraisal rights. All shares of Common Stock now outstanding are,
and additional shares of Common Stock offered will be when issued, fully paid
and nonassessable.
Under the Maryland General Corporation Law (the "MGCL"), a Maryland
corporation generally cannot dissolve, amend its charter, merge, sell all or
substantially all of its assets, engage in a share exchange or engage in similar
transactions outside the ordinary course of business unless approved by the
affirmative vote of stockholders holding at least two thirds of the shares
entitled to vote on the matter unless a lesser percentage (but not less than a
majority of all of the votes entitled to be cast on the matter) is set forth in
the corporation's charter. The Charter provides that any such action shall be
effective if approved by the affirmative vote of holders of shares entitled to
cast a majority of all the votes entitled to be cast on the matter.
The Charter authorizes the Board of Directors to reclassify any unissued
shares of Common Stock into other classes or series of stock and to establish
the number of shares in each class or series and to set the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
transferability, dividends or other distributions, qualifications or terms or
conditions of redemption for each such class or series.
MARYLAND BUSINESS COMBINATION LAW
Under the MGCL, certain "business combinations" (including certain issuances
of equity securities) between a Maryland corporation and any person who
beneficially owns ten percent or more of the voting power of the corporation's
shares (an "Interested Stockholder") or an affiliate thereof are prohibited for
five years after the most recent date on which the Interested Stockholder
becomes an Interested Stockholder. Thereafter, any such business combination
must be approved by two super-majority stockholder votes unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in cash
or in the same form as previously paid by the Interested Stockholder for its
shares. The business combinations provisions of the MGCL do not apply, however,
to business combinations that are approved or exempted by the Board of Directors
prior to the time that the Interested Stockholder becomes an Interested
Stockholder.
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These provisions of the MGCL may delay, defer or prevent a transaction or a
change in control of the Company that might involve a premium price for the
Common Stock or otherwise be in the best interests of the stockholders.
MARYLAND CONTROL SHARE ACQUISITIONS LAW
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror or by officers or directors who
are employees of the corporation. "Control Shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
the acquiror or in respect of which the acquiror is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors within
one of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a majority
or more of all voting power. Control shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained
stockholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
As permitted by the MGCL, the Bylaws contain a provision exempting the
Company from the control share acquisition statute any and all acquisitions by
any person of the Company's shares of stock. There can be no assurance that such
provision will not be amended or eliminated by the Board of Directors at any
time in the future.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), not more than 50% in value of its outstanding
capital stock may be owned, actually or constructively, by five or fewer
individuals (defined in the Code to include certain entities) during the last
half of a taxable year. To assist the Company in meeting this requirement and
certain other requirements relating to its tax status as a REIT, the Company may
take certain actions to limit the actual, beneficial or constructive ownership
by a single person or entity of the Company's outstanding equity securities. See
"Restrictions on Ownership and Transfers of Capital Stock."
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TRANSFER AGENT
The registrar and transfer agent for the Common Stock is The Bank of New
York.
DESCRIPTION OF PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of Preferred Stock,
$1.00 par value per share, of which no shares were outstanding as of August 19,
1997.
GENERAL
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Charter (including any applicable Articles
Supplementary) and the Bylaws.
The Charter authorizes the Board of Directors to classify any unissued
shares of Preferred Stock and to reclassify any previously classified but
unissued shares of any class or series, as authorized by the Board of Directors.
Prior to issuance of shares of each series, the Board is required by the MGCL
and the Charter to set, subject to the provisions of the Charter regarding the
restrictions on transfer of stock, the preferences, conversion or other rights,
voting powers, restrictions, limitations as to transferability, dividends or
other distributions, qualifications and terms or conditions of redemption for
each such series. Thus, the Board could authorize the issuance of shares of
Preferred Stock with terms and conditions which could have the effect of
delaying, deferring or preventing a transaction or a change in control of the
Company that might involve a premium price for holders of Common Stock or
otherwise be in their best interest. As of the date hereof, no shares of
Preferred Stock are outstanding and the Company has no present plans to issue
any Preferred Stock. The Preferred Stock will, when issued, be fully paid and
nonassessable and will have no preemptive rights.
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms of and other information concerning the
Preferred Stock, including:
(1) the title of such Preferred Stock;
(2) the number of shares of such Preferred Stock offered, the
liquidation preference per share and the offering price of such Preferred
Stock;
(3) the dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Stock;
(4) whether such Preferred Stock is cumulative or not and, if
cumulative, the date from which dividends on such Preferred Stock shall
accumulate;
(5) the procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) the provision for a sinking fund, if any, for such Preferred Stock;
(7) any voting rights of such Preferred Stock;
(8) the provision for redemption, if applicable, of such Preferred
Stock;
(9) any listing of such Preferred Stock on any securities exchange;
(10) the terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into Common Stock, including the conversion price
(or manner of calculation thereof);
(11) a discussion of federal income tax considerations applicable to
such Preferred Stock;
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(12) any limitations on actual, beneficial or constructive ownership and
restrictions on transfer, in each case as may be appropriate to preserve the
Company's REIT status;
(13) the relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company;
(14) whether liquidation preferences on Preferred Stock shall be counted
as liabilities of the Company in determining whether distributions to junior
stockholders can be made under the MGCL;
(15) any limitations on issuance of any series or class of Preferred
Stock ranking senior to or on a parity with such series or class of
Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company; and
(16) any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock.
RANK
Unless otherwise specified in the applicable Prospectus Supplement, the
Preferred Stock will, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company, rank (a)
senior to all classes or series of Common Stock and to all equity securities
ranking junior to such Preferred Stock with respect to dividend rights or rights
upon liquidation, dissolution or winding up of the Company; (b) on a parity with
all equity securities issued by the Company the terms of which specifically
provide that such equity securities rank on a parity with the Preferred Stock
with respect to dividend rights or rights upon liquidation, dissolution or
winding up of the affairs of the Company; and (c) junior to all equity
securities issued by the Company the terms of which specifically provide that
such equity securities rank senior to the Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
affairs of the Company. For these purposes, the term "equity securities" does
not include convertible debt securities.
DIVIDENDS
Holders of shares of the Preferred Stock of each series or class shall be
entitled to receive, when, as and if authorized and declared by the Company's
Board of Directors, out of the Company's assets legally available for payment,
cash dividends at such rates and on such dates as will be set forth in the
applicable Prospectus Supplement. Each such dividend shall be payable to holders
of record as they appear on the Company's stock transfer books on such record
dates as shall be fixed by the Company's Board of Directors.
Dividends on any series or class of Preferred Stock may be cumulative or
noncumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Company's Board of Directors fails to
authorize a dividend payable on a dividend payment date on any series or class
of Preferred Stock for which dividends are noncumulative, then the holders of
such series or class of Preferred Stock will have no right to receive a dividend
in respect of the dividend period ending on such dividend payment date, and the
Company will have no obligation to pay the dividend accrued for such period,
whether or not dividends on such series or class are declared or paid for any
future period.
If any shares of Preferred Stock of any series or class are outstanding, no
full dividends shall be authorized or paid or set apart for payment on the
Preferred Stock of any other series or class ranking, as to dividends, on a
parity with or junior to the Preferred Stock of such series or class for any
period unless (a) if such series or class of Preferred Stock has a cumulative
dividend, then full cumulative dividends have been or contemporaneously are
authorized and paid or authorized and a sum sufficient for the payment thereof
is set apart for such payment on the Preferred Stock of such series or class for
all past dividend periods and the then current dividend period or (b) if such
series or class of Preferred Stock does not have
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a cumulative dividend, then full dividends for the then current dividend period
have been or contemporaneously are authorized and paid or authorized and a sum
sufficient for the payment thereof is set apart for such payment on the
Preferred Stock of such series or class. When dividends are not paid in full (or
a sum sufficient for such full payment is not so set apart) upon the shares of
Preferred Stock of any series or class and the shares of any other series or
class of Preferred Stock ranking on a parity as to dividends with the Preferred
Stock of such series or class, then all dividends authorized on shares of
Preferred Stock of such series or class and any other series or class of
Preferred Stock ranking on a parity as to dividends with such Preferred Stock
shall be authorized pro rata so that the amount of dividends authorized per
share on the Preferred Stock of such series or class and such other series or
class of Preferred Stock shall in all cases bear to each other the same ratio
that accrued dividends per share on the shares of Preferred Stock of such series
or class (which shall not include any accumulation in respect of unpaid
dividends for prior dividend periods if such Preferred Stock does not have a
cumulative dividend) and such other series or class of Preferred Stock bear to
each other. No interest, or sum of money in lieu of interest, shall be payable
in respect of any dividend payment or payments on Preferred Stock of such series
or class that may be in arrears.
Except as provided in the immediately preceding paragraph, unless (a) if
such series or class of Preferred Stock has a cumulative dividend, full
cumulative dividends on the Preferred Stock of such series or class have been or
contemporaneously are authorized and paid or authorized and a sum sufficient for
the payment thereof is set apart for payment for all past dividend periods and
the then current dividend period and (b) if such series or class of Preferred
Stock does not have a cumulative dividend, full dividends on the Preferred Stock
of such series or class have been or contemporaneously are authorized and paid
or authorized and a sum sufficient for the payment thereof is set apart for
payment for the then current dividend period, then no dividends (other than in
the Common Stock or other stock of the Company ranking junior to the Preferred
Stock of such series or class as to dividends and upon liquidation) shall be
authorized or paid or set aside for payment nor shall any other distribution be
authorized or made on the Common Stock or any other stock of the Company ranking
junior to or on a parity with the Preferred Stock of such series or class as to
dividends or upon liquidation, nor shall the Common Stock or any other stock of
the Company ranking junior to or on a parity with the Preferred Stock of such
series or class as to dividends or upon liquidation be redeemed, purchased or
otherwise acquired for any consideration (or any amounts be paid to or made
available for a sinking fund for the redemption of any shares of any such stock)
by the Company (except by conversion into or exchange for other stock of the
Company ranking junior to the Preferred Stock of such series or class as to
dividends and upon liquidation).
Any dividend payment made on shares of a series or class of Preferred Stock
shall first be credited against the earliest accrued but unpaid dividend due
with respect to shares of such series or class that remains payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the shares of
Preferred Stock will be subject to mandatory redemption or redemption at the
Company's option, as a whole or in part, in each case on the terms, at the times
and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series or class of Preferred Stock
that is subject to mandatory redemption will specify the number of shares of
such Preferred Stock that shall be redeemed by the Company in each year
commencing after a date to be specified, at a redemption price per share to be
specified, together with an amount equal to all accumulated and unpaid dividends
thereon (which shall not, if such Preferred Stock does not have a cumulative
dividend, include any accumulation in respect of unpaid dividends for prior
dividend periods) to the date of redemption. The redemption price may be payable
in cash or other property, as specified in the applicable Prospectus Supplement.
If the redemption price for Preferred Stock of any series or class is payable
only from the net proceeds of the issuance of stock of the Company, the terms of
such Preferred Stock may provide that, if no such stock shall have been
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issued or to the extent the net proceeds from any issuance are insufficient to
pay in full the aggregate redemption price then due, such Preferred Stock shall
automatically and mandatorily be converted into shares of the applicable stock
of the Company pursuant to conversion provisions specified in the applicable
Prospectus Supplement.
Notwithstanding the foregoing, unless (a) if such series or class of
Preferred Stock has a cumulative dividend, full cumulative dividends on all
shares of such series or class of Preferred Stock have been or contemporaneously
are authorized and paid or authorized and a sum sufficient for the payment
thereof is set apart for payment for all past dividend periods and the then
current dividend period and (b) if such series or class of Preferred Stock does
not have a cumulative dividend, full dividends on the Preferred Stock of such
series or class have been or contemporaneously are authorized and paid or
authorized and a sum sufficient for the payment thereof is set apart for payment
for the then current dividend period, then no shares of such series or class of
Preferred Stock shall be redeemed unless all outstanding shares of Preferred
Stock of such series or class are simultaneously redeemed; PROVIDED, HOWEVER,
that the foregoing shall not prevent the purchase or acquisition of shares of
Preferred Stock of such series or class to preserve the Company's REIT status or
pursuant to a purchase or exchange offer made on the same terms to holders of
all outstanding shares of Preferred Stock of such series or class. In addition,
unless (i) if such series or class of Preferred Stock has a cumulative dividend,
full cumulative dividends on all outstanding shares of such series or class of
Preferred Stock have been or contemporaneously are authorized and paid or
authorized and a sum sufficient for the payment thereof is set apart for payment
for all past dividend periods and the then current dividend period and (ii) if
such series or class of Preferred Stock does not have a cumulative dividend,
full dividends on the Preferred Stock of such series or class have been or
contemporaneously are authorized and paid or authorized and a sum sufficient for
the payment thereof is set apart for payment for the then current dividend
period, the Company shall not purchase or otherwise acquire directly or
indirectly any shares of Preferred Stock of such series or class (except by
conversion into or exchange for stock of the Company ranking junior to the
Preferred Stock of such series or class as to dividends and upon liquidation);
PROVIDED, HOWEVER, that the foregoing shall not prevent the purchase or
acquisition of shares of Preferred Stock of such series or class to preserve the
Company's REIT status or pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding shares of Preferred Stock of such
series or class.
If fewer than all the outstanding shares of Preferred Stock of any series or
class are to be redeemed, the number of shares to be redeemed will be determined
by the Company and such shares may be redeemed pro rata from the holders of
record of such shares in proportion to the number of such shares held by such
holders (with adjustments to avoid redemption of fractional shares) or any other
equitable method determined by the Company.
Notice of redemption will be mailed at least 30, but not more than 60, days
before the redemption date to each holder of record of a share of Preferred
Stock of any series or class to be redeemed at the address shown on the
Company's stock transfer books. Each notice shall state: (a) the redemption
date; (b) the number of shares and series or class of the Preferred Stock to be
redeemed; (c) the redemption price; (d) the place or places where certificates
for such Preferred Stock are to be surrendered for payment of the redemption
price; (e) that dividends on the shares to be redeemed will cease to accumulate
on such redemption date; and (f) the date on which the holder's conversion
rights, if any, as to such shares shall terminate. If fewer than all the shares
of Preferred Stock of any series or class are to be redeemed, the notice mailed
to each such holder thereof shall also specify the number of shares of Preferred
Stock to be redeemed from each such holder and, upon redemption, a new
certificate shall be issued representing the unredeemed shares without cost to
the holder thereof. If notice of redemption of any shares of Preferred Stock has
been given and if the funds necessary for such redemption have been set aside by
the Company in trust for the benefit of the holders of any shares of Preferred
Stock so called for redemption, then from and after the redemption date
dividends will cease to accrue on such shares of Preferred Stock, such shares of
Preferred Stock shall no longer be deemed outstanding and all rights of the
holders of such shares will
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terminate, except the right to receive the redemption price. In order to
facilitate the redemption of shares of Preferred Stock of any series or class,
the Board of Directors may fix a record date for the determination of shares of
such series or class of Preferred Stock to be redeemed.
Subject to applicable law and the limitation on purchases when dividends on
a series or class of Preferred Stock are in arrears, the Company may, at any
time and from time to time, purchase any shares of such series or class of
Preferred Stock in the open market, by tender or by private agreement.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of the Common Stock or any other series or class of stock of
the Company ranking junior to any series or class of the Preferred Stock in the
distribution of assets upon any liquidation, dissolution or winding up of the
affairs of the Company, the holders of such series or class of Preferred Stock
shall be entitled to receive out of assets of the Company legally available for
distribution to shareholders liquidating distributions in the amount of the
liquidation preference per share (set forth in the applicable Prospectus
Supplement), plus an amount equal to all dividends accrued and unpaid thereon
(which shall not include any accumulation in respect of unpaid dividends for
prior dividend periods if such Preferred Stock does not have a cumulative
dividend). After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Preferred Stock will have no right or
claim to any of the remaining assets of the Company. If, upon any such voluntary
or involuntary liquidation, dissolution or winding up, the legally available
assets of the Company are insufficient to pay the amount of the liquidating
distributions on all outstanding shares of any series or class of Preferred
Stock and the corresponding amounts payable on all shares of other classes or
series of stock of the Company ranking on a parity with such series or class of
Preferred Stock in the distribution of assets upon liquidation, dissolution or
winding up, then the holders of such series or class of Preferred Stock and all
other such classes or series of capital stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
any series or class of Preferred Stock, the remaining assets of the Company
shall be distributed among the holders of any other classes or series of stock
ranking junior to such series or class of Preferred Stock upon liquidation,
dissolution or winding up, according to their respective rights and preferences
and in each case according to their respective number of shares. For such
purposes, the consolidation or merger of the Company with or into any other
entity, or the sale, lease, transfer or conveyance of all or substantially all
of the Company's property or business, shall not be deemed to constitute a
liquidation, dissolution or winding up of the affairs of the Company.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except as
set forth below or as indicated in the applicable Prospectus Supplement.
Unless provided otherwise for any series or class of Preferred Stock, so
long as any shares of Preferred Stock of a series or class remain outstanding,
the Company shall not, without the affirmative vote or consent of the holders of
at least a majority of the shares of such series or class of Preferred Stock
outstanding at the time, given in person or by proxy, either in writing or at a
meeting (such series or class voting separately as a class), (a) authorize or
create, or increase the authorized or issued amount of, any class or series of
stock ranking prior to such series or class of Preferred Stock with respect to
payment of dividends or the distribution of assets upon liquidation, dissolution
or winding up or reclassify any authorized stock of the Company into any such
shares, or create, authorize or issue any obligation or security convertible
into or evidencing the right to purchase any such shares; or (b) amend, alter or
repeal
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the provisions of the Charter or the Articles Supplementary for such series or
class of Preferred Stock, whether by merger, consolidation or otherwise, so as
to materially and adversely affect any right, preference, privilege or voting
power of such series or class of Preferred Stock or the holders thereof;
PROVIDED, HOWEVER, that any increase in the amount of the authorized Preferred
Stock or the creation or issuance of any other series or class of Preferred
Stock, or any increase in the amount of authorized shares of such series or
class or any other series or class of Preferred Stock, in each case ranking on a
parity with or junior to the Preferred Stock of such series or class with
respect to payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up, shall not be deemed to materially and adversely
affect such rights, preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series or class of Preferred Stock
shall have been redeemed or called for redemption upon proper notice and
sufficient funds shall have been deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series or class
of Preferred Stock are convertible into shares of Common Stock will be set forth
in the applicable Prospectus Supplement relating thereto. Such terms will
include the number of shares of Common Stock into which the Preferred Stock is
convertible, the conversion price (or manner of calculation thereof), the
conversion period, provisions as to whether conversion will be at the option of
the holders of the Preferred Stock or the Company, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of such Preferred Stock.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding capital stock may be owned, actually or constructively,
by five or fewer individuals (defined in the Code to include certain entities)
during the last half of a taxable year. To assist the Company in meeting this
requirement and certain other requirements relating to its tax status as a REIT,
the Company may take certain actions to limit the actual, beneficial or
constructive ownership by a single person or entity of the Company's outstanding
equity securities. See "Restrictions on Ownership and Transfers of Capital
Stock."
TRANSFER AGENT
The transfer agent and registrar for any series or class of Preferred Stock
will be set forth in the applicable Prospectus Supplement.
RESTRICTIONS ON OWNERSHIP AND TRANSFERS OF CAPITAL STOCK
The following summary of certain restrictions on the ownership and transfer
of shares of stock of the Company does not purport to be complete and is subject
to, and qualified in its entirety by reference to, the applicable provisions of
the Charter and Bylaws.
In order for the Company to qualify as a REIT under the Code, no more than
50% in value of its outstanding shares of stock may be owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year for which an election to be treated as a REIT has been made). In addition,
if the Company, or an owner of 10% or more of the Company, actually or
constructively owns 10% or more of a tenant of the Company (or a tenant of any
partnership in which the Company is a partner), the rent received by the Company
(either directly or through any such partnership) from such tenant will not be
qualifying income for purposes of the REIT gross income tests of the Code. A
REIT's stock must also be beneficially owned by 100 or more persons during at
least 335 days of a taxable year of twelve months or during a
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proportionate part of a shorter taxable year (other than the first year for
which an election to be treated as a REIT has been made).
Because the Company expects to continue to qualify as a REIT, the Charter
contains restrictions on the ownership and transfer of Common Stock which are
intended to assist the Company in complying with these requirements. The Charter
provides that, subject to certain specified exceptions, no person or entity may
own, or be deemed to own by virtue of the applicable constructive ownership
provisions of the Code, more than 9.8% (by number or value, whichever is more
restrictive) of the outstanding shares of Common Stock (the "Ownership Limit").
The constructive ownership rules of the Code are complex, and may cause shares
of Common Stock owned actually or constructively by a group of related
individuals and/or entities to be constructively owned by one individual or
entity. As a result, the acquisition of less than 9.8% of the shares of Common
Stock (or the acquisition of an interest in an entity that owns, actually or
constructively, Common Stock) by an individual or entity, could, nevertheless
cause that individual or entity, or another individual or entity, to own
constructively in excess of 9.8% of the outstanding Common Stock and thus
violate the Ownership Limit, or such other limit as permitted by the Board of
Directors. The Board of Directors may, but in no event is required to, waive the
Ownership Limit with respect to a particular stockholder if it determines that
such ownership will not jeopardize the Company's status as a REIT. As a
condition of such waiver, the Board of Directors may require a ruling from the
Internal Revenue Service or an opinion of counsel satisfactory to it and/or
undertakings or representations from the applicant with respect to preserving
the REIT status of the Company.
The Charter further prohibits (i) any person from actually or constructively
owning shares of Common Stock of the Company that would result in the Company
being "closely held" under Section 856(h) of the Code or otherwise cause the
Company to fail to qualify as a REIT, and (ii) any person from transferring
shares of Common Stock of the Company if such transfer would result in shares of
stock of the Company being beneficially owned by fewer than 100 persons
(determined without reference to any rules of attribution).
Any person who acquires or attempts to acquire actual or constructive
ownership of shares of stock of the Company that will violate any of the
foregoing restrictions on transferability and ownership is required to give
notice immediately to the Company and provide the Company with such other
information as the Company may request in order to determine the effect of such
transfer on the Company's status as a REIT. The foregoing restrictions on
transferability and ownership will not apply if the Board of Directors
determines that it is no longer in the best interest of the Company to attempt
to qualify, or to continue to qualify, as a REIT and such determination is
approved by a two thirds vote of the Company's stockholders as required by the
Charter. Except as otherwise described above, any change in the Ownership Limit
would require an amendment to the Charter.
Pursuant to the Charter, if any purported transfer of Common Stock or any
other event would otherwise result in any person violating the Ownership Limit
or such other limit as permitted by the Board of Directors, or result in the
Company being "closely held" under Section 856(h) of the Code or otherwise cause
the Company to fail to qualify as a REIT, then that number of shares in excess
of the Ownership Limit or such other limit shall be transferred to a trust for
the benefit of a charitable beneficiary as described below and the purported
transferee (the "Prohibited Transferee"), shall acquire no rights (or, in the
case of any event other than a purported transfer, the person or entity holding
record title to any such excess shares (the "Prohibited Owner") shall cease to
have any rights) in such excess shares. Any such excess shares described above
will be transferred automatically, by operation of law, to a trust, the
beneficiary of which will be a qualified charitable organization selected by the
Company (the "Beneficiary"). Such automatic transfer shall be deemed to be
effective as of the close of business on the business day prior to the date of
such violative transfer. Within 20 days of receiving notice from the Company of
the transfer of shares to the trust, the trustee of the trust (who shall be
designated by the Company and be unaffiliated with the Company and any
Prohibited Transferee or Prohibited Owner) will be required to sell such excess
shares to a person or entity who could own such shares without violating the
Ownership Limit,
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or such other limit as permitted by the Board of Directors, and distribute to
the Prohibited Transferee or Prohibited Owner, as applicable, an amount equal to
the lesser of the price paid by the Prohibited Transferee or Prohibited Owner
for such excess shares or the net sales proceeds received by the trust for such
excess shares. In the case of any excess shares resulting from any event other
than a transfer, or from a transfer for no consideration (such as a gift), the
trustee will be required to sell such excess shares to a qualified person or
entity and distribute to the Prohibited Owner an amount equal to the lesser of
the Market Price (as defined in the Charter) of such excess shares as of the
date of such event or the net sales proceeds received by the trust for such
excess shares. In either case, any proceeds in excess of the amount
distributable to the Prohibited Transferee or Prohibited Owner, as applicable,
will be distributed to the Beneficiary. Prior to a sale of any such excess
shares by the trust, the trustee will be entitled to receive, in trust for the
Beneficiary, all dividends and other distributions paid by the Company with
respect to such excess shares, and also will be entitled to exercise all voting
rights with respect to such excess shares. Subject to Maryland law, effective as
of the date that such shares have been transferred to the trust, the trustee
shall have the authority (at the trustee's sole discretion) (i) to rescind as
void any vote cast by a Prohibited Transferee or Prohibited Owner, as
applicable, prior to the discovery by the Company that such shares have been
transferred to the trust and (ii) to recast such vote in accordance with the
desires of the trustee acting for the benefit of the Beneficiary. However, if
the Company has already taken irreversible corporate action, then the trustee
shall not have the authority to rescind and recast such vote. Any dividend or
other distribution paid to the Prohibited Transferee or Prohibited Owner (prior
to the discovery by the Company that such shares had been automatically
transferred to a trust as described above) will be required to be repaid to the
trustee upon demand for distribution to the Beneficiary. In the event that the
transfer to the trust as described above is not automatically effective (for any
reason) to prevent violation of the Ownership Limit or such other limit as
permitted by the Board of Directors, then the Charter provides that the transfer
of the excess shares will be void.
In addition, shares of stock of the Company held in the trust shall be
deemed to have been offered for sale to the Company, or its designee, at a price
per share equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the trust (or, in the case of a devise or gift or
other transaction which does not involve a purchase of stock, the Market Price
as of the day of the event which resulted in the transfer of such excess shares
to the trust) and (ii) the Market Price on the date the Company, or its
designee, accepts such offer. The Company shall have the right to accept such
offer until the trustee has sold the shares of stock held in the trust. Upon
such a sale to the Company, the interest of the Beneficiary in the shares sold
shall terminate and the trustee shall distribute the net proceeds of the sale to
the Prohibited Transferee or Prohibited Owner.
If any purported transfer of shares of Common Stock would cause the Company
to be beneficially owned by fewer than 100 persons, such transfer will be null
and void in its entirety and the intended transferee will acquire no rights to
the stock.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above. The foregoing ownership
limitations could delay, defer or prevent a transaction or a change in control
of the Company that might involve a premium price for the Common Stock or
otherwise be in the best interest of stockholders.
Under the Charter, each stockholder shall upon demand be required to
disclose to the Company in writing such information as the Company may request
in order to determine the Company's status as a REIT.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations to the
Company is based on current law, is for general information only, and is not tax
advice. The tax treatment of a holder of any of the Securities will vary
depending upon the terms of the specific Securities acquired by such holder, as
well as his particular situation, and this discussion does not attempt to
address any aspects of federal income taxation relating to holders of
Securities. Certain federal income tax considerations relevant to holders of the
Securities will be provided in the applicable Prospectus Supplement relating
thereto.
EACH INVESTOR IS URGED TO CONSULT THE APPLICABLE PROSPECTUS SUPPLEMENT, AS
WELL AS HIS OWN TAX ADVISOR, REGARDING THE TAX CONSEQUENCES TO HIM OF THE
ACQUISITION, OWNERSHIP AND SALE OF THE SECURITIES, INCLUDING THE FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION, OWNERSHIP AND
SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY AS A REIT
GENERAL. The Company has elected to be taxed as a real estate investment
trust under Sections 856 through 860 of the Code, commencing with its taxable
year ended December 31, 1994. The Company believes that, commencing with its
taxable year ended December 31, 1994, it has been organized and has operated in
such a manner as to qualify for taxation as a REIT under the Code, and the
Company intends to continue to operate in such a manner, but no assurance can be
given that it has operated or will operate in a manner so as to qualify or
remain qualified.
These sections of the Code are highly technical and complex. The following
sets forth the material aspects of the sections that govern the federal income
tax treatment of a REIT. This summary is qualified in its entirety by the
applicable Code provisions, rules and regulations promulgated thereunder, and
administrative and judicial interpretations thereof. Latham & Watkins has acted
as tax counsel to the Company in connection with this Prospectus and the
Company's election to be taxed as a REIT.
Latham & Watkins has rendered an opinion to the Company as of September 12,
1997 to the effect that commencing with the Company's taxable year ended
December 31, 1994, the Company has been organized in conformity with the
requirements for qualification as a REIT, and its proposed method of operation
has enabled and will continue to enable it to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized that
this opinion is based on various assumptions and is conditioned upon certain
representations made by the Company as to factual matters, and that Latham &
Watkins undertakes no obligation to update this opinion subsequent to such date.
Moreover, such qualification and taxation as a REIT depends upon the Company's
ability to meet (through actual annual operating results, distribution levels
and diversity of stock ownership) the various qualification tests imposed under
the Code discussed below, the results of which have not been and will not be
reviewed by Latham & Watkins. Accordingly, no assurance can be given that the
actual results of the Company's operation in any particular taxable year will
satisfy such requirements. See "--Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
investment in a regular corporation. However, the Company will be subject to
federal income tax as follows: First, the Company will be taxed at regular
corporate rates on any undistributed real estate investment trust taxable
income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its items of tax preference. Third, if Company has (i) net income from the sale
or other disposition of "foreclosure property" which is held primarily for sale
to customers in the ordinary course of business or (ii) other non-qualifying
income from foreclosure property, it will be subject to tax at the highest
corporate rate on such income. Fourth, if
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the Company has net income from prohibited transactions (which are, in general,
certain sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business other than foreclosure property),
such income will be subject to a 100% tax. Fifth, if the Company should fail to
satisfy the 75% gross income test or the 95% gross income test (as discussed
below), but has nonetheless maintained its qualification as a real estate
investment trust because certain other requirements have been met, it will be
subject to a 100% tax on an amount equal to (a) the gross income attributable to
the greater of the amount by which the Company fails the 75% or 95% test,
multiplied by (b) a fraction intended to reflect the Company's profitability.
Sixth, if the Company should fail to distribute during each calendar year at
least the sum of (i) 85% of its real estate investment trust ordinary income for
such year, (ii) 95% of its real estate investment trust capital gain net income
for such year, and (iii) any undistributed taxable income from prior periods,
the Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, with respect to any
asset (a "Built-in Gain Asset") acquired by the Company from a corporation which
is or has been a C corporation (i.e., generally a corporation subject to full
corporate-level tax) in a transaction in which the basis of the Built-in Gain
Asset in the hands of the Company is determined by reference to the basis of the
asset in the hands of the C corporation, if the Company recognizes gain on the
disposition of such asset during the 10-year period (the "Recognition Period")
beginning on the date on which such asset was acquired by the Company, then, to
the extent of the Built-in Gain (i.e., the excess of (a) the fair market value
of such asset over (b) the Company's adjusted basis in such asset, determined as
of the beginning of the Recognition Period), such gain will be subject to tax at
the highest regular corporate rate pursuant to Treasury Regulations that have
not yet been promulgated. The results described above with respect to the
recognition of Built-in Gain assume that the Company has made an election
pursuant to IRS Notice 88-19.
REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or directors,
(2) the beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest, (3) which would be taxable as
a domestic corporation, but for Sections 856 through 859 of the Code, (4) which
is neither a financial institution nor an insurance company subject to certain
provisions of the Code, (5) the beneficial ownership of which is held by 100 or
more persons, (6) during the last half of each taxable year, not more than 50%
in value of the outstanding stock of which is owned, actually or constructively,
by five or fewer individuals (as defined in the Code to include certain
entities) and (7) which meets certain other tests, described below, regarding
the nature of its income and assets and the amount of its distributions. The
Code provides that conditions (1) to (4) must be met during the entire taxable
year and that condition (5) must be met during at least 335 days of a taxable
year of 12 months, or during a proportionate part of a taxable year of less than
12 months. Conditions (5) and (6) will not apply until after the first taxable
year for which an election is made to be taxed as a real estate investment
trust.
The Company believes that it has satisfied condition (5) and that it has
issued sufficient shares to allow it to satisfy condition (6). In addition, the
Company's Charter provides for restrictions regarding ownership and transfer of
the Company's capital stock, which restrictions are intended to assist the
Company in continuing to satisfy the share ownership requirements described in
(5) and (6) above. Such ownership and transfer restrictions are described in
"Restrictions on Ownership and Transfers of Capital Stock." There can be no
assurance, however, that such transfer and ownership restrictions will, in all
cases, prevent a violation of the stock ownership provisions described in (5)
and (6) above. The ownership and transfer restrictions pertaining to a
particular class or series of capital stock will be described in the applicable
Prospectus Supplement pertaining to such class or series.
The Company owns, and has owned, interests in various partnerships. In the
case of a REIT that is a partner in a partnership, Treasury Regulations provide
that the REIT will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to be entitled to the income of the partnership
attributable to such share. In addition, the character of the assets and gross
income of the partnership will retain the same character in the hands of the
real estate investment trust for purposes of
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Section 856 of the Code, including satisfying the gross income tests and the
asset tests. Thus, the Company's proportionate share of the assets, liabilities
and items of income of the partnerships in which the Company is a partner will
be treated as assets, liabilities and items of income of the Company for
purposes of applying the requirements described herein. See "--Tax Risks
Associated with the Partnerships."
The Company owns 100% of the stock of a subsidiary that is a qualified REIT
subsidiary (a "QRS") and may acquire stock of one or more new subsidiaries. A
corporation will qualify as a QRS if 100% of its stock is held by the Company at
all times during the period such QRS was in existence. A QRS will not be treated
as a separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a QRS will be treated as assets, liabilities and such
items (as the case may be) of the Company for all purposes of the Code including
the REIT qualification tests. For this reason, references under "Certain Federal
Income Tax Considerations" to the income and assets of the Company shall include
the income and assets of any QRS. A QRS will not be subject to federal income
tax and the Company's ownership of the voting stock of a QRS will not violate
the restrictions against ownership of securities of any one issuer which
constitute more than 10% of such issuer's voting securities or more than 5% of
the value of the Company's total assets, described below under "--Asset Tests."
INCOME TESTS. In order to maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, dividends, interest and gain
from the sale or disposition of stock or securities (or from any combination of
the foregoing). Third, short-term gain from the sale or other disposition of
stock or securities, gain from prohibited transactions and gain on the sale or
other disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a real estate investment trust
described above only if several conditions are met. First, the amount of rent
must not be based in whole or in part on the income or profits of any person.
However, an amount received or accrued generally will not be excluded from the
term "rents from real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. Second, the Code provides that
rents received from a tenant will not qualify as "rents from real property" in
satisfying the gross income tests if the real estate investment trust, or an
owner of 10% or more of the real estate investment trust, actually or
constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property leased in connection with a
lease of real property is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property." Finally, for rents received to qualify as
"rents from real property," the real estate investment trust generally must not
operate or manage the property or furnish or render services to the tenants of
such property, other than through an independent contractor from whom the real
estate investment trust derives no revenue; PROVIDED, HOWEVER, the Company may
directly perform certain services that are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant" of the property. The Company does not and
will not (i) charge rent for any property that is based in whole or in part on
the income or profits of any person (except by reason of being based on a
percentage of receipts or sales, as described above), (ii) rent any property to
a Related Party Tenant, (iii) derive rental income attributable to personal
property (other than personal property leased in connection with the lease of
real property, the amount of which is less than 15% of the total rent received
under the lease), or (iv) perform
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services considered to be rendered to the occupant of the property, other than
through an independent contractor from whom the Company derives no revenue.
Notwithstanding the foregoing, the Company may take certain of the actions set
forth in (i) through (iv) above to the extent such actions will not, based on
the advice of tax counsel to the Company, jeopardize the Company's tax status as
a REIT.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a real estate
investment trust for such year if it is entitled to relief under certain
provisions of the Code. These relief provisions will generally be available if
the Company's failure to meet such tests was due to reasonable cause and not due
to willful neglect, the Company attaches a schedule of the sources of its income
to its federal income tax return, and any incorrect information on the schedule
was not due to fraud with intent to evade tax. It is not possible, however, to
state whether in all circumstances the Company would be entitled to the benefit
of these relief provisions. As discussed above under "--General," even if these
relief provisions apply, a tax would be imposed with respect to the excess net
income.
ASSET TESTS. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets (including stock or debt instruments held for not more than one
year purchased with the proceeds of a stock offering or long-term (at least five
years) public debt offering of the Company), cash, cash items and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities.
ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its stockholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (ii) 95% of the net income
(after tax), if any, from foreclosure property, minus (B) the sum of certain
items of non-cash income. In addition, if the Company disposes of any asset
during its Recognition Period, the Company will be required, pursuant to IRS
regulations which have not yet been promulgated, to distribute at least 95% of
the Built-in Gain (after tax), if any, recognized on the disposition of such
asset. Such distributions must be paid in the taxable year to which they relate,
or in the following taxable year if declared before the Company timely files its
tax return for such year and if paid on or before the first regular dividend
payment after such declaration. To the extent that the Company does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its REIT taxable income, as adjusted, it will be subject to tax
thereon at regular ordinary and capital gain corporate tax rates.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in arriving at taxable income of the Company. In the event that
such timing differences occur, in order to meet the 95% distribution
requirement, the Company may find it necessary to arrange for short-term, or
possibly long-term, borrowings or to pay dividends in the form of taxable stock
dividends.
Under certain circumstances, the Company may be able to rectify a failure to
meet the above distribution requirements for a year by paying "deficiency
dividends" to stockholders in a later year, which
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may be included in the Company's deduction for dividends paid for the earlier
year. Thus, the Company may be able to avoid being taxed on amounts distributed
as deficiency dividends; however, the Company will be required to pay interest
based upon the amount of any deduction taken for deficiency dividends.
Furthermore, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its real estate investment trust ordinary
income for such year, (ii) 95% of its real estate investment trust capital gain
income for such year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. The Company intends
to make timely distributions sufficient to satisfy the annual distribution
requirements set forth above.
DISTRIBUTION OF ACQUIRED EARNINGS. In addition to the above annual
distribution requirements, a REIT is not allowed to have accumulated earnings
and profits attributable to non-REIT years. A REIT has until the close of its
first taxable year in which it has non-REIT earnings and profits to distribute
any such earnings and profits. In a corporate reorganization qualifying as a
tax-free statutory merger, the acquired corporation's earnings and profits are
carried over to the surviving corporation. Any earnings and profits treated as
having been acquired by a REIT through such a merger will be treated as
accumulated earnings and profits of the REIT attributable to non-REIT years. On
August 17, 1995, R.I.C. Advisor, Inc., a California corporation ("R.I.C.
Advisor"), merged with and into the Company (the "Merger") pursuant to an
Agreement and Plan of Merger dated as of April 28, 1995, by and among the
Company, R.I.C. Advisor and the shareholders of R.I.C. Advisor. Accordingly, as
a result of the Merger, the Company was treated as having acquired the earnings
and profits (the "Acquired Earnings") of R.I.C. Advisor. The Company was
required to distribute (or be deemed to distribute) the Acquired Earnings prior
to the close of 1995. Failure to do so would result in the loss of the Company's
REIT status, which would have a material adverse effect on the financial
position and results of operations of the Company and its ability to make
distributions to stockholders and debt service payments. See "--Failure to
Qualify."
The amount of the Acquired Earnings was based on the earnings and profits of
R.I.C. Advisor immediately prior to the Merger. The Acquired Earnings were
determined through an earnings and profits study based on the corporate tax
returns of R.I.C. Advisor for the tax years beginning with R.I.C. Advisor's date
of incorporation through the date of the Merger. The Company requested that KPMG
Peat Marwick LLP perform certain procedures relating to the amount of the
earnings and profits of R.I.C. Advisor for purposes of the earnings and profits
distribution requirement. Based on KPMG Peat Marwick LLP's conclusions (which
were based on R.I.C. Advisor's tax returns as filed with the Internal Revenue
Service (the "IRS"), certain other information provided by R.I.C. Advisor and
other assumptions and qualifications set forth in KPMG Peat Marwick LLP's
report) and other relevant factors, the Company believes that it made (or was
deemed to make) distributions to its shareholders which were sufficient to
distribute the Acquired Earnings prior to the close of 1995.
The calculation of the amount of Acquired Earnings is subject to challenge
by the IRS. The IRS may examine R.I.C. Advisor's prior tax returns and propose
adjustments to increase its taxable income. Because the earnings and profits
study used to calculate the amount of Acquired Earnings was based on these
returns, such adjustments may increase the amount of the Acquired Earnings. If
the IRS determines that the Company did not distribute all of the Acquired
Earnings prior to the end of 1995, the Company would fail to qualify as a REIT
for 1995 and perhaps for subsequent years, which would have a material adverse
effect on the financial position and results of operations of the Company and
its ability to make distributions to stockholders and debt service payments. See
"--Failure to Qualify." However, the Company may make an additional distribution
within 90 days of such a determination by the IRS to distribute the Acquired
Earnings and would be required to pay to the IRS an interest charge based on 50%
of the amount not previously distributed. If such additional distribution is
made, the Company's failure to distribute the Acquired Earnings would not
prevent it from qualifying as a REIT for years subsequent to 1995.
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TAX RISKS ASSOCIATED WITH THE PARTNERSHIPS
The Company presently owns an interest in one partnership and previously
owned an interest in other partnerships. The ownership of an interest in a
partnership may involve special tax risks, including the possible challenge by
the IRS of (i) allocations of income and expense items, which could affect the
computation of taxable income of the Company, and (ii) the status of a
partnership as a partnership (as opposed to an association taxable as a
corporation) for federal income tax purposes. If the partnership was treated as
an association taxable as a corporation for federal income tax purposes, the
partnership would be treated as a taxable entity. In addition, in such a
situation, (i) if the Company owned more than 10% of the outstanding voting
securities of such partnership, or the value of such securities exceeded 5% of
the value of the Company's assets, the Company would fail to satisfy the asset
tests described above and would therefore fail to qualify as a REIT, (ii)
distributions from the partnership to the Company would be treated as dividends,
which are not taken into account in satisfying the 75% gross income test
described above and could, therefore, make it more difficult for the Company to
satisfy such test, (iii) the interest in the partnership held by the Company
would not qualify as a "real estate asset," which could make it more difficult
for the Company to meet the 75% asset test described above, and (iv) the Company
would not be able to deduct its share of any losses generated by the
partnerships in computing its taxable income. See "--Failure to Qualify" for a
discussion of the effect of the Company's failure to meet such tests for a
taxable year. The Company believes that each of the partnerships in which the
Company owns or has owned an interest have been and will be treated for tax
purposes as a partnership (rather than an association taxable as a corporation).
The Company's position will not be binding on the IRS and no assurance can be
given that the IRS will not successfully challenge the status of any partnership
as a partnership for federal income tax purposes.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Such a failure to qualify for taxation as a REIT would
reduce the cash available for distribution by the Company to stockholders and to
pay debt service and could have an adverse effect on the market value and
marketability of the Securities. Distributions to stockholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company will
also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible to
state whether in all circumstances the Company would be entitled to such
statutory relief.
TAXPAYER RELIEF ACT OF 1997
On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act
of 1997 (H.R. 2014), which will have the effect of modifying certain
REIT-related Code provisions for tax years beginning on or after January 1,
1998. Some of the potentially significant REIT-related changes contained in this
legislation include: (i) the rule disqualifying a REIT for any year in which it
fails to comply with certain regulations requiring the REIT to monitor its stock
ownership is replaced with an intermediate financial penalty; (ii) the rule
disqualifying a REIT in any year that it is "closely held" does not apply if
during such year the REIT complied with certain regulations which require the
REIT to monitor its stock ownership, and the REIT did not know or have reason to
know that it was closely held; (iii) a REIT is permitted to render a DE MINIMIS
amount of impermissible services to tenants in connection with the management of
property and still treat amounts received with respect to such property (other
than certain amounts relating to such services) as qualified rent; (iv) the
rules regarding attribution to partnerships for purposes of defining
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qualified rent and independent contractors are modified so that attribution
occurs only when a partner owns a 25% or greater interest in the partnership;
(v) the 30% gross income test is repealed; (vi) any corporation wholly-owned by
a REIT is permitted to be treated as a qualified REIT subsidiary regardless of
whether such subsidiary has always been owned by the REIT; (vii) the ordering
rule for purposes of the requirement that newly-electing REITs distribute
earnings and profits accumulated in non-REIT years is modified; (viii) the class
of excess noncash items for purposes of the REIT distribution requirements is
expanded; (ix) the rules regarding the treatment of hedges are modified; and (x)
certain other Code provisions relating to REITs are amended. Some or all of the
provisions could affect both the Company's operations and its ability to
maintain its REIT status for its taxable years beginning in 1998.
STATE AND LOCAL TAXES
The Company may be subject to state or local taxes in other jurisdictions
such as those in which the Company may be deemed to be engaged in activities or
own property or other interests. Such tax treatment of the Company in states
having taxing jurisdiction over it may differ from the federal income tax
treatment described in this summary.
PLAN OF DISTRIBUTION
The Company may sell the Securities to one or more underwriters for public
offering and sale by them or may sell the Securities to investors directly or
through agents. Any such underwriter or agent involved in the offer and sale of
the Securities will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Securities at a fixed price or prices,
which may be changed, at prices relating to the prevailing market prices at the
time of sale or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as the Company's agents to offer and sell the
Securities upon the terms and conditions as are set forth in the applicable
Prospectus Supplement. In connection with the sale of Securities, underwriters
may be deemed to have received compensation from the Company in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of Securities for whom they may act as agent. Underwriters may sell
Securities to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent. Any underwriting
compensation paid by the Company to underwriters or agents in connection with
the offering of Securities, and any discounts, concessions or commissions
allowed by underwriters to participating dealers, will be set forth in the
applicable Prospectus Supplement. Underwriters, dealers and agents participating
in the distribution of the Securities may be deemed to be underwriters, and any
discounts and commissions received by them and any profit realized by them on
resale of the Securities may be deemed to be underwriting discounts and
commissions, under the Securities Act. Any such underwriter or agent will be
identified, and such compensation received from the Company will be described,
in the applicable Prospectus Supplement.
Underwriters, dealers and agents may be entitled, under agreements entered
into with the Company, to indemnification against and contribution toward
certain civil liabilities, including liabilities under the Securities Act.
Certain of the underwriters, dealers and agents and their affiliates may be
customers of, engage in transactions with and perform services for the Company
and its subsidiaries in the ordinary course of business.
Unless otherwise specified in the related Prospectus Supplement, each series
of Securities will be a new issue with no established trading market, other than
the Common Stock. The Common Stock is currently listed on the NYSE. Unless
otherwise specified in the related Prospectus Supplement, any shares of Common
Stock sold pursuant to a Prospectus Supplement will be listed on the NYSE,
subject to official notice of issuance. The Company may elect to list any series
of Debt Securities or Preferred Stock on an
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exchange or Nasdaq, but is not obligated to do so. It is possible that one or
more underwriters may make a market in a series of Securities, but will not be
obligated to do so and may discontinue any market making at any time without
notice. Therefore, there can be no assurance as to the liquidity of, or the
trading market for, the Securities.
EXPERTS
The consolidated financial statements and financial statement schedule of
Realty Income Corporation as of December 31, 1996 and 1995 and for each of the
years in the three-year period ended December 31, 1996 included in Realty Income
Corporation's Annual Report on Form 10-K for the fiscal year ended December 31,
1996 and incorporated by reference herein have been audited by KPMG Peat Marwick
LLP, independent certified public accountants, and have been incorporated herein
by reference in reliance upon the reports of KPMG Peat Marwick LLP, incorporated
herein by reference, and upon the authority of such firm as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the Securities will be passed upon for the Company by
Ballard Spahr Andrews & Ingersoll. Certain legal matters will be passed upon for
the Company by Latham & Watkins.
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2,000,000 SHARES
[LOGO]
% CLASS B CUMULATIVE REDEEMABLE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
------------------------------
PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
A.G. EDWARDS & SONS, INC.
EVEREN SECURITIES, INC.
FIRST UNION CAPITAL MARKETS CORP.
PAINEWEBBER INCORPORATED
SUTRO & CO. INCORPORATED
, 1999
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