<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus dated October 1, 1997)
$ 20,000,000
REALTY INCOME CORPORATION
8% Notes due 2009
The notes bear interest at 8% per year. Interest on the
notes is payable semiannually on each January 15 and July 15,
beginning July 15, 1999. The notes will mature on January 15,
2009 and are redeemable at any time at the option of Realty
Income Corporation, in whole or in part, at a redemption price
equal to the sum of (i) the principal amount of the notes being
redeemed plus accrued interest to the redemption date and (ii)
the Make-Whole Amount (as defined in the section of this
prospectus supplement entitled "Description of the Notes-Optional
Redemption"), if any. The notes are not subject to any mandatory
sinking fund.
The notes are unsecured and rank equally with all of our
other unsecured senior indebtedness. The notes will be
represented by a single note in book-entry form registered in the
name of The Depository Trust Company or its nominee. This means
that we will not issue note certificates to individual holders.
<TABLE>
Per Note Total
-------- -----------
<S> <C> <C>
Public Offering Price 98.757% $19,751,400
Underwriting Discount .65% $130,000
Proceeds, before expenses,
to Realty Income Corporation 98.107% $19,621,400
</TABLE>
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus supplement or the
accompanying prospectus are truthful or complete. Any
representation to the contrary is a criminal offense.
We expect that the notes will be ready for delivery in book-
entry form only through The Depository Trust Company on or about
January 21, 1999.
Donaldson, Lufkin & Jenrette
----------------------------
The date of this Prospectus Supplement is January 15, 1999.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
Page
----
<S> <C>
Forward-Looking Statements S-3
Where You Can Find More Information S-4
Incorporation of Information We File with the SEC S-4
Prospectus Supplement Summary S-6
Use of Proceeds S-11
Ratio of Earnings to Fixed Charges S-11
Description of the Notes S-11
Underwriting S-23
Legal Matters S-24
</TABLE>
PROSPECTUS
<TABLE>
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>
--------------------------
Page S-2
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus supplement includes forward-looking
statements. We have based these forward-looking statements on
our current expectations and projections about future events.
These forward-looking statements are subject to risks,
uncertainties, and assumptions about Realty Income Corporation,
including, among other things:
- Our anticipated growth strategies;
- Our intention to acquire additional properties;
- Anticipated trends in our business, including trends in
the market for long-term net leases of freestanding,
single tenant retail properties; and
- Future expenditures for development projects.
Additional factors that may cause risks, uncertainties and
assumptions include those discussed in the section entitled
"Business*Other Items" in our Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (the "Annual Report"),
including the subheadings entitled "Competition for Acquisition
of Real Estate," "Environmental Liabilities," "Taxation of the
Company," "Effect of Distribution Requirements," "Real Estate
Ownership Risks" and "Dependence on Key Personnel," and the
section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual
Report and in our Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1998, June 30, 1998 and September 30, 1998, and
in our Current Report on Form 8-K filed October 16, 1998.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these
risks, uncertainties, and assumptions, the forward-looking events
discussed in this prospectus supplement might not occur.
You should rely only on the information contained or
incorporated by reference in this prospectus supplement and the
accompanying prospectus. We have not, and the Underwriter has
not, authorized any other person to provide you with different
information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not,
and the Underwriter is not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in
this prospectus supplement and the accompanying prospectus, as
well as information we previously filed with the Securities and
Exchange Commission (the "SEC") and incorporated by reference, is
Page S-3
<PAGE>
accurate as of its date only. Our business, financial condition,
results of operations, and prospects may have changed since those
dates.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with
the SEC. Our SEC filings are also available over the Internet at
the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file at the SEC's public reference rooms in
Washington, D.C., New York, New York, and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for more information on the
public reference rooms and their copy charges. You may also
inspect our SEC reports and other information at the New York
Stock Exchange, 20 Broad Street, New York, New York 10005.
We have filed a registration statement on Form S-3 with the
SEC covering the notes. For further information on Realty Income
and the notes, you should refer to our registration statement and
its exhibits. This prospectus supplement and the accompanying
prospectus summarize some of the material provisions of contracts
and other documents that we refer you to. Since this 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 statements.
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 the information in this prospectus
supplement and the accompanying prospectus.
We incorporate by reference the documents listed below which
we filed with the SEC under the Securities Exchange Act of 1934
("Exchange Act"):
- Annual Report on Form 10-K for the year ended
December 31, 1997;
- Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1998, June 30, 1998 and September 30, 1998;
- Information relating to executive compensation in our
Definitive Proxy Statement on Schedule 14A dated
March 31, 1998; and
Page S-4
<PAGE>
- Current Reports on Form 8-K filed March 31, 1998,
June 29, 1998, October 16, 1998 and October 28, 1998.
We also incorporate by reference the documents listed below
that we file with the SEC after the date of this prospectus
supplement but before the end of the notes offering:
- Reports filed under Sections 13(a) and (c) of the
Exchange Act;
- Definitive proxy or information statements filed under
Section 14 of the Exchange Act in connection with any
subsequent stockholders' meeting; and
- Any reports filed under Section 15(d) of the Exchange
Act.
You may request a copy of any filings referred to above
(excluding exhibits), at no cost, by contacting us at the
following address:
Realty Income Corporation
Attention: Investor Relations
220 West Crest Street
Escondido, CA 92025-1707
(760) 741-2111
Page S-5
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
This summary may not contain all the information that may be
important to you. You should read the entire prospectus
supplement and the accompanying prospectus, including the
financial data and related notes, before making an investment
decision. 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 this prospectus supplement indicates otherwise,
information relating to our properties is as of October 1, 1998.
Realty Income
Realty Income is organized to operate as an equity real
estate investment trust ("REIT"). We are a fully integrated,
self-administered real estate company with in-house acquisition,
leasing, legal, retail and real estate research, portfolio
management and capital markets expertise. As of October 1, 1998,
we owned a diversified portfolio of 920 properties located in 44
states with over 7.2 million square feet of leasable space. Over
99% of our properties were leased as of October 1, 1998.
Realty Income's investment strategy is to acquire
freestanding, single tenant, retail properties leased to regional
and national retail chains under long-term, net lease agreements.
We typically acquire, and then lease back, retail store locations
from chain store operators, providing capital to the operators
for continued expansion and other corporate purposes. Our net
lease agreements generally are for initial terms of 10 to 20
years, require the tenant to pay a minimum monthly rent and
property operating expenses (taxes, insurance and maintenance),
and provide for future rent increases (typically subject to
ceilings) based on increases in the consumer price index, fixed
increases or additional rent calculated as a percentage of the
tenant's gross sales above a specified level.
Since 1970 and through June 30, 1998, we have acquired and
leased back to regional and national retail chains 863 properties
(including 34 properties that have been sold) and have collected
in excess of 98% of the original contractual rent obligations on
those properties. We believe that the long-term ownership of an
actively managed, diversified portfolio of retail properties
leased under long-term, net lease agreements produces consistent,
predictable income. We believe that the income generated under
long-term leases, coupled with the tenant's responsibility for
property expenses under the net lease structure, generally
produce a more predictable income stream than many other types of
real estate portfolios. Of the 920 properties in the portfolio
Page S-6
<PAGE>
as of October 1, 1998, 913 were single tenant properties and the
remaining properties were multi-tenant. As of October 1, 1998,
over 99% or 910 of our 913 single tenant properties were net
leased pursuant to leases with an average remaining lease term
(excluding extension options) of approximately 8.4 years.
Our five senior officers have each managed our properties and
operations for between eight and 13 years. Our directors and
five senior officers, as a group, owned approximately 2.9% of our
outstanding common stock as of December 31, 1998. Realty Income
had 50 employees as of December 31, 1998.
The Offering
All capitalized terms used in this section, "-The Offering,"
and not defined in this section have the meanings provided in the
section of this prospectus supplement entitled "Description of
the Notes." For a more complete description of the terms of the
notes specified in the following summary, see "Description of the
Notes" in this prospectus supplement and "Description of Debt
Securities" in the accompanying prospectus.
<TABLE>
<S> <C>
Aggregate Principal Amount $ 20,000,000.
Interest Rate 8% per year.
Maturity Date January 15, 2009.
Interest Calculations Based on 360-day year of
twelve 30-day months.
Interest Payment Dates Semiannually on January 15
and July 15, beginning
July 15, 1999.
Ranking The notes are not secured by
any of our property or
assets. Accordingly, your
ownership of notes means you
are one of our unsecured
creditors. Although the
notes will rank equally with
all of our other senior
unsecured indebtedness, the
notes will be effectively
subordinated to all
indebtedness and other
liabilities of our
subsidiaries, and will also
be effectively subordinated
to any of our senior
secured indebtedness to the
Page S-7
<PAGE>
extent of the collateral
pledged as security for the
senior secured
indebtedness.
Form of Note One global note, held in
the name of The Depository
Trust Company or its
nominee.
Credit Rating The notes will be rated
BBB- by Standard & Poor's
Ratings Group, Baa3 by
Moody's Investors Service,
Inc., and BBB by Duff &
Phelps Credit Rating
Company.
Optional Redemption The notes are redeemable at
any time at the option of
the Company, in whole or in
part, at a redemption price
equal to the sum of (i) the
principal amount of the
notes being redeemed plus
accrued interest to the
redemption date and (ii)
the Make-Whole Amount, if
any. For further
information, read the
section entitled
"Description of the Notes-
Optional Redemption" in
this prospectus supplement.
Sinking Fund None.
Use of Proceeds We estimate that the net
proceeds from the offering
will be approximately
$19.5 million. We intend to
use these proceeds to repay
bank borrowings and for
general corporate purposes.
See "Use of Proceeds."
Limitations on Incurrence of Debt The notes contain various
covenants, including the
following:
Page S-8
<PAGE>
(1) We will not incur any
Debt if, after giving effect
to the incurrence of the
Debt, the aggregate
principal amount of all of
our Debt is greater than 60%
of the sum of (i) our Total
Assets as of the end of the
fiscal quarter covered by
our most recent report on
Form 10-K or 10-Q, as the
case may be, and (ii) the
increase in our Total Assets
from the end of that quarter
including any increase in
Total Assets caused by the
application of the proceeds
of that additional Debt
(that increase together with
our Total Assets is referred
to as "Adjusted Total
Assets").
(2) We will not incur any
Secured Debt if, after
giving effect to the Secured
Debt, the aggregate
principal amount of all of
our Secured Debt is greater
than 40% of our Adjusted
Total Assets.
(3) We will not incur any
Debt if the ratio of our
Consolidated Income
Available for Debt Service
to our Annual Debt Service
Charge for the four
consecutive fiscal quarters
most recently ended prior to
the date on which the
additional Debt is to be
incurred would be less than
1.5 to 1.0, calculated on a
pro forma basis after giving
effect to the incurrence of
that additional Debt and the
application of the proceeds
from that incurrence.
Page S-9
<PAGE>
(4) We will maintain Total
Unencumbered Assets of not
less than 150% of the
aggregate outstanding
principal amount of our
Unsecured Debt.
</TABLE>
Recent Developments
Acquisition of 99 Net Leased, Retail Properties. During the
first nine months of 1998, Realty Income acquired 99 retail
properties located in 34 states and invested approximately $140.2
million in new properties and properties under development
(excluding estimated unfunded development costs on properties
under construction at September 30, 1998). During that period,
we selectively sold five properties. The number of properties in
our portfolio increased by 11.4% to 920 at September 30, 1998
from 826 at December 31, 1997. During the first nine months of
1998, we added five new industries and 16 new retailers to our
real estate portfolio.
The 99 properties acquired will contain approximately 1.0
million leasable square feet and are 100% leased under net
leases, with an average initial lease term of 14.6 years. The
weighted average annual unleveraged return on the cost of the 99
properties (including the estimated unfunded development cost of
the properties under development) is estimated to be 10.4%,
computed as estimated contractual net operating income (which in
the case of a net leased property is equal to the base rent or,
in the case of properties under construction, the estimated base
rent under the lease) for the first year of each lease, divided
by total acquisition and estimated development costs. Since it
is possible that a tenant could default on the payment of
contractual rent, no assurance can be given that the actual
return on the cost of the 99 properties acquired in 1998 will not
differ from the foregoing percentage.
8 1/4% Monthly Income Senior Notes Due 2008. On
October 28, 1998, we completed the sale of $100 million principal
amount 8 1/4% Monthly Income Senior Notes due 2008. The notes
were sold to individual retail investors in $25 denominations and
are listed for trading on the New York Stock Exchange under the
symbol "OUI." After adjusting for our U.S. Treasury interest
rate lock agreement, the effective interest rate to us was 9.12%.
The proceeds from the offering were used to pay down our bank
borrowings and will allow us to continue our strategic property
acquisition activities.
Increase in Our Credit Facility. On November 13, 1998 we amended
our revolving credit agreement to increase the amount available
for borrowing from $150 million to $170 million and extended the
maturity date as to $118 million of availability from December
Page S-10
<PAGE>
2000 to December 2001. The increase in the amount available for
borrowing under our revolving credit line should help enable us
to continue our growth strategies, continue to acquire additional
properties and fund expenditures for development projects. As of
December 31, 1998, we had $85.2 million available for borrowing
under the revolving credit agreement.
USE OF PROCEEDS
Our net proceeds from the sale of the notes offered in this
prospectus supplement, after deducting the discount to the
Underwriter and other estimated expenses of this offering payable
by us, are estimated to be approximately $19.5 million. We intend
to use the net proceeds to pay down outstanding indebtedness
under our revolving credit agreement, which had an outstanding
balance at December 31, 1998 of $84.8 million, and for other
general corporate purposes. The revolving credit agreement is a
revolving, unsecured acquisition credit facility with a borrowing
capacity of $170 million. Borrowings under the credit agreement
currently bear interest at a spread of 0.85% over the London
Interbank Offered Rate ("LIBOR"). The credit agreement also
offers our Company other interest rate options. The maturity
date on $52 million under the credit agreement is December 2000
and $118 million under the credit agreement matures in December
2001, and the effective interest rate was 6.27% at
December 31, 1998. See the section in this prospectus supplement
entitled "Recent Developments*Increase in Our Credit Facility."
RATIO OF EARNINGS TO FIXED CHARGES
For the nine months ended September 30, 1998 and for the year
ended December 31, 1997, our ratios of earnings to fixed charges
were 4 to 1 and 5 to 1, respectively. See the section entitled
"Ratios of Earnings to Fixed Charges" in the accompanying
prospectus for a description of how these ratios are calculated.
DESCRIPTION OF THE NOTES
The following description of the particular terms of the
notes offered in this prospectus supplement augments and, to the
extent inconsistent with the accompanying prospectus, replaces
the description of the general terms and provisions of the Debt
Securities set forth in the accompanying prospectus. The
following statements relating to the notes and the Indenture (as
defined below) are summaries of provisions contained in the notes
and the Indenture and do not purport to be complete. These
statements are qualified by reference to the provisions of the
notes and the Indenture, including the definitions in the notes
and Indenture of certain terms. Unless otherwise expressly stated
Page S-11
<PAGE>
or the context otherwise requires, all references to the
"Company" appearing under this caption "Description of the Notes"
and under the caption "Description of Debt Securities" in the
accompanying prospectus will mean Realty Income Corporation
excluding its consolidated subsidiaries. Other capitalized terms
used under the caption, "Description of the Notes" but not
otherwise defined will have the meanings given to them in the
accompanying prospectus.
The notes constitute Debt Securities (which are more fully
described in the accompanying prospectus), to be issued pursuant
to an indenture (the "Indenture") between the Company and The
Bank of New York, as trustee (the "Trustee"). The terms of the
notes include those provisions contained in the Indenture and
those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "TIA"). The notes are
subject to all those terms, and investors are referred to the
Indenture and the TIA for a statement of those terms.
General
The notes will be a separate series of Debt Securities under
the Indenture, limited in aggregate principal amount to $20
million. This series may not be reopened for the issuance of
additional Debt Securities of this series. The notes will be
direct, senior unsecured obligations of the Company and will rank
equally with all other senior unsecured indebtedness of the
Company from time to time outstanding. The notes will be
effectively subordinated to all indebtedness and other
liabilities (including guarantees) of the Company's subsidiaries
and will also be effectively subordinated to any senior secured
indebtedness of the Company to the extent of any collateral
pledged as security therefor. As of September 30, 1998,
subsidiary indebtedness (not including guarantees of borrowings
under the Credit Facility) and other liabilities (primarily rents
received in advance) aggregated approximately $769,000 and the
Company (excluding its subsidiaries) had unsecured senior
indebtedness aggregating approximately $242.9 million and senior
secured indebtedness aggregating approximately $770,000. In
addition, borrowings under the Company's revolving credit
agreement have been guaranteed by certain of its subsidiaries.
See "Use of Proceeds." Subject to certain limitations set forth
in the Indenture and as described below under "*Additional
Covenants of the Company," the Indenture will permit the Company
and its subsidiaries to incur additional secured and unsecured
indebtedness.
The notes will be issued only in fully registered form
without coupons, in denominations of $1,000 and integral
multiples thereof. The notes will be evidenced by a global note
(the "Global Note") in book-entry form, except under the limited
circumstances described below under "*Book Entry System."
Page S-12
<PAGE>
Notices or demands to or upon the Company in respect of the notes
and the Indenture may be served and, if notes are issued in
definitive certificated form, notes may be surrendered for
payment, registration of transfer or exchange, at the office or
agency of the Company maintained for this purpose in the Borough
of Manhattan, The City of New York, which will initially be the
corporate trust office of the Trustee, which on the date of this
prospectus supplement is located at Attention: Corporate Trust
Administration, 101 Barclay Street, 21st Floor, New York, New
York 10286.
Reference is made to the section titled "Description of Debt
Securities*Certain Covenants" in the accompanying prospectus and
"*Additional Covenants of the Company" below for a description
of certain covenants applicable to the notes. Compliance with
these covenants generally may not be waived unless the holders of
a majority in principal amount of the outstanding notes consent
to the waiver. In addition, the defeasance and covenant
defeasance provisions of the Indenture described under
"Description of Debt Securities*Discharge, Defeasance and
Covenant Defeasance" in the accompanying prospectus will apply to
the notes; covenant defeasance will be applicable with respect to
the covenants described in the accompanying prospectus under
"Description of Debt Securities*Certain Covenants" (except the
covenant requiring the Company to preserve and keep in full force
and effect its corporate existence) and the covenants described
below under "*Additional Covenants of the Company."
Except as described under "Description of Debt Securities*
Merger, Consolidation or Sale of Assets" in the accompanying
prospectus or "*Additional Covenants of the Company" below, the
Indenture does not contain any provisions that would afford
holders of the notes protection in the event of (i) a highly
leveraged or similar transaction involving the Company, (ii) a
change of control or the management of the Company, or (iii) a
reorganization, restructuring, merger or similar transaction
involving the Company that may adversely affect the holders of
the notes. In addition, subject to the limitations set forth
under "Description of Debt Securities*Merger, Consolidation or
Sale of Assets" in the accompanying prospectus, the Company may,
in the future, enter into certain transactions such as the sale
of all or substantially all of its assets or the merger or
consolidation of the Company with another entity that would
increase the amount of the Company's indebtedness or
substantially reduce or eliminate the Company's assets, which may
have an adverse affect on the Company's ability to service its
indebtedness, including the notes.
The Company has no present intention of engaging in a highly
leveraged or similar transaction involving the Company. In
addition, certain restrictions on ownership and transfers of the
Company's capital stock designed to preserve its status as a REIT
Page S-13
<PAGE>
may act to prevent or hinder any such transaction or change of
control.
Interest and Maturity
The notes will mature on January 15, 2009 (the "Maturity
Date"). The notes are not subject to any sinking fund
provisions. The notes are subject to redemption at the Company's
option and are not subject to repayment or repurchase by the
Company at the option of the Holders (as defined below). See "--
Optional Redemption."
The notes will bear interest at the rate per annum set forth
on the cover page of this prospectus supplement from
January 21, 1999 or from the immediately preceding Interest
Payment Date (as defined below) to which interest has been paid,
payable semiannually in arrears on January 15 and July 15 of each
year (the "Interest Payment Dates"), commencing July 15, 1999, to
the persons (the "Holders") in whose names the notes are
registered in the security register applicable to the notes at
the close of business on January 1 or July 1 (the "Regular Record
Dates"), as the case may be, immediately before the Interest
Payment Dates regardless of whether the Regular Record Date is a
Business Day. Interest on the notes will be computed on the
basis of a 360-day year of twelve 30-day months.
If any Interest Payment Date, the Maturity Date, any date
fixed for redemption or any other day on which the principal of,
premium, if any, or interest on a note becomes due and payable
falls on a day that is not a Business Day, the required payment
will be made on the next Business Day as if it were made on the
date the payment was due and no interest will accrue on the
amount so payable for the period from and after the Interest
Payment Date, Maturity Date, redemption date or other date, as
the case may be. "Business Day" means any day, other than a
Saturday or a Sunday, that is not a day on which banking
institutions in The City of New York are authorized or required
by law, regulation or executive order to close.
Additional Covenants of the Company
Reference is made to the section titled "Description of Debt
Securities" in the accompanying prospectus for a description of
certain covenants applicable to the notes. In addition to the
foregoing, the following covenants of the Company will apply to
the notes for the benefit of the Holders of the notes:
Limitation on Incurrence of Total Debt. The Company will
not, and will not permit any Subsidiary to, incur any Debt, other
than Intercompany Debt if, immediately after giving effect to the
incurrence of this additional Debt and the application of the
proceeds therefrom on a pro forma basis, the aggregate principal
Page S-14
<PAGE>
amount of all outstanding Debt of the Company and its
Subsidiaries on a consolidated basis determined in accordance
with GAAP is greater than 60% of the sum of (i) the Company's
Total Assets as of the end of the latest fiscal quarter covered
in the Company's Annual Report on Form 10-K or Quarterly Report
on Form 10-Q, as the case may be, most recently filed with the
SEC (or, if this filing is not required under the Exchange Act,
with the Trustee) before the incurrence of this additional Debt
and (ii) the increase, if any, in Total Assets from the end of
such quarter including, without limitation, any increase in Total
Assets caused by the application of the proceeds of the
additional Debt (this increase together with the Company's Total
Assets is referred to as the "Adjusted Total Assets").
Limitation on Incurrence of Secured Debt. The Company will
not, and will not permit any Subsidiary to, incur any Secured
Debt other than Intercompany Debt if, immediately after giving
effect to the incurrence of this additional Secured Debt and the
application of the proceeds therefrom on a pro forma basis, the
aggregate principal amount of all outstanding Secured Debt of the
Company and its Subsidiaries on a consolidated basis determined
in accordance with GAAP is greater than 40% of the Company's
Adjusted Total Assets.
Debt Service Coverage. The Company will not, and will not
permit any Subsidiary to, incur any Debt, other than Intercompany
Debt, if the ratio of Consolidated Income Available for Debt
Service to the Annual Debt Service Charge for the period
consisting of the four consecutive fiscal quarters most recently
ended before the date on which the additional Debt is to be
incurred is less than 1.5 to 1.0, on a pro forma basis after
giving effect to the incurrence of this Debt and the application
of the proceeds therefrom, and calculated on the assumption that
(i) this Debt and any other Debt incurred by the Company or any
of its Subsidiaries since the first day of the four-quarter
period and the application of the proceeds therefrom (including
to refinance other Debt since the first day of the four-quarter
period) had occurred on the first day of the period, (ii) the
repayment or retirement of any other Debt of the Company or any
of its Subsidiaries since the first day of the four-quarter
period had occurred on the first day of the period (except that,
in making the computation, the amount of Debt under any revolving
credit facility, line of credit or similar facility will be
computed based upon the average daily balance of the Debt during
the period), and (iii) in the case of any acquisition or
disposition by the Company or any Subsidiary of any asset or
group of assets since the first day of the four-quarter period,
including, without limitation, by merger, stock purchase or sale,
or asset purchase or sale, the acquisition or disposition had
occurred on the first day of the period with the appropriate
adjustments with respect to the acquisition or disposition being
included in the pro forma calculation. If the Debt giving rise
Page S-15
<PAGE>
to the need to make the foregoing calculation or any other Debt
incurred after the first day of the relevant four-quarter period
bears interest at a floating rate then, for purposes of
calculating the Annual Debt Service Charge, the interest rate on
the Debt will be computed on a pro forma basis as if the average
interest rate which would have been in effect during the entire
four-quarter period had been the applicable rate for the entire
period.
Maintenance of Total Unencumbered Assets. The Company will
maintain at all times Total Unencumbered Assets of not less than
150% of the aggregate outstanding principal amount of the
Unsecured Debt of the Company and its Subsidiaries, computed on a
consolidated basis in accordance with GAAP.
As used herein:
"Annual Debt Service Charge" as of any date means the amount
which is expensed in any 12-month period for interest on Debt of
the Company and its Subsidiaries.
"Consolidated Income Available for Debt Service" for any
period means Consolidated Net Income plus, without duplication,
amounts which have been deducted in determining Consolidated Net
Income during the period for (i) Consolidated Interest Expense,
(ii) provision for taxes of the Company and its Subsidiaries
based on income, (iii) amortization (other than amortization of
debt discount) and depreciation, (iv) provisions for losses from
sales or joint ventures, (v) provision for impairment losses,
(vi) increases in deferred taxes and other non-cash charges,
(vii) charges resulting from a change in accounting principles,
and (viii) charges for early extinguishment of debt, and less,
without duplication, amounts which have been added in determining
Consolidated Net Income during the period for (a) provisions for
gains from sales or joint ventures, and (b) decreases in deferred
taxes and other non-cash items.
"Consolidated Interest Expense" for any period, and without
duplication, means all interest (including the interest component
of rentals on capitalized leases, letter of credit fees,
commitment fees and other like financial charges) and all
amortization of debt discount on all Debt (including, without
limitation, payment-in-kind, zero coupon and other like
securities) but excluding legal fees, title insurance charges,
other out-of-pocket fees and expenses incurred in connection with
the issuance of Debt and the amortization of any debt issuance
costs that are capitalized, all determined for the Company and
its Subsidiaries on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" for any period means the amount of
consolidated net income (or loss) of the Company and its
Subsidiaries for the period determined on a consolidated basis in
accordance with GAAP.
Page S-16
<PAGE>
"Debt" means any indebtedness of the Company or any
Subsidiary, whether or not contingent, in respect of (i) money
borrowed or evidenced by bonds, notes, debentures or similar
instruments, (ii) indebtedness secured by any mortgage, pledge,
lien, charge, encumbrance, trust deed, deed of trust, deed to
secure debt, security agreement or any security interest existing
on property owned by the Company or any Subsidiary, (iii) letters
of credit or amounts representing the balance deferred and unpaid
of the purchase price of any property except any balance that
constitutes an accrued expense or trade payable or (iv) any lease
of property by the Company or any Subsidiary as lessee that is
reflected on the Company's consolidated balance sheet as a
capitalized lease in accordance with GAAP, in the case of items
of indebtedness under (i) through (iii) above to the extent that
any items (other than letters of credit) would appear as
liabilities on the Company's consolidated balance sheet in
accordance with GAAP, and also includes, to the extent not
otherwise included, any obligation of the Company or any
Subsidiary to be liable for, or to pay, as obligor, guarantor or
otherwise (other than for purposes of collection in the ordinary
course of business), indebtedness of another person (other than
the Company or any Subsidiary) of the type referred to in (i),
(ii), (iii) or (iv) above (it being understood that Debt will be
deemed to be incurred by the Company or any Subsidiary whenever
the Company or Subsidiary will create, assume, guarantee or
otherwise become liable in respect thereof).
"Executive Group" means, collectively, those individuals
holding the offices of Chairman, Vice Chairman, Chief Executive
Officer, President, Chief Operating Officer, or any Vice
President of the Company.
"GAAP" means generally accepted accounting principles, as in
effect from time to time, as used in the United States applied on
a consistent basis.
"Intercompany Debt" means indebtedness owed by the Company or
any Subsidiary solely to the Company or any Subsidiary.
"Secured Debt" means Debt secured by any mortgage, lien,
charge, encumbrance, trust deed, deed of trust, deed to secure
debt, security agreement, pledge, conditional sale or other title
retention agreement, capitalized lease, or other security
interest or agreement granting or conveying security title to or
a security interest in real property or other tangible assets.
"Subsidiary" means (i) any corporation, partnership, joint
venture, limited liability company or other entity the majority
of the shares, if any, of the non-voting capital stock or other
equivalent ownership interests of which (except directors'
qualifying shares) are at the time directly or indirectly owned
by the Company, and the majority of the shares of the voting
Page S-17
<PAGE>
capital stock or other equivalent ownership interests of which
(except for directors' qualifying shares) are at the time
directly or indirectly owned by the Company, any other Subsidiary
or Subsidiaries, and/or one or more individuals of the Executive
Group (or, in the event of death or disability of any of the
individuals, his/her respective legal representative(s), or the
individuals' successors in office as an officer of the Company),
and (ii) any other entity the accounts of which are consolidated
with the accounts of the Company. The foregoing definition of
"Subsidiary" will only be applicable with respect to the
covenants and other definitions set forth herein under "*
Additional Covenants of the Company" and, insofar as the
provisions described in the accompanying prospectus under
"Description of Debt Securities*Merger, Consolidation or Sale of
Assets" apply to the notes, the foregoing definition of
Subsidiary will be applicable instead of the definition of
"Subsidiary" set forth in the accompanying prospectus.
"Total Assets" as of any date means the sum of (i)
Undepreciated Real Estate Assets and (ii) all other assets of the
Company and its Subsidiaries determined on a consolidated basis
in accordance with GAAP (but excluding accounts receivable and
intangibles).
"Total Unencumbered Assets" as of any date means Total Assets
minus the value of any properties of the Company and its
Subsidiaries that are encumbered by any mortgage, charge, pledge,
lien, security interest, trust deed, deed of trust, deed to
secure debt, security agreement, or other encumbrance of any kind
(other than those relating to Intercompany Debt), including the
value of any stock of any Subsidiary that is so encumbered
determined on a consolidated basis in accordance with GAAP. For
purposes of this definition, the value of each property will be
equal to the purchase price or cost of each property and the
value of any stock subject to any encumbrance will be determined
by reference to the value of the properties owned by the issuer
of the stock as aforesaid.
"Undepreciated Real Estate Assets" as of any date means the
amount of real estate assets of the Company and its Subsidiaries
on the date, before depreciation and amortization, determined on
a consolidated basis in accordance with GAAP.
"Unsecured Debt" means Debt of the Company or any Subsidiary
that is not Secured Debt.
Optional Redemption
The notes may be redeemed at any time at the option of the
Company, in whole or from time to time in part, at a redemption
price equal to the sum of (i) the principal amount of the notes
being redeemed plus accrued interest thereon to the redemption
Page S-18
<PAGE>
date and (ii) the Make-Whole Amount (as defined below), if any,
with respect to such notes (the "Redemption Price"); provided
that installments of interest on notes which are payable on
Interest Payment Dates falling on or prior to the relevant
redemption dates shall be payable to the Holders of such notes
(or one or more predecessor notes) registered as such at the
close of business on the relevant Regular Record Dates.
If notice has been given as provided in the Indenture and
funds for the redemption of any notes called for redemption shall
have been made available on the redemption date referred to in
such notice, such notes will cease to bear interest on the date
fixed for such redemption specified in such notice and the only
right of the Holders of the notes will be to receive payment of
the Redemption Price.
Notice of any optional redemption of any notes will be given
to Holders at their addresses, as shown in the security register
for the notes, not more than 60 nor less than 30 days prior to
the date fixed for redemption. The notice of redemption will
specify, among other items, the Redemption Price and the
principal amount of the notes held by such Holder to be redeemed.
If less than all the notes are to be redeemed at the option
of the Company, the Company will notify the Trustee at least 45
days prior to giving notice of redemption (or such shorter notice
period as is satisfactory to the Trustee) of the aggregate
principal amount of notes to be redeemed and their redemption
date. The Trustee shall select, in such manner as it shall deem
fair and appropriate, notes to be redeemed in whole or in part.
As used herein:
"Make-Whole Amount" means, in connection with any optional
redemption of any notes, the excess, if any, of (i) the aggregate
present value as of the date of such redemption of each dollar of
principal being redeemed and the amount of interest (exclusive of
interest accrued to the date of redemption) that would have been
payable in respect of each such dollar if such redemption had not
been made, determined by discounting, on a semi-annual basis,
such principal and interest at the Reinvestment Rate (determined
on the third Business Day preceding the date such notice of
redemption is given) from the respective dates on which such
principal and interest would have been payable if such redemption
had not been made to the date of redemption over (ii) the
aggregate principal amount of the notes being redeemed. For
purposes of the Indenture, all references to "premium, if any" on
the notes shall be deemed to refer to the Make-Whole Amount, if
any.
"Reinvestment Rate" means .25% plus the arithmetic mean of
the yields under the heading "Week Ending" published in the most
Page S-19
<PAGE>
recent Statistical Release under the caption "Treasury Constant
Maturities" for the maturity (rounded to the nearest month)
corresponding to the remaining life to maturity of the notes, as
of the payment date of the principal being redeemed. If no
maturity exactly corresponds to such maturity, yields for the two
published maturities most closely corresponding to such maturity
shall be calculated pursuant to the immediately preceding
sentence and the Reinvestment Rate shall be interpolated or
extrapolated from such yields on a straight-line basis, rounding
in each of such relevant periods to the nearest month. For the
purposes of calculating the Reinvestment Rate, the most recent
Statistical Release published prior to the date of determination
of the Make-Whole Amount shall be used.
"Statistical Release" means the statistical release
designated "H.15(519)" or any successor publication which is
published weekly by the Federal Reserve System and which reports
yields on actively traded U.S. government securities adjusted to
constant maturities, or, if such statistical release is not
published at the time of any determination under the Indenture,
then such other reasonably comparable index which shall be
designated by the Company.
Book-Entry System
The following are summaries of certain rules and operating
procedures of DTC that affect the payment of principal, premium,
if any, and interest and transfers of interests in the Global
Note. Upon issuance, the notes will only be issued in the form of
a Global Note which will be deposited with, or on behalf of, DTC
and registered in the name of Cede & Co., as nominee of DTC.
Unless and until it is exchanged in whole or in part for notes in
definitive form under the limited circumstances described below,
a Global Note may not be transferred except as a whole (i) by DTC
to a nominee of DTC, (ii) by a nominee of DTC to DTC or another
nominee of DTC or (iii) by DTC or any nominee to a successor of
DTC or a nominee of a successor.
Ownership of beneficial interests in a Global Note will be
limited to persons that have accounts with DTC for such Global
Note ("participants") or persons that may hold interests through
participants. Upon the issuance of a Global Note, DTC will
credit, on its book-entry registration and transfer system, the
participants' accounts with the respective principal amounts of
the notes represented by such Global Note beneficially owned by
participants. Ownership of beneficial interests in the Global
Note will be shown on, and the transfer of ownership interests
will be effected only through, records maintained by DTC (with
respect to interests of participants) and on the records of
participants (with respect to interests of persons holding
through participants). The laws of some states may require that
certain purchasers of securities take physical delivery of the
Page S-20
<PAGE>
securities in definitive form. These laws may limit or impair the
ability to own, transfer or pledge beneficial interests in the
Global Note.
So long as DTC or its nominee is the registered owner of a
Global Note, DTC or its nominee, as the case may be, will be
considered the sole owner or Holder of the notes represented by
the Global Note for all purposes under the Indenture. Except as
set forth below, owners of beneficial interests in a Global Note
will not be entitled to have notes represented by the Global Note
registered in their names, will not receive or be entitled to
receive physical delivery of notes in certificated form and will
not be considered the registered owners or Holders thereof under
the Indenture. Accordingly, each person owning a beneficial
interest in a Global Note must rely on the procedures of DTC and,
if the person is not a participant, on the procedures of the
participant through which the person owns its interest, to
exercise any rights of a Holder under the Indenture. The Company
understands that under existing industry practices, if the
Company requests any action of Holders or if an owner of a
beneficial interest in a Global Note desires to give or take any
action that a Holder is entitled to give or take under the
Indenture, DTC would authorize the participants holding the
relevant beneficial interests to give or take this action, and
the participants would authorize beneficial owners owning through
the participants to give or take this action or would otherwise
act upon the instructions of beneficial owners holding through
them.
Principal, premium, if any, and interest payments on
interests represented by a Global Note will be made to DTC or its
nominee, as the case may be, as the registered owner of the
Global Note. None of the Company, the Trustee or any other agent
of the Company or agent of the Trustee will have any
responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership
of interests in the Global Notes or for maintaining, supervising
or reviewing any records relating to beneficial ownership
interests. The Company expects that DTC, upon receipt of any
payment of principal, premium, if any, or interest in respect of
a Global Note, will immediately credit participants' accounts
with payments in amounts proportionate to their respective
beneficial interests in the Global Note as shown on the records
of DTC. The Company also expects that payments by participants to
owners of beneficial interests in the Global Note held through
the participants will be governed by standing customer
instructions and customary practice, as is now the case with
securities held for the accounts of customers in bearer form or
registered in "street name," and will be the responsibility of
the participants.
Page S-21
<PAGE>
The Indenture will provide that if (i) DTC notifies the
Company that it is unwilling or unable to continue as depositary
or if DTC ceases to be a clearing agency registered under the
Exchange Act at any time when the depositary is required to be so
registered to act as depositary for the notes and a successor
depositary is not appointed within 90 days after the Company
receives notice or learns of such ineligibility, (ii) the Company
determines that the notes will no longer be represented by a
Global Note and executes and delivers to the Trustee an officers'
certificate to that effect or (iii) an Event of Default with
respect to the notes has occurred and is continuing and
beneficial owners representing a majority in aggregate principal
amount of the outstanding notes advise DTC to cease acting as
depositary for the notes, the Company will issue the notes in
definitive form in exchange for interests in the Global Note.
Any notes issued in definitive form in exchange for interests in
the Global Note will be registered in such name or names, and
will be issued in denominations of $1,000 and integral multiples
thereof, as DTC will instruct the Trustee. It is expected that
these instructions will be based upon directions received by DTC
from participants with respect to ownership of beneficial
interests in the Global Note.
DTC is a limited-purpose trust company organized under the
Banking Law of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of
the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities of its
participants and to facilitate the clearance and settlement of
transactions among its participants in these securities through
electronic book-entry changes in accounts of the participants,
thereby eliminating the need for physical movement of securities
certificates. DTC's participants include securities brokers and
dealers, banks, trust companies, clearing corporations and
certain other organizations, some of which (and/or their
representatives) own DTC. Access to the DTC book-entry system is
also available to others, such as banks, brokers and dealers and
trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.
Same-Day Settlement and Payment
Settlement for the notes will be made by the Underwriters in
immediately available funds. All payments of principal, premium,
if any, and interest in respect of the notes will be made by the
Company by wire transfer of immediately available funds to an
account maintained in the United States; provided that, if notes
are issued in definitive certificated form, the Holders thereof
will have given appropriate wire transfer instructions to the
Company.
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<PAGE>
The notes will trade in DTC's Same-Day Funds Settlement
System until maturity or until the notes are issued in
certificated form, and secondary market trading activity in the
notes will therefore be required by DTC to settle in immediately
available funds. The Company expects that secondary trading in
the certificated securities, if any, will also be settled in
immediately available funds.
UNDERWRITING
Subject to the terms and conditions contained in the Purchase
Agreement that relates to the notes, we have agreed to sell to
Donaldson, Lufkin & Jenrette Securities Corporation (the
"Underwriter"), and the Underwriter has agreed to purchase from
us, all of the notes offered hereby.
The Purchase Agreement states that the obligation of the
Underwriter to purchase and accept delivery of the notes offered
by this prospectus supplement is subject to the approval of
certain legal matters by its counsel and certain other
conditions. If any of the notes are purchased by the Underwriter
pursuant to the Purchase Agreement, then all of the notes must be
purchased.
The Underwriter has told us they intend to offer the notes to
the public initially at the price to the public that is on the
cover page of this prospectus supplement. After the completion
of the initial offering of the notes, the Underwriter may change
the offering price and other selling terms at any time, without
notice.
We have agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"). Alternatively, we may
contribute to payments that the Underwriter may be required to
make as a result of these liabilities. These indemnification
provisions would require us to hold the Underwriter harmless from
and against any and all losses, claims, damages, liabilities and
judgments caused by any false statement of or any failure to
state a material fact in this prospectus supplement, the
accompanying prospectus or the documents incorporated by
reference therein. The indemnification provisions would not
apply to false statements or omissions that are based on
information that is furnished in writing to us by the Underwriter
expressly for use in this prospectus supplement or the prospectus
and are subject to certain other limitations.
In connection with the offering of the notes, the Underwriter
may engage in transactions that stabilize, maintain or otherwise
affect the price of the notes. Specifically, the Underwriter may
overallot the offering, creating a syndicate short position. The
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<PAGE>
Underwriter may bid for and purchase notes in the open market to
cover syndicate short positions. In addition, the Underwriter
may bid for and purchase notes in the open market to stabilize
the price of the notes. These activities may stabilize or
maintain the market price of the notes above independent market
levels. The Underwriter is not required to engage in these
activities and may end these activities at any time.
Prior to this offering, there has been no public market for
the notes. The Underwriter has informed us that it may make a
market in the notes from time to time. The Underwriter is not
obligated to do this, and it may discontinue this market making
at any time without notice. Therefore, no assurance can be given
concerning the liquidity of the trading market for the notes or
that an active market will develop. We do not intend to apply
for the notes to be listed on any national securities exchange or
national securities quotation system.
LEGAL MATTERS
The validity of the notes to be issued in connection with the
offering will be passed upon for our Company by Latham & Watkins,
Costa Mesa, California. Brown & Wood LLP, San Francisco,
California will act as counsel for the Underwriter. Certain
matters of Maryland law will be passed upon for the Company by
Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland.
Page S-24
<PAGE>
$20,000,000
REALTY INCOME CORPORATION
8% Notes due 2009
PROSPECTUS SUPPLEMENT
Donaldson, Lufkin & Jenrette
January 15, 1999
<PAGE>
