<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JULY 14, 1999)
1,200,000 SHARES
[LOGO]
9 1/2% CLASS C CUMULATIVE REDEEMABLE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
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Distributions on the Class C Preferred Stock will be cumulative from the
date of original issuance and will be paid monthly in arrears. The Class C
Preferred Stock will not be redeemable before July 30, 2004 except under limited
circumstances intended to preserve our status as a real estate investment trust
for federal and/or state income tax purposes. Beginning July 30, 2004, we may
redeem any or all shares of Class C Preferred Stock at $25 per share plus
accrued and unpaid dividends.
Realty Income Corporation is a fully integrated, self-administered real
estate company with in-house acquisition, leasing, legal, retail and real estate
research, portfolio management and capital markets expertise. Through our
predecessors, we have been in the real estate investment business since 1969. As
of March 31, 1999, we owned a diversified portfolio of 1,004 properties located
in 45 states with over 8.1 million square feet of leasable space. As of March
31, 1999, 99.4% of our single-tenant properties were leased pursuant to leases
with an average remaining term (excluding extension options) of approximately
8.6 years.
We have applied to list the Class C Preferred Stock on the New York Stock
Exchange under the symbol "OPrC." 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 C Preferred Stock.
INVESTING IN THE CLASS C PREFERRED STOCK INVOLVES RISKS WHICH ARE DESCRIBED
IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE S-8.
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<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public offering price(1)................................................. $25.00 $30,000,000
Underwriting discount.................................................... $.7875 $945,000
Proceeds, before expenses, to Realty Income Corporation.................. $24.2125 $29,055,000
</TABLE>
(1) Plus accrued dividends from July 30, 1999, if settlement occurs after
that date
The underwriters may also purchase up to an additional 180,000 shares of
Class C 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 C Preferred Stock will be ready for delivery in New
York, New York on or about July 30, 1999.
------------------------
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
EVEREN SECURITIES, INC.
FIRST UNION CAPITAL MARKETS CORP.
PAINEWEBBER INCORPORATED
SALOMON SMITH BARNEY
SUTRO & CO. INCORPORATED
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The date of this prospectus supplement is July 27, 1999.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
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PAGE
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Prospectus Supplement Summary.............................................................................. S-3
The Offering............................................................................................... S-5
Risk Factors............................................................................................... S-8
Selected Financial Information............................................................................. S-15
Use of Proceeds............................................................................................ S-17
Capitalization............................................................................................. S-18
Business and Properties.................................................................................... S-19
Management................................................................................................. S-29
Description of Class C Preferred Stock..................................................................... S-32
Material Federal Income Tax Considerations to Holders of Class C Preferred Stock........................... S-39
Where You Can Find More Information........................................................................ S-45
Incorporation of Information We File with the SEC.......................................................... S-45
Underwriting............................................................................................... S-46
Legal Matters.............................................................................................. S-47
PROSPECTUS
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The Company................................................................................................ 3
Use of Proceeds............................................................................................ 3
Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends... 3
Forward-Looking Statements................................................................................. 4
Description of Debt Securities............................................................................. 4
Description of Common Stock................................................................................ 16
Description of Preferred Stock............................................................................. 18
Restrictions on Ownership and Transfers of Capital Stock................................................... 25
Material Federal Income Tax Considerations to Realty Income................................................ 28
Plan of Distribution....................................................................................... 35
Experts.................................................................................................... 36
Legal Matters.............................................................................................. 36
Where You Can Find More Information........................................................................ 36
Incorporation of Information We File with the SEC.......................................................... 37
</TABLE>
S-2
<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 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 July 19, 1999.
Realty Income had 50 employees as of July 19, 1999.
S-3
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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.
ISSUANCE OF 9 3/8% CLASS B CUMULATIVE REDEEMABLE PREFERRED STOCK. On May
25, 1999, we completed the sale of 2,760,000 shares of our 9 3/8% Class B
Cumulative Redeemable Preferred Stock (the "Class B Preferred Stock") at $25.00
per share. Distributions on the Class B Preferred Stock are paid quarterly in
arrears. The net proceeds of approximately $66.6 million were used to pay down
outstanding indebtedness under our revolving credit agreement. At our option,
the Class B Preferred Stock may be redeemed on or after May 25, 2004 at $25.00
per share plus any accrued and unpaid dividends.
S-4
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THE OFFERING
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Issuer............................ Realty Income Corporation
Securities Offered................ 1,200,000 shares of 9 1/2% Class C Cumulative Redeemable
Preferred Stock, plus up to an additional 180,000 shares
if the underwriters' over-allotment option is exercised
in full.
Dividends......................... Investors will be entitled to receive cumulative cash
dividends on the Class C Preferred Stock at a rate of
9 1/2% per annum of the $25.00 per share liquidation
preference (equivalent to $2.375 per annum per share).
Dividends on the Class C Preferred Stock will be payable
monthly in arrears commencing August 31, 1999. Dividends
on the Class C Preferred Stock will be cumulative from
the date of original issuance, which is expected to be
July 30, 1999. Because the first dividend payment date
is August 31, 1999, the dividend payable on each share
of Class C Preferred Stock on that date will be a full
monthly dividend.
Maturity.......................... The Class C Preferred Stock does not have any maturity
date nor are we required to redeem the Class C Preferred
Stock. Accordingly, the Class C 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 C Preferred Stock.
Optional Redemption............... We may not redeem the Class C Preferred Stock prior to
July 30, 2004, except under limited circumstances
intended to preserve our status as a real estate
investment trust for federal and/or state income tax
purposes. On and after July 30, 2004, we may, at our
option, redeem the Class C Preferred Stock, in whole or
from time to time in part, for cash in the amount of
$25.00 per share, plus accrued and unpaid dividends to
the date of redemption. We may pay the redemption price
(other than the portion consisting of accrued and unpaid
dividends) only out of the sale proceeds of our other
stock, which may include other series of our preferred
stock.
Liquidation Preference............ If we liquidate, dissolve or wind up Realty Income,
holders of the Class C Preferred Stock and 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 C Preferred Stock will rank senior to our
common stock, and on a parity with our Class B Preferred
Stock, with respect to the payment of dividends and the
distribution of assets in the event of our liquidation,
dissolution or winding up.
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S-5
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Voting Rights..................... Holders of Class C Preferred Stock will generally have
no voting rights. However, if we do not pay dividends on
the Class C Preferred Stock for 18 or more monthly
dividend periods (whether or not consecutive), the
holders of the Class C Preferred Stock, voting as a
class with the holders of any other class or series of
our preferred stock which has similar voting rights
(including the holders of Class B Preferred Stock), 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 C Preferred
Stock.
In addition, so long as any shares of Class C 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 C Preferred Stock
outstanding at the time given in person or by proxy,
either in writing or at a meeting (with Class C
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 C 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 C Preferred Stock, so as to
materially and adversely affect any right,
preference, privilege or voting power of the Class C
Preferred Stock or the holders thereof; or
- Enter into any share exchange that affects shares of
the Class C 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 C Preferred Stock remains outstanding
without a material adverse change to its terms and
rights or is converted into or exchanged for
preferred stock of the surviving or resulting entity
having preferences, rights, dividends, voting powers,
restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption
identical to those of the Class C Preferred Stock;
</TABLE>
S-6
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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 C Preferred Stock or any other class or series of
preferred stock, in each case ranking on a parity with
or junior to the Class C Preferred Stock with respect to
payment of dividends and the distribution of assets upon
liquidation, dissolution and winding up, shall not be
deemed to materially and adversely affect any right,
preference, privilege or voting power of the Class C
Preferred Stock or the holders thereof.
Listing........................... We have applied to list the Class C Preferred Stock on
the New York Stock Exchange under the symbol "OPrC." 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 C Preferred Stock.
Restrictions on Ownership and
Transfer........................ The Class C Preferred Stock will contain provisions
intended to assist us in maintaining our status as a
real estate investment trust for federal and/or state
income tax purposes. For example, the terms of the Class
C 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 C
Preferred Stock, as more fully described in the section
entitled "Description of Class C Preferred Stock."
Conversion........................ The Class C 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 C 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 of which
we are unaware. 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 June 30, 1999, tenants representing
approximately 87% 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 June 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
S-11
<PAGE>
during the term of the lease, liability and property damage insurance policies
issued by companies 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.
S-12
<PAGE>
RESTRICTIONS ON OWNERSHIP AND TRANSFERS OF CLASS C PREFERRED STOCK
In order to qualify as a REIT, among other things, not more than 50% in
value of our outstanding stock may be owned, actually or constructively, by five
or fewer individuals (defined in the Code to include certain entities) during
the last half of a taxable year, and such stock must be beneficially owned by
100 or more persons during at least 335 days of a taxable year of 12 months or
during a proportionate part of a shorter taxable year. To ensure that we remain
qualified as a REIT, the terms of the Class C 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 C Preferred Stock.
OTHER GENERAL RISKS
RISKS OF DEBT FINANCING. Although we intend to apply the net proceeds from
the sale of the Class C 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 July 16, 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 C 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 C PREFERRED STOCK. One of
the factors that influences the price of the Class C Preferred Stock in public
trading markets is the absence of a prior public market for the shares of Class
C Preferred Stock. Although we intend to apply to list the Class C 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 C 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.
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<PAGE>
Eight of our properties were vacant as of July 1, 1999 and available for
lease. As of July 1, 1999, 22 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.
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.
S-14
<PAGE>
SELECTED FINANCIAL INFORMATION
The following information is unaudited and was derived from our financial
statements and the financial statements of our predecessor partnerships. The
information is only a summary and does not provide all of the information
contained in our financial statements, including the related notes, Management's
Discussion and Analysis of Financial Conditions and Results of Operations, and
Quantitative and Qualitative Disclosures about Market Risk, which are part of
our Annual Report on Form 10-K for the year ended December 31, 1998 and our
quarterly report on Form 10-Q for the quarter ended March 31, 1999. You should
read our financial statements and other information filed with the SEC.
Information as of and for the quarter ended March 31, 1999 does not purport to
be indicative of our financial condition or results of operations to be expected
as of and for the year ending December 31, 1999.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------------------------------------------
AS OF OR FOR THE
QUARTER ENDED MARCH
31, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994(1)
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenue:
Rental................................ $ 23,948 $ 19,168 $ 84,876 $ 67,613 $ 56,777 $ 51,185 $ 47,905
Interest and other.................... 38 54 256 284 180 370 958
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue....................... 23,986 19,222 85,132 67,897 56,957 51,555 48,863
---------- ---------- ---------- ---------- ---------- ---------- ----------
Expenses:
Depreciation and amortization......... 6,090 5,084 21,935 18,596 16,422 14,849 13,790
Interest.............................. 5,880 2,491 13,723 8,226 2,367 2,642 396
General, administrative expenses and
advisor fees........................ 1,646 1,465 6,680 5,437 5,181 6,875 7,187
Property.............................. 441 473 1,790 1,785 1,640 1,607 2,095
Provision for impairment losses....... 165 579 135
Consolidation costs................... 11,201
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses...................... 14,057 9,513 44,128 34,209 26,189 25,973 34,804
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations.................. 9,929 9,709 41,004 33,688 30,768 25,582 14,059
Net gain on sales of properties......... 215 526 1,082 1,455 18 1,165
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
change in accounting principle........ 9,929 9,924 41,530 34,770 32,223 25,600 15,224
Cumulative effect of change in
accounting principle.................. (226)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.............................. $ 9,929 $ 9,924 $ 41,304 $ 34,770 $ 32,223 $ 25,600 $ 15,224
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Ratio of earnings to fixed charges(2)... 2.6x 4.8x 3.8x 5.1x 13.7x 9.9x 39.4x
Ratio of earnings to combined fixed
charges and preferred stock
dividends(2).......................... 2.6x 4.8x 3.8x 5.1x 13.7x 9.9x 39.4x
Basic and diluted net income per
share................................. $ 0.37 $ 0.38 $ 1.55 $ 1.48 $ 1.40 $ 1.27 $ 0.78
Weighted average common shares used for
basic net income per share
computation........................... 26,822,382 26,028,589 26,629,936 23,568,831 22,976,789 20,230,886 19,502,091
Weighted average common shares used for
diluted net income per share
computation........................... 26,825,412 26,037,595 26,638,284 23,572,715 22,977,837 20,230,963 19,502,091
</TABLE>
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<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 and Class C Preferred
Stock were issued and the proceeds therefrom were applied to repay our
Credit Facility borrowings on January 1, 1998, the ratio of earnings to
combined fixed charges and preferred stock dividends for the year ended
December 31, 1998 would have been 3.1x and the ratio of earnings to combined
fixed charges and preferred stock dividends for the quarter ended March 31,
1999 would have been 2.2x. Our historical ratios of earnings to fixed
charges are equivalent to our historical ratios of earnings to combined
fixed charges and preferred stock dividends because we had not issued any
preferred stock prior to March 31, 1999.
(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.
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<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the Class C 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 $28.9 million, and approximately $33.2 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 July 16, 1999 of $94.7 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 of available borrowing capacity expires in December 2000 and $118
million expires in December 2001. The effective interest rate on the outstanding
borrowings at July 16, 1999 was 6.1%.
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<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, the 2,760,000 shares of our Class B Preferred Stock issued on May 25,
1999 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 $ 8,487
Notes due 2007.......................................................................... 110,000 110,000
Notes due 2008.......................................................................... 100,000 100,000
Notes due 2009.......................................................................... 20,000 20,000
----------- -----------
Total debt............................................................................ 333,900 238,487
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value per share, 20,000,000 shares authorized, no shares
issued or outstanding, 3,960,000 shares issued and outstanding as adjusted............ -- 3,960
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.................................................. 609,794 701,247
Accumulated distributions in excess of net income....................................... (190,095) (190,095)
----------- -----------
Total stockholders' equity............................................................ 446,521 541,934
----------- -----------
Total capitalization.................................................................. $ 780,421 $ 780,421
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) The amount drawn on the Credit Facility was $94.7 million at July 16, 1999
and is expected to be approximately $138.9 million on the closing date of
this offering.
S-18
<PAGE>
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
- 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 retailer'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;
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<PAGE>
- 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.
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.
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<PAGE>
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 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;
S-21
<PAGE>
- 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;
- 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 of available
borrowing capacity expires in December 2000 and $118 million expires in December
2001. As of July 16, 1999, the outstanding balance on the Credit Facility was
$94.7 million with an effective interest rate of approximately 6.1%. 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 July 16, 1999, on a pro
forma basis after giving effect to this offering and the application of net
proceeds therefrom to repay borrowings under the Credit Facility, our total
outstanding credit facility borrowings and outstanding notes would have been
approximately 26.9% 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 July 16, 1999 of $23.625 per share plus the
liquidation value of the Class B Preferred Stock, the Class C Preferred Stock,
the outstanding borrowings on the Credit Facility and outstanding notes at July
16, 1999).
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<PAGE>
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 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.
S-23
<PAGE>
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 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
APRIL 1, 1999(1) REVENUE FOR THE YEARS ENDED
--------------------------- DECEMBER 31,
NUMBER OF PERCENT OF -------------------------------
INDUSTRY PROPERTIES RENTAL 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.
S-24
<PAGE>
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 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 Realty Income. 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-25
<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 for each of the properties by 12 and adding the
previous 12 month's historic percentage rent (i.e.,
S-26
<PAGE>
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-27
<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, 29
were occupied as of July 16, 1999 and the remaining 5 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, ten of which have been completed and were
operating and paying rent as of July 16, 1999. We will continue to seek to
acquire land for development under similar arrangements.
S-28
<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-29
<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-30
<PAGE>
<TABLE>
<CAPTION>
NAME AGE TITLE AND BUSINESS EXPERIENCE
- --------------------------------- --- ------------------------------------------------------------------------
<S> <C> <C>
Michael D. McKee................. 53 DIRECTOR
Director (August 1994-present).
Vice Chairman of the Irvine Company (July 1999-present).
Executive Vice President of The Irvine Company (March 1994-July 1999).
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. and Mandalay Resort Group
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-31
<PAGE>
DESCRIPTION OF CLASS C PREFERRED STOCK
This description of the particular terms of the Class C Preferred Stock
supplements, and to the extent inconsistent therewith replaces, the description
of the general terms and provisions of our preferred stock set forth in the
accompanying prospectus, to which description reference is hereby made.
GENERAL
Pursuant to our charter, we are authorized to issue up to 20,000,000 shares
of preferred stock, $1.00 par value per share, in one or more series, with such
designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms and conditions of redemption as our Board of Directors may determine
without any vote or action by our shareholders. As of the date of this
prospectus supplement, 2,760,000 shares of Class B Preferred Stock are
outstanding, and our Board of Directors has authorized the issuance of 1,000,000
shares of our Class A Junior Participating Preferred Stock (the "Class A
Preferred Stock") pursuant to our shareholder rights plan, though no shares of
the Class A Preferred Stock are currently outstanding.
We have authorized the issuance of a class of our preferred stock,
consisting of 1,200,000 shares, plus up to an additional 180,000 shares which
may be issued upon exercise of the underwriters' over-allotment options,
designated as 9 1/2% Class C Cumulative Redeemable Preferred Stock. The
following summary of the material terms and provisions of the Class C 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 C 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 C Preferred Stock will be The Bank of New York.
The Articles Supplementary fixing the terms of the Class C Preferred Stock will
provide that we will maintain a registrar, paying agent and transfer agent for
the Class C Preferred Stock in New York City.
The certificates representing the Class C 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 C Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption.
RANK
The Class C Preferred Stock will rank, with respect to rights to the payment
of dividends and the distribution of assets upon our liquidation, dissolution or
winding up:
(i) Senior to all classes or series of our common stock, to the Class A
Preferred Stock and to all other equity securities issued by us other than
equity securities referred to in clauses (ii) and (iii) below;
(ii) On a parity with the Class B Preferred Stock and all equity securities
issued by us with terms specifically providing that those equity securities rank
on a parity with the Class C Preferred Stock with respect to rights to the
payment of dividends and the distributon of assets upon our liquidation,
dissolution or winding up; and
S-32
<PAGE>
(iii) Junior to all equity securities issued by us with terms specifically
providing that those equity securities rank senior to the Class C Preferred
Stock with respect to rights to the payment of dividends and the distributon of
assets upon our liquidation, dissolution or winding up. See "--Voting Rights"
below. The term "equity securities" does not include convertible debt
securities, which will rank senior to the Class C Preferred Stock prior to
conversion.
DIVIDENDS
Holders of shares of the Class C Preferred Stock are entitled to receive,
when, as, and if authorized by our Board of Directors and declared by us, out of
funds we have legally available for the payment of dividends, cumulative cash
dividends at the rate of 9 1/2% of the liquidation preference per annum
(equivalent to $2.375 per annum per share).
Dividends on the Class C Preferred Stock shall be cumulative from the date
of original issue and shall be payable monthly in arrears on the dividend
payment dates, which shall be the last day of each month or, if not a business
day, the next succeeding business day in which case no interest or additional
dividends will accrue on the amount payable. The first dividend on the Class C
Preferred Stock is scheduled to be paid on August 31, 1999 and, as a result, the
dividend payable on each share of Class C Preferred Stock on that date will be a
full monthly dividend. Any dividend payable on the Class C 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 each month.
No dividends on shares of Class C Preferred Stock shall be authorized by the
Board of Directors or paid or set apart for payment by us at any time when the
terms and provisions of any agreement of ours, including any agreement relating
to our indebtedness, prohibits the authorization, payment or setting apart for
payment or provides that the authorization, payment or setting apart for payment
would constitute a breach of the agreement or a default under the agreement, or
if the authorization or payment shall be restricted or prohibited by law.
Notwithstanding the foregoing, dividends on the Class C 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 C Preferred Stock will
not bear interest or any sum in lieu of interest and holders of the Class C
Preferred Stock will not be entitled to any dividends in excess of full
cumulative dividends described above. Any dividend payment made on the Class C
Preferred Stock shall first be credited against the earliest accrued but unpaid
dividend due with respect to those shares.
If, for any taxable year, we elect to designate as a "capital gain
dividend," as defined in Section 857 of the Internal Revenue Code of 1986, as
amended, any portion of the dividends, as determined for federal income tax
purposes, paid or made available for the year to holders of our stock, then the
portion of the total capital gain dividends paid or made available for the year
to holders of all classes of our stock that shall be allocable to the holders of
Class C Preferred Stock shall be in proportion to the amount that the total
dividends, as determined for federal income tax purposes, paid or made available
for the year to the holders of the Class C Preferred Stock bears to the total
dividends paid or made available to holders of all classes of our stock for the
year. In addition, we will make a similar allocation with respect to any
undistributed long-term capital gains which are to be included in our
stockholders' long-term capital gains, based on the allocation of the capital
gains amount which would have resulted if those undistributed long-term capital
gains had been distributed as "capital gain dividends" by us to our
stockholders. See "Material Federal Income Tax Considerations to Holders of
Class C Preferred Stock--Taxation of Taxable U.S. Stockholders."
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LIQUIDATION PREFERENCES
In the event we liquidate, dissolve or wind up our affairs, voluntarily or
involuntarily, the holders of shares of Class C 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 C Preferred Stock as to liquidation rights, a
liquidation preference of $25 per share, plus an amount equal to any accrued and
unpaid dividends to the date of payment, before any distribution of assets is
made to holders of common stock or any other class or series of our stock that
ranks junior to the Class C Preferred Stock as to liquidation rights. After
payment of the full amount of the liquidating distributions to which they are
entitled, holders of Class C 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 C Preferred Stock upon our liquidation,
dissolution or winding up, see "Description of Preferred Stock--Liquidation
Preference" in the accompanying prospectus.
In determining whether a distribution (other than upon voluntary or
involuntary liquidation, dissolution or winding up) by dividend, redemption or
other acquisition of shares of our stock or otherwise is permitted under the
Maryland General Corporation Law, no effect shall be given to amounts that would
be needed if we would be dissolved at the time of the distribution, to satisfy
the preferential rights upon distribution of holders of shares of our Class C
Preferred Stock.
OPTIONAL REDEMPTION
The Class C Preferred Stock is not redeemable prior to July 30, 2004.
However, we will be entitled, pursuant to the Articles Supplementary, to
purchase shares of the Class C Preferred Stock in 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 July 30, 2004, we, at our option, upon not less than 30 nor
more than 60 days' written notice, may redeem shares of the Class C Preferred
Stock, in whole or in part, at any time or from time to time, for cash at a
redemption price of $25 per share, plus accrued and unpaid dividends thereon to
the date fixed for redemption. The redemption price (other than the portion
thereof consisting of accrued and unpaid dividends) is payable solely out of the
sale proceeds of our other stock, which may include shares of other classes or
series of preferred stock. For purposes of the preceding sentence, "stock" means
any common stock, preferred stock (other than Class C 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 C Preferred Stock to be redeemed shall surrender the Class
C 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 C 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 C Preferred Stock so called for redemption, then from and after the
redemption date, dividends will cease to accrue on those shares of Class C
Preferred Stock, those shares of Class C Preferred Stock shall no longer be
deemed outstanding and all rights of the holders of those shares will terminate,
except the right to receive the redemption price plus accrued dividends. If any
redemption date is not a business day, then the redemption price and accrued
dividends may be paid on the next business day and no interest, additional
dividends or other sums will accrue on the amount payable. If less than all of
the outstanding Class C Preferred Stock is to be redeemed, the Class C Preferred
Stock to be redeemed shall be selected pro rata (as nearly as may be practicable
without creating fractional shares) or by any
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other equitable method we determine. See "Description of Preferred
Stock--Redemption" in the accompanying prospectus.
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 C Preferred Stock in open-market
transactions duly authorized by our Board of Directors and effected in
compliance with applicable laws.
Failure to give notice on any defect in the notice or in the mailing of the
notice pursuant to the accompanying prospectus will not affect the validity of
the proceedings for the redemption of any shares of Class C Preferred Stock
except as to the holder to whom notice was defective or not given.
VOTING RIGHTS
Holders of the Class C Preferred Stock will not have any voting rights,
except as set forth below and in "Description of Preferred Stock--Voting Rights"
in the accompanying prospectus.
Whenever dividends on any shares of Class C Preferred Stock shall be in
arrears for 18 or more monthly dividend periods, whether or not consecutive, the
number of directors constituting our Board of Directors will be automatically
increased by two (if not already increased by two by reason of the election of
directors by the holders of any other class or series of our preferred stock
with similar voting rights and with which the Class C Preferred Stock is
entitled to vote as a class with respect to the election of those two directors)
and the holders of Class C 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 C 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 C 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 C Preferred Stock as
aforesaid (unless the request is received less than 90 days before the date
fixed for the next annual or special meeting of shareholders, in which case such
vote will be held at the earlier of the next annual or special meeting of
shareholders), and at each subsequent annual meeting until all dividends
accumulated on those shares of Class C Preferred Stock for all past dividend
periods and the then current dividend period shall have been fully paid or
declared and a sum sufficient for the payment thereof set aside for payment. In
that case, the right of the Class C 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 and the number of directors
constituting the Board of Directors shall be reduced accordingly.
If a special meeting is not called by us within 30 days after request from
the holders of Class C Preferred Stock as described above, then the holders of
record of at least 10% of the outstanding Class C Preferred Stock may designate
a holder to call the meeting at our expense.
Each share of Class C 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 C Preferred Stock as a single class on any matter, the
Class C 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 C
Preferred Stock will not have any relative, participating, optional or other
special voting rights and powers, and the consent of the holders thereof shall
not be required for the taking of any corporate action.
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CONVERSION
The Class C Preferred Stock is not convertible into or exchangeable for any
of our other property or securities.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
In order for us to qualify as a REIT under the Internal Revenue Code, no
more than 50% in value of our outstanding shares of stock may be owned, actually
or constructively, by five or fewer individuals (as defined in the Internal
Revenue Code to include certain entities) during the last half of a taxable
year. 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 C Preferred Stock contain
restrictions on the ownership and transfer of Class C 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 C Preferred Stock. The constructive ownership
rules are complex, and may cause shares of Class C 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 C Preferred Stock (or the
acquisition of an interest in an entity that owns, actually or constructively,
Class C 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 C Preferred Stock and
thus violate the ownership limit, or any other limit as permitted by our Board
of Directors. Our 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 our
Board of Directors otherwise decides the action would be in our best interest.
As a condition of the waiver, our 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 C
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 C 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 C Preferred Stock that will or may
violate any of the foregoing restrictions on transferability and ownership is
required to give us notice immediately and provide us with any other information
we may request in order to determine the effect of a transfer on our status as a
REIT. The foregoing restrictions on transferability and ownership will not apply
if the Board of Directors determines that it is no longer in our best interest
to attempt to qualify, or to continue to qualify, as a
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REIT and such determination is approved by a two-thirds vote of our stockholders
as required by our charter.
Pursuant to the Articles Supplementary, if any purported transfer of Class C
Preferred Stock or any other event would otherwise result in any person
violating the ownership limit or would result in our being "closely held" under
Section 856(h) of the Internal Revenue Code or otherwise failing to qualify as a
REIT, then any purported transfer will be void and of no force or effect with
respect to the purported transferee as to that number of shares of Class C
Preferred Stock in excess of the ownership limit, and the purported transferee
shall acquire no right or interest (or, in the case of any event other than a
purported transfer, the person or entity holding record title to any excess
shares shall cease to own any right or interest) in those excess shares. Any
excess shares described above will be transferred automatically, by operation of
law, to a trust, the beneficiary of which will be a qualified charitable
organization selected by us. The automatic transfer shall be deemed to be
effective as of the close of business on the business day prior to the date of
the violative transfer. Within 20 days of receiving notice from us of the
transfer of shares to the trust, the trustee of the trust (who shall be
designated by us and be unaffiliated with us and any purported transferee or
other person or entity holding title to the excess shares) will be required to
sell those excess shares to a person or entity who could own those shares
without violating the ownership limit, and distribute to the purported
transferee or other person or entity holding title to the excess shares, as
applicable, an amount equal to the lesser of the price paid by the purported
transferee or other person or entity holding title to the excess shares for
those excess shares or the net sales proceeds received by the trust for those
excess shares. In the case of any excess shares resulting from any event other
than a purchase for fair value, the trustee will be required to sell the excess
shares to a qualified person or entity and distribute to the person or entity
holding title to those shares an amount equal to the lesser of the market price
of those excess shares as of the date of the event or the net sales proceeds
received by the trust for the excess shares. In either case, any proceeds in
excess of the amount distributable to the purported transferee or other
prohibited owner, as applicable, will be distributed to the qualified charitable
organization acting as beneficiary. Prior to a sale of any excess shares by the
trust, the trustee will be entitled to receive, in trust for the beneficiary,
all dividends and other distributions we have paid with respect to those excess
shares, and also will be entitled to exercise all voting rights with respect to
those excess shares. Subject to Maryland law, effective as of the date that
those shares have been transferred to the trust, the trustee shall have the
authority (at the trustee's sole discretion):
- to rescind as void any vote cast by a purported transferee or other
prohibited owner, as applicable, prior to our discovery that the shares
have been transferred to the trust; and
- to recast the vote in accordance with the desires of the trustee acting
for the benefit of the beneficiary.
However, if we have already taken irreversible corporate action, then the
trustee shall not have the authority to rescind and recast its vote. Any
dividend or other distribution paid to the purported transferee or other
prohibited owner (prior to our discovery that the shares had been automatically
transferred to a trust as described above) will be required to be repaid to the
trustee upon demand for distribution to the beneficiary. In the event that the
transfer to the trust as described above is not automatically effective (for any
reason) to prevent violation of the ownership limit then the Articles
Supplementary provide that the transfer of the excess shares will be void ab
initio.
In addition, shares of our Class C Preferred Stock held in the trust shall
be deemed to have been offered for sale to us, or our designee, at a price per
share equal to the lesser of:
- the price per share in the transaction that resulted in the transfer to
the trust (or, if the event which resulted in the transfer to the trust
did not involve a purchase of Class C Preferred Stock for fair value, the
market price as of the date of the event); or
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- 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 C Preferred Stock would cause
us to be beneficially owned by fewer than 100 persons, that transfer will be
null and void ab initio in its entirety and the intended transferee will acquire
no rights to the stock. In addition, the Articles Supplementary permit the Board
of Directors to take such action as it deems necessary or advisable to preserve
our status as a REIT, including redeeming Class C Preferred Stock whose
ownership or transfer violates the restrictions described above.
All certificates representing shares of Class C 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 C Preferred Stock or
otherwise be in the best interest of stockholders.
Each holder of Class C 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 C Preferred Stock on our status as a REIT and to ensure compliance with
the ownership limit.
The provisions set forth herein under "--Restrictions on Ownership and
Transfer" shall apply to the Class C Preferred Stock notwithstanding any
contrary provisions of the Class C Preferred Stock described elsewhere in this
prospectus supplement or the accompanying prospectus.
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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS TO HOLDERS
OF CLASS C PREFERRED STOCK
THE FOLLOWING IS A SUMMARY OF THE FEDERAL INCOME TAX CONSIDERATIONS
ANTICIPATED TO BE MATERIAL TO PURCHASERS OF CLASS C 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 C 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 C PREFERRED STOCK. THIS PROSPECTUS SUPPLEMENT DOES NOT ADDRESS THE
TAXATION OF US OR THE IMPACT ON US OF OUR ELECTION TO BE TAXED AS A REAL ESTATE
INVESTMENT TRUST. A DISCUSSION OF OUR FEDERAL INCOME TAX TREATMENT IS SET FORTH
IN THE ACCOMPANYING PROSPECTUS UNDER THE HEADING ENTITLED "MATERIAL FEDERAL
INCOME TAX CONSIDERATIONS TO REALTY INCOME CORPORATION." 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
"MATERIAL FEDERAL INCOME TAX CONSIDERATIONS--TAXATION OF REALTY INCOME
CORPORATION--FAILURE TO QUALIFY" IN THE ACCOMPANYING 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
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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 C
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
C 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;
- 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 C 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 C 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
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dividend on or before January 31 of the following year. Stockholders may not
include in their own income tax returns any of our net operating losses or
capital losses.
CAPITAL GAIN DISTRIBUTIONS. Distributions that we properly designate as
capital gain dividends will be taxable to our taxable U.S. stockholders as gain,
to the extent that such gain does not exceed our actual net capital gain for the
taxable year from the sale or disposition of capital assets. Depending on the
characteristics of the assets which produced these gains, and on specified
designations, if any, which we may make, these gains may be taxable to
non-corporate U.S. stockholders at a 20% or 25% rate. U.S. stockholders that are
corporations may, however, be required to treat up to 20% of some capital gain
dividends as ordinary income. If we properly designate any portion of a dividend
as a capital gain dividend, then any portion of the total capital gain dividends
paid or made available to holders of all classes of our stock for the year shall
be allocable to the holders of Class C 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 C Preferred Stock for the
year bears to the total dividends paid or made available to holders of all
classes of our stock for the year.
PASSIVE ACTIVITY LOSSES AND INVESTMENT INTEREST LIMITATIONS. Distributions
we make and gain arising from the sale or exchange by a U.S. stockholder of
shares of Class C 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 C Preferred
Stock, however, may not be treated as investment income depending upon your
particular situation.
RETENTION OF NET LONG-TERM CAPITAL GAINS. We may elect to retain, rather
than distribute as a capital gain dividend, our net long-term capital gains. If
we make this election, we would pay tax on our retained net long-term capital
gains. In addition, to the extent we designate, a U.S. stockholder generally
would:
- include its proportionate share of our undistributed long-term capital
gains in computing its long-term capital gains in its return for its
taxable year in which the last day of our taxable year falls;
- be deemed to have paid the capital gains tax imposed on us on the
designated amounts included in the U.S. stockholder's long-term capital
gains;
- receive a credit or refund for the amount of tax deemed paid by it;
- increase the adjusted basis of its shares of Class C 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 C PREFERRED STOCK. If you are a U.S. stockholder and
you sell or dispose of your shares of Class C Preferred Stock to a person other
than the Company, you will recognize gain or loss for federal income tax
purposes in an amount equal to the difference between (i) the amount of cash and
the fair market value of any property you receive on the sale or other
disposition, less any portion thereof attributable to accumulated and declared
but unpaid distributions that you are entitled to receive, which would have been
characterized as a dividend to the extent of our current and accumulated
earnings and profits, and (ii) your adjusted basis in the shares of Class C
Preferred Stock for tax purposes. This gain or loss will be capital gain or loss
if you have held the Class C Preferred Stock as a capital asset. This gain or
loss, except as provided below, will be long-term capital gain or
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loss if you have held the Class C 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 C 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 C PREFERRED STOCK. A redemption of shares of the Class
C 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 C 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.
If a redemption of shares of the Class C 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 C
Preferred Stock" above for the tax treatment of a sale or exchange.
If a redemption of shares of the Class C 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 C 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
S-42
<PAGE>
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.
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."
S-43
<PAGE>
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 C 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 C 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 C 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.
S-44
<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; and
- Current Report on Form 8-K dated May 24, 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
S-45
<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 has
severally and not jointly agreed to purchase from us, the number of shares of
Class C Preferred Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................................... 180,000
A.G. Edwards & Sons, Inc......................................................... 170,000
EVEREN Securities, Inc........................................................... 170,000
First Union Capital Markets Corp................................................. 170,000
PaineWebber Incorporated......................................................... 170,000
Salomon Smith Barney Inc......................................................... 170,000
Sutro & Co. Incorporated......................................................... 170,000
----------
Total.................................................................. 1,200,000
----------
----------
</TABLE>
The underwriters are obligated to purchase all of the shares of Class C
Preferred Stock, if any shares of Class C 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 C Preferred Stock to the public at the public offering price set forth on
the cover page of this prospectus supplement, and to selected dealers at that
price less a concession not in excess of $.50 per share of Class C Preferred
Stock. The underwriters may allow, and those dealers may reallow, a discount not
in excess of $.50 per share of Class C 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 C Preferred Stock to us before deducting expenses payable
by us. This information is presented assuming either no exercise or full
exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
---------- ------------- -------------
<S> <C> <C> <C>
Public offering price.................................................. $25.00 $30,000,000 $34,500,000
Underwriting discount.................................................. $.7875 $945,000 $1,086,750
Proceeds, before expenses, to us....................................... $24.2125 $29,055,000 $33,413,250
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $200,000 and are payable by us.
S-46
<PAGE>
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 180,000
additional shares of Class C 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 C 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 C Preferred
Stock as the percentage of the shares of Class C 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
C Preferred Stock. We have submitted an application to list the Class C
Preferred Stock on the NYSE. If approved for listing, trading of the Class C
Preferred Stock is expected to begin within 30 days of the original issuance of
the Class C Preferred Stock. The underwriters have advised us that they intend
to make a market in the Class C Preferred Stock prior to the commencement of
trading on the NYSE. However, the underwriters 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 C Preferred
Stock which may exist.
PRICE STABILIZATION AND SHORT POSITIONS
Until the sale of the Class C Preferred Stock is completed, SEC rules may
limit the ability of the underwriters and selling group members to bid for and
purchase the Class C Preferred Stock. As an exception to these rules, the
underwriters are permitted to engage in transactions that stabilize the price of
the Class C Preferred Stock. These transactions may consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Class C
Preferred Stock.
If the underwriters create a short position in the Class C Preferred Stock
in connection with this offering, which would occur if they sell more shares of
Class C Preferred Stock than are set forth on the cover page of this prospectus
supplement, the underwriters may reduce that short position by purchasing Class
C 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 C Preferred Stock. In addition, neither
we nor any of the underwriters make any representation that the underwriters
will engage in those transactions or that those transactions, once commenced,
will not be discontinued without notice.
LEGAL MATTERS
We will have Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland
pass upon the validity of the Class C 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. Paul C. Pringle
and Eric S. Haueter are partners of Brown & Wood LLP and, in the aggregate,
beneficially own 3,438 shares of our common stock.
S-47
<PAGE>
PROSPECTUS
$409,000,000
REALTY INCOME CORPORATION
DEBT SECURITIES, PREFERRED STOCK AND COMMON STOCK
------------------------
Realty Income Corporation, referred to in this prospectus as Realty Income,
the Company, we or our, may from time to time offer in one or more series (i)
our debt securities, (ii) shares of our preferred stock, $1.00 par value per
share, or (iii) shares of our common stock, $1.00 par value per share, with an
aggregate public offering price of up to $409,000,000 on terms to be determined
at the time of the offering. Our debt securities, our preferred stock and our
common stock (collectively referred to as our securities), may be offered,
separately or together, in separate series, in amounts, at prices and on terms
that will be set forth in one or more prospectus supplements to this prospectus.
The specific terms of the securities with respect to which this prospectus
is being delivered will be set forth in the applicable prospectus supplement and
will include, where applicable:
- in the case of our debt securities, the specific title, aggregate
principal amount, currency, form (which may be registered, bearer,
certificated or global), authorized denominations, maturity, rate (or
manner of calculating the rate) and time of payment of interest, terms for
redemption at our option or repayment at the holder's option, terms for
sinking fund payments, terms for conversion into shares of our preferred
stock or common stock, covenants and any initial public offering price;
- in the case of our 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
- in the case of our common stock, any initial public offering price.
In addition, the 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 our status as a real
estate investment trust, or REIT, for federal income tax purposes. The
applicable prospectus supplement will also contain information, where
applicable, about United States federal income tax considerations, and any
exchange listing of the securities covered by the prospectus supplement.
Our common stock is traded on the New York Stock Exchange under the symbol
"O". On June 14, 1999, the last reported sale price of our common stock was
$23.75 per share.
Our securities may be offered directly, through agents designated from time
to time by us, or to or through underwriters or dealers. If any agents or
underwriters are involved in the sale of any of our securities, their names, and
any applicable purchase price, fee, commission or discount arrangement between
or among them, will be set forth in the applicable prospectus supplement. None
of our securities may be sold without delivery of the applicable prospectus
supplement describing the method and terms of the offering of those securities.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this prospectus is July 14, 1999.
<PAGE>
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
The Company................................................................................................ 3
Use of Proceeds............................................................................................ 3
Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends... 3
Forward-Looking Statements................................................................................. 4
Description of Debt Securities............................................................................. 4
Description of Common Stock................................................................................ 16
Description of Preferred Stock............................................................................. 18
Restrictions on Ownership and Transfers of Capital Stock................................................... 25
Material Federal Income Tax Considerations to Realty Income Corporation.................................... 28
Plan of Distribution....................................................................................... 35
Experts.................................................................................................... 36
Legal Matters.............................................................................................. 36
Where You Can Find More Information........................................................................ 36
Incorporation of Information We File with the SEC.......................................................... 37
</TABLE>
2
<PAGE>
THE COMPANY
We are organized to operate as an equity real estate investment trust or
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.
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 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 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.
USE OF PROCEEDS
Unless otherwise described in the applicable prospectus supplement, we
intend to use the net proceeds from the sale of our securities for general
corporate purposes, which may include, among other things, the repayment of
indebtedness, the development and acquisition of additional properties and other
acquisition transactions, and the expansion and improvement of properties in our
portfolio.
RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth ratios of earnings to fixed charges for the
periods shown. The ratios of earnings to fixed charges were computed by dividing
earnings by fixed charges. For this purpose, earnings consist of net income
before interest expense. Fixed charges consist of interest costs (including
capitalized interest) and the amortization of debt issuance costs. As of March
31, 1999, we had not issued any of our preferred stock; therefore, the ratios of
earnings to combined fixed charges and preferred share dividends are the same as
the ratios presented below. However, on a pro forma basis, assuming that our
9 3/8% Class B Cumulative Redeemable Preferred Stock was issued and the proceeds
therefrom were used to repay borrowings under our Credit Facility on January 1,
1998, the ratio of earnings to combined fixed charges and preferred stock
dividends for the year ended December 31, 1998 would have been 3.4x and the
ratio of earnings to combined fixed charges and preferred stock dividends for
the quarter ended March 31, 1999 would have been 2.4x.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEARS ENDED DECEMBER 31
- -------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
2.6x 4.8x 3.8x 5.1x 13.7x 9.9x 39.4x
</TABLE>
3
<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;
- future expenditures for development projects; and
- availability of capital to finance our business.
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, 1998 (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 Report on Form 10-Q for the quarter ended March 31,
1999.
You should rely only on the information contained or incorporated by
reference in this prospectus and in any accompanying prospectus supplement. We
have 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 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, as well as information we
previously filed with the Securities and Exchange Commission (the "SEC") and
incorporated by reference, is accurate as of its date only. Our business,
financial condition, results of operations and prospects may have changed since
those dates.
DESCRIPTION OF DEBT SECURITIES
GENERAL
Our debt securities will be our direct obligations and they may be secured
or unsecured, senior or subordinated indebtedness. We may issue our debt
securities under one or more indentures and each indenture will be dated on or
before the issuance of the debt securities to which it relates. Additionally,
each indenture must be in the form filed as an exhibit to the Registration
Statement containing this prospectus or in a form incorporated by reference to
this prospectus in a post-effective amendment to the Registration Statement or a
Form 8-K. The form of indenture is subject to any amendments or supplements that
may be adopted from time to time. We will enter into each indenture with a
trustee and the trustee for each indenture may be the same. The indenture will
be subject to, and governed by, the Trust Indenture Act of 1939, as amended.
Because this description of debt securities is a summary, it does not contain
all the information that may be important to you. You should read all provisions
of our indenture and our debt securities to assure that you have all the
important information you need to make any required decisions. All capitalized
terms used, but not defined, in this section shall have the meanings set forth
in the applicable indenture.
TERMS
The particular terms of any series of our debt securities will be described
in a prospectus supplement. Additionally, any applicable modifications of or
additions to the general terms of our debt securities
4
<PAGE>
described in this prospectus and in the applicable indenture will also be
described in a prospectus supplement. Accordingly, for a description of the
terms of any series of our debt securities, you must refer to both the
prospectus supplement relating to those debt securities and the description of
the debt securities set forth in this prospectus. If any particular terms of our
debt securities described in a prospectus supplement differ from any of the
terms described in this prospectus, then those terms shall have the meaning set
forth in the relative prospectus supplement.
Except as set forth in any prospectus supplement, our 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 our Board of Directors, a
committee of the Board of Directors or as set forth in the applicable indenture
or one or more supplements to the indenture. All of our debt securities of one
series need not be issued at the same time, and unless otherwise provided, a
series may be reopened for issuance of additional debt securities without the
consent of the holders of the debt securities of that series.
Each indenture will provide that we may, but need not, designate more than
one trustee for the indenture, each with respect to one or more series of our
debt securities. Any trustee under an indenture may resign or be removed with
respect to one or more series of our debt securities, and a successor trustee
may be appointed to act with respect to that series. If two or more persons are
acting as trustee to different series of our debt securities, each 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
in this prospectus, any action taken by a trustee may be taken by that 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.
This summary sets forth certain general terms and provisions of the
indenture and our debt securities. For a detailed description of a specific
series of debt securities, you should consult the prospectus supplement for that
series. The prospectus supplement contains all of the following information:
1. the title of those debt securities;
2. the aggregate principal amount of those debt securities and any limit on the
aggregate principal amount;
3. the price (expressed as a percentage of the principal amount of those debt
securities) at which those debt securities will be issued and, if other than
the principal amount of those debt securities, the portion of the principal
amount payable upon declaration of acceleration of the maturity thereof, or
(if applicable) the portion of the principal amount of those debt securities
that is convertible into common stock or preferred stock, or the method by
which any convertible portion of those debt securities shall be determined;
4. if those debt securities are convertible, the terms on which they are
convertible, including the initial conversion price or rate and conversion
period and, in connection with the preservation of our status as a REIT, any
applicable limitations on the ownership or transferability of the common
stock or the preferred stock into which those debt securities are
convertible;
5. the date or dates, or the method for determining the date or dates, on which
the principal of those debt securities will be payable;
6. the rate or rates (which may be fixed or variable), or the method by which
the rate or rates shall be determined, at which those debt securities will
bear interest, if any;
7. the date or dates, or the method for determining the date or dates, from
which any interest will accrue, the dates upon which that interest will be
payable, the record dates for payment of that interest, or the method by
which any of those dates shall be determined, the persons to whom that
interest shall be payable, and the basis upon which that interest shall be
calculated if other than that of a 360-day year of twelve 30-day months;
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8. the place or places where the principal of (and premium, if any) and
interest, if any, on debt securities will be payable, where debt securities
may be surrendered for conversion or registration of transfer or exchange
and where notices or demands to or upon us relating to 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 those debt securities may be
redeemed, as a whole or in part, at our option;
10. our obligation, if any, to redeem, repay or purchase those debt securities
pursuant to any sinking fund or analogous provision or at the option of a
holder of those debt securities, and the period or periods within which,
the price or prices at which and the terms and conditions upon which those
debt securities will be redeemed, repaid or purchased, as a whole or in
part, pursuant to this obligation;
11. if other than U.S. dollars, the currency or currencies in which those 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 those 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 those amounts
shall be determined;
13. whether those debt securities will be issued in certificated and/or
book-entry form, and, if so, the identity of the depositary for those debt
securities;
14. whether those 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 of the indenture;
16. any deletions from, modifications of or additions to the events of default
or our covenants with respect to those debt securities;
17. whether and under what circumstances we will pay any additional amounts on
those debt securities in respect of any tax, assessment or governmental
charge and, if so, whether we will have the option to redeem those debt
securities in lieu of making this payment;
18. the subordination provisions, if any, relating to those debt securities;
19. the provisions, if any, relating to any security provided for those debt
securities; and
20. any other terms of those debt securities.
If the applicable prospectus supplement provides, we may issue the debt
securities at a discount below their principal amount and provide for less than
the entire principal amount of the debt securities to be payable upon
declaration of acceleration of the maturity thereof ("Original Issue Discount
Securities"). In those 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 of $1,000.
Unless otherwise described in the applicable prospectus supplement, we will
pay the principal of (and premium, if any) and interest on any series of debt
securities at the applicable trustee's corporate trust
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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, we may make interest payments (i) by check mailed to the
address of the person entitled to the payment as that address appears in the
applicable register for those debt securities, or (ii) by wire transfer of funds
to the 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 those debt
securities at the office of any transfer agent we designate for that 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 we designate for that 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 that
transfer must provide evidence of title and identity satisfactory to us and the
applicable transfer agent. No service charge will be made for any registration
of the transfer or exchange of any debt securities, but we may require payment
of a sum sufficient to cover any tax or other governmental charge payable in
connection therewith. We 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 transfer agent acts, except that we
will be required to maintain a transfer agent in each place of payment for that
series. We may at any time designate additional transfer agents with respect to
any series of debt securities.
Neither we nor any trustee shall be required to
- issue, register the transfer of or exchange debt securities of any series
if that 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 those
debt securities and ending at the close of business on
1. the day of mailing of the relevant notice of redemption if the debt
securities of that series are issuable only in registered form, or
2. the day of the first publication of the relevant notice of redemption
if the debt securities of that series are issuable (only) in bearer
form, or
3. the day of mailing of the relevant notice of redemption if those debt
securities are issuable in registered form (and bearer form) and
there is no publication; or
- 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
- exchange any debt security in bearer form so selected for redemption,
except in exchange for a debt security of that series in registered form
that is simultaneously surrendered for redemption; or
- 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 that debt security not to be so repaid.
MERGER, CONSOLIDATION OR SALE OF ASSETS
Each indenture will provide that we will not consolidate with, sell, lease
or convey all or substantially all of our assets to, or merge with or into, any
person unless
- either we shall be the continuing entity, or the successor person (if not
us) formed by or resulting from the consolidation or merger or which shall
have received the transfer of the assets shall be a corporation organized
and existing under the laws of the United States or any State or
jurisdiction
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thereof and shall expressly assume (1) our obligation to pay the principal
of (and premium, if any) and interest on all the debt securities issued
under the indenture and (2) the due and punctual performance and
observance of all the covenants and conditions contained in the indenture
and in the debt securities;
- immediately after giving effect to the transaction and treating any
indebtedness that becomes our obligation or the obligation of any
Subsidiary as a result of the transaction having occurred, and treating
any liens on any property or assets of ours or any Subsidiary that are
incurred, created or assumed as a result of the transaction having
occurred or as having been created, incurred or assumed, by us or the
Subsidiary (defined below) at the time of the transaction, no event of
default under the indenture, and no event that, after notice or the lapse
of time, or both, would become an event of default, shall have occurred
and be continuing; and
- an officer's certificate and legal opinion certifying that these
conditions have been met shall be delivered to the trustee.
CERTAIN COVENANTS
EXISTENCE. Except as permitted under the heading above, entitled "--Merger,
Consolidation or Sale of Assets," we will be required under each indenture to do
or cause to be done all things necessary to preserve and keep in full force and
effect our corporate existence, all material rights (by charter, bylaws and
statute) and all material franchises; provided, however, that we shall not be
required to preserve any right or franchise if our Board of Directors determines
that the preservation thereof is no longer desirable in the conduct of our
business.
MAINTENANCE OF PROPERTIES. Each indenture will require us to cause all of
our material properties used or useful in the conduct of our 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 will require us
to make all necessary repairs, renewals, replacements, betterments and
improvements to those properties, as in our judgment may be necessary so that
the business carried on in connection with those properties may be properly and
advantageously conducted at all times; provided, however, that we and our
Subsidiaries shall not be prevented from selling or otherwise disposing of these
properties for value in the ordinary course of business.
INSURANCE. Each indenture will require us and each of our Subsidiaries, to
keep in force upon all of our properties and operations policies of insurance
carried with responsible companies in amounts and covering all 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 us to pay or
discharge or cause to be paid or discharged, before they shall become
delinquent, (a) all taxes, assessments and governmental charges levied or
imposed on us, our income, profits or property, or any Subsidiary, its income,
profits or property and (b) all lawful claims for labor, materials and supplies
that, if unpaid, might by law become a lien upon our property or the property of
any Subsidiary; provided, however, that we shall not be required to pay or
discharge or cause to be paid or discharged any tax, assessment, charge or claim
the amount, applicability or validity of which we are contesting in good faith
through appropriate proceedings.
PROVISIONS OF FINANCIAL INFORMATION. Whether or not we are subject to
Section 13 or 15(d) of the Exchange Act, we will be required by each indenture,
within 15 days after each of the respective dates by which we would have been
required to file annual reports, quarterly reports and other documents with the
Commission if we were subject to those Sections of the Exchange Act to:
- transmit by mail to all holders of debt securities issued under the
indenture, as their names and addresses appear in the applicable register
for those debt securities, without cost to the holders,
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copies of the annual reports, quarterly reports and other documents that
we would have been required to file with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act if we were subject to those
Sections;
- file with the applicable trustee copies of the annual reports, quarterly
reports and other documents that we would have been required to file with
the Commission pursuant to Section 13 or 15(d) of the Exchange Act if we
were subject to those Sections; and
- supply promptly, upon written request and payment of the reasonable cost
of duplication and delivery, copies of these documents to any prospective
holder of the 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 any other Person of which more than 50% of (a) the equity or other
ownership interests or (b) 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 us or one or more of our
Subsidiaries or a combination thereof.
ADDITIONAL COVENANTS. If we make any additional covenants with respect to
any series of debt securities, those covenants will be set forth in the
prospectus supplement relating to those debt securities.
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" for any series of debt
securities issued under it:
- default for 30 days in the payment of any installment of interest on any
debt security of that series;
- default in the payment of the principal of (or premium, if any, on) any
debt security of that series when due, whether at stated maturity or by
declaration of acceleration, notice of redemption, notice of option to
elect repayment or otherwise;
- default in making any sinking fund payment as required for any debt
security of that series;
- default in the performance of any of our other covenants 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 that
series), which continues for 60 days after we receive written notice from
the trustee or the holders of at least 25% in principal amount of the
outstanding debt securities of that series;
- default under any bond, debenture, note or other evidence of indebtedness
for money borrowed by us or any of our subsidiaries (including obligations
under leases required 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 us or any of our Subsidiaries (including leases, but not
including indebtedness or obligations for which recourse is limited to
property purchased) in an aggregate principal amount in excess of
$25,000,000, whether the indebtedness exists at the date of the relevant
indenture or shall thereafter be created, which default shall have
resulted in the indebtedness becoming or being declared due and payable
prior to the date on which it would otherwise have become due and payable
or which default shall have resulted in the obligation being accelerated,
without the acceleration having been rescinded or annulled;
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- certain events of bankruptcy, insolvency or reorganization, or court
appointment of a receiver, liquidator or trustee experienced by us or a
Significant Subsidiary; and
- any other event of default provided with respect to a particular series of
debt securities.
The term "Significant Subsidiary" as used above has the meaning ascribed to
the term in Regulation S-X promulgated under the Securities Act, as the
Regulation was in effect on January 1, 1999.
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 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, that 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 us (and to the
applicable trustee if given by the holders). However, at any time after the
declaration of acceleration with respect to debt securities of a 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 that series may
rescind and annul the declaration and its consequences if:
- we 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 that series (other than principal and premium, if any, and
interest which have become due solely as a result of the acceleration),
plus certain fees, expenses, disbursements and advances of the applicable
trustee; and
- 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 that 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 that series and its consequences,
except:
- a default in the payment of the principal of (or premium, if any) or
interest on any debt security of that series; or
- a default in respect of a covenant or provision contained in the indenture
that cannot be modified or amended without the consent of the holder of
each outstanding debt security of the series affected by the default.
Each indenture will require each trustee to give notice of a default under
the indenture to all holders of debt securities within 90 days unless the
default shall have been cured or waived, subject to certain exceptions;
provided, however, that the trustee may withhold notice to the holders of any
series of debt securities of any default with respect to that series (except a
default in the payment of the principal of (or premium, if any) or interest on
any debt security of that series or in the payment of any sinking fund
installment in respect of any debt security of that series) if specified
responsible officers of the trustee consider withholding the notice to be in
that 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 that
series, as well as an offer of indemnity reasonably satisfactory to it, and no
direction inconsistent with the written request has been given to the trustee
during the 60-day period by holders of a majority in principal amount of the
outstanding debt securities of that series. This provision will not prevent,
however, any holder of debt securities from instituting suit for the enforcement
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of payment of the principal of (and premium, if any) and interest on those 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 the debt securities
then outstanding under the indenture, unless those 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 the direction shall not
conflict with any rule of law or the indenture, and provided further that 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 that series not joining in the direction to the trustee.
Within 120 days after the close of each fiscal year, we will be required to
deliver to the trustee a certificate, signed by one of several specified
officers, stating whether or not the officer has knowledge of any default under
the indenture and, if so, specifying each 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 the indenture affected
by the modification or amendment; provided, however, that no modification or
amendment may, without the consent of the holder of each debt security affected
thereby,
- change the stated maturity of the principal of, or any installment of
principal, interest (or premium, if any) on, any debt security;
- reduce the principal amount of, or the rate or amount of interest on, or
any premium payable on redemption of, any 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 of the
Original Issue Discount Security 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
repayment);
- change the place of payment, or the coin or currency, for payment of
principal of (or premium, if any) or interest on any debt security;
- impair the right to institute suit for the enforcement of any payment on
or with respect to any debt security when due;
- 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 of the indenture or certain defaults and consequences
under the indenture or to reduce the quorum or voting requirements set
forth in the indenture; or
- 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 the 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, our compliance with
certain restrictive covenants in the applicable indenture.
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We, along with the trustee, shall be permitted to modify and amend an
indenture without the consent of any holder of debt securities for any of the
following purposes:
- to evidence the succession of another person to our obligations under the
indenture;
- to add to our covenants for the benefit of the holders of all or any
series of debt securities or to surrender any right or power conferred
upon us in the indenture;
- to add events of default for the benefit of the holders of all or any
series of debt securities;
- 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 this action shall not adversely affect
the interests of the holders of the debt securities of any series in any
material respect;
- to change or eliminate any provisions of the indenture, provided that any
change or elimination does not apply to any outstanding debt securities of
a series created prior to the date of the amendment or supplement that are
entitled to the benefit of that provision;
- to secure the debt securities;
- to establish the form or terms of debt securities of any series, including
the provisions and procedures, if applicable, for the conversion of debt
securities into common stock or preferred stock;
- 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;
- 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 this action shall not adversely
affect the interests of holders of debt securities of any series in any
material respect; or
- 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 debt securities, provided, however, that this
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
described in indenture or whether a quorum is present at a meeting of holders of
debt securities,
- the principal amount of an Original Issue Discount Security that shall be
deemed to be outstanding shall be the amount of the principal of that
security that would be due and payable as of the date of the determination
upon declaration of acceleration of the maturity thereof;
- 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 the 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 the debt security of the
amount determined as provided in (a) above);
- the principal amount of an indexed security that shall be deemed
outstanding shall be the principal face amount of the indexed security at
original issuance, unless otherwise provided with respect to the indexed
security in the applicable indenture; and
- debt securities owned by us or any other obligor upon the debt securities
or any affiliate of ours or of the other obligor shall be disregarded.
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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 our request or request of the holders of at
least 10% in principal amount of the outstanding debt securities of a series, in
any 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 by the
indenture, any resolution presented at a meeting at which a quorum is present,
or at such a meeting adjourned and duly reconvened, 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 the
series may be adopted at a meeting at which a quorum is present, or at such a
meeting adjourned and duly reconvened by the affirmative vote of the holders of
the 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
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 that series; provided, however, that if any action is to be taken
at a 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 that series, the persons holding or representing
the specified percentage in principal amount of the outstanding debt securities
of that 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 that series and one or more additional
series: (a) there shall be no minimum quorum requirement for the meeting and (b)
the principal amount of the outstanding debt securities of all those series that
are entitled to vote in favor of the request, demand, authorization, direction,
notice, consent, waiver or other action shall be taken into account in
determining whether the 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 our
request any indenture shall cease to be of further effect with respect to any
series of debt securities issued under the indenture specified in our request
(except as to certain limited provisions of the indenture which shall survive)
when either (a) all debt securities of that series have been delivered to the
trustee for cancellation or (b) all debt securities of that series have become
due and payable or will become due and payable within one year (or are scheduled
for redemption within one year) and we have irrevocably deposited with the
applicable trustee, in trust, funds in the currency or currencies, currency unit
or units or composite currency or currencies in which those debt securities are
payable an amount sufficient to pay the entire indebtedness on those debt
securities in respect of principal (and premium, if any) and interest to the
date of the deposit (if those 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, we may elect either to:
- 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 the debt securities and the obligations to register the
transfer or exchange of the debt securities, to replace temporary or
mutilated, destroyed, lost or stolen debt
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securities, to maintain an office or agency in respect of the debt
securities and to hold money for payment in trust) ("defeasance"); or
- be released from our obligations with respect to certain covenants (which
will be described in the relevant prospectus supplement) applicable to the
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 these obligations shall not
constitute a default or an event of default with respect to those debt
securities ("covenant defeasance"),
in either case upon our irrevocable deposit with the applicable trustee, in
trust, of an amount, in the currency or currencies, currency unit or units or
composite currency or currencies in which those debt securities are payable at
stated maturity, or Government Obligations (as defined below), or both,
applicable to those 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
those debt securities, and any mandatory sinking fund or analogous payments on
those debt securities, on the scheduled due dates.
A trust may only be established if, among other things, we have delivered to
the applicable trustee an opinion of counsel (as specified in the applicable
indenture) to the effect that the holders of those debt securities will not
recognize income, gain or loss for U.S. federal income tax purposes as a result
of the 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 the defeasance or covenant defeasance had not
occurred. Additionally, in the case of defeasance an opinion of counsel 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 defeasance, the holders of those debt
securities would thereafter be able to look only to the 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 the government which issued the foreign currency in
which the debt securities of that series are payable, the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America or the 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 Government Obligation or a specific payment of interest on or
principal of any Government Obligation held by a custodian for the account of
the holder of a depository receipt; provided, however, that (except as required
by law) the custodian is not authorized to make any deduction from the amount
payable to the holder of the 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 the
depository receipt.
Unless otherwise provided in the applicable prospectus supplement, if after
we have deposited funds and/or Government Obligations to effect defeasance or
covenant defeasance with respect to debt securities of any series,
- the holder of a debt security of that series is entitled to elect pursuant
to the applicable indenture or the terms of that debt security to receive
payment in a currency, currency unit or composite currency other than that
in which the deposit has been made in respect of that debt security, and
so elects, or
- a Conversion Event (as defined below) occurs in respect of the currency,
currency unit or composite currency in which the deposit has been made,
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then the indebtedness represented by that 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 that debt security as they
become due out of the proceeds yielded by converting the amount so deposited in
respect of that debt security into the currency, currency unit or composite
currency in which the debt security becomes payable as a result of the election
or Conversion Event based on the applicable market exchange rate. "Conversion
Event" means the cessation of use of:
- a currency, currency unit or composite currency both by the government of
the country which issued the currency and for the settlement of
transactions by a central bank or other public institution of or within
the international banking community;
- the ECU both within the European Monetary System and for the settlement of
transactions by public institutions of or within the European Communities;
or
- 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 we effect a covenant defeasance with respect to any debt
securities and those 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 4 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 those debt securities) or clause 7 thereunder with respect to
any other covenant as to which there has been covenant defeasance, the amount in
currency, currency unit or composite currency in which those debt securities are
payable, and Government Obligations on deposit with the applicable trustee, may
not be sufficient to pay amounts due on those debt securities at the time of the
acceleration resulting from the event of default. We would, however, remain
liable to make payment of the amounts due at the time of acceleration.
The applicable prospectus supplement may further describe the provisions, if
any, permitting the 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 to those debt securities. The terms
will include whether the 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 our option or
the option of the holders, the events requiring an adjustment of the conversion
price and provisions affecting conversion in the event of the redemption of the
debt securities and any restrictions on conversion, including restrictions
directed at maintaining our REIT status.
UNCLAIMED PAYMENTS
We will be repaid for all amounts we pay to a paying agent or a trustee for
the payment of the principal of or any premium or interest on any debt security
that remains unclaimed at the end of two years after the principal, premium or
interest has become due and payable, and the holder of that debt security may
look only to us for payment of the principal, premium or interest.
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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 that 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 that series.
DESCRIPTION OF COMMON STOCK
We have authority to issue 100,000,000 shares of our common stock, $1.00 par
value per share. As of June 15, 1999, we had outstanding 26,822,447 shares of
our common stock.
GENERAL
The following description of our common stock sets forth certain general
terms and provisions of our common stock to which any prospectus supplement may
relate, including a prospectus supplement providing that our common stock will
be issuable upon conversion of our debt securities or our preferred stock. The
statements below describing our common stock are in all respects subject to and
qualified in their entirety by reference to the applicable provisions of our
charter and bylaws.
TERMS
Subject to the preferential rights of any other shares or series of stock
and to the provisions of our charter regarding the restrictions on transfer of
stock, holders of our common stock are entitled to receive dividends when, as
and if authorized and declared by our board of directors out of assets legally
available therefor. Payment and authorization of dividends on our common stock
and purchases of those shares by us may be subject to certain restrictions if we
fail to pay dividends on the preferred stock. If we were to experience
liquidation, dissolution or winding up, holders of our common stock would be
entitled to share equally and ratably in any assets available for distribution
to them, after payment or adequate provision for payment of our debts and other
liabilities and the preferential amounts owing with respect to any of our
outstanding preferred stock.
Subject to the provisions of our charter regarding the restrictions on
transfer of stock, each outstanding share of our 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. Our board of directors is divided into three classes of directors.
The terms of the Class I, Class II and Class III directors will expire in 2001,
2002 and 2000, respectively. Each class is 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 other attempt to change control of us even
though a tender offer or change in control might be in the best interest of the
stockholders.
Holders of our 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 our common stock voting for the election of directors can elect all
the directors of the class then standing for election if they choose to do so
and the holders of the remaining shares cannot elect any directors of that
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 us at a subsequent
date. Holders of shares of common stock have no preference, conversion,
exchange, sinking fund, redemption or appraisal rights. Under Maryland law,
stockholders generally are not liable for the corporation's debts or
obligations. All shares of common stock now outstanding are, and additional
shares of common stock offered will be when issued, fully paid and
nonassessable.
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Under the Maryland General Corporation Law or 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. Our 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.
Our charter authorizes our board of directors to reclassify any unissued
shares of our common stock into other classes or series of classes 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 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 a merger,
consolidation, share exchange or, in certain circumstances, an asset tranfer or
issuances or reclassification 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 or an affiliate or associate (as
defined in the MGCL) of the corporation who, at any time within the two-year
period prior to the date in question was the beneficial owner of ten percent or
more of the voting power of the outstanding voting stock of the corporation (an
interested stockholder) or an affiliate of such an interested stockholder 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 recommended by the board of directors of the corporation and
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 common shares. The
business combination 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.
These provisions of the MGCL may delay, defer or prevent a transaction or a
change in control of us 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
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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
and all of the control shares (except those for which the 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 exempted by a provision in the charter or
bylaws of the corporation adopted before the acquisition of the shares.
As permitted by the MGCL, our Bylaws contain a provision exempting from the
control share acquisition statute any and all acquisitions by any person of the
Company's share 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 us to qualify as a REIT under the Internal Revenue Code of 1986, as
amended, 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 us in meeting this requirement and certain other requirements relating to
our tax status as a REIT, we may take certain actions to limit the actual,
beneficial or constructive ownership by a single person or entity of our
outstanding equity securities. See "--Restrictions on Ownership and Transfers of
Capital Stock".
TRANSFER AGENT
The registrar and transfer agent for our common stock is The Bank of New
York.
DESCRIPTION OF PREFERRED STOCK
We are authorized to issue 20,000,000 shares of preferred stock, $1.00 par
value per share, of which 2,760,000 shares, designated 9 3/8% Cumulative
Redeemable Preferred Stock, were outstanding as of June 15, 1999 and 1,000,000
shares designated Class A Junior Participating Preferred Stock were reserved for
issuance under our Stockholder Rights Plan.
GENERAL
The following description of our preferred stock sets forth certain general
terms and provisions of our preferred stock to which any prospectus supplement
may relate. The statements below describing our preferred stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of our charter (including any applicable articles
supplementary) and our bylaws.
Our charter authorizes our 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 our board of directors.
Prior to issuance of shares of each series, our board is required by the MGCL
and our charter to set, subject to the provisions of our charter regarding the
restrictions on transfer of stock, the terms, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
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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 us that might
involve a premium price for holders of our common stock or otherwise be in their
best interest. Our preferred stock will, when issued, be fully paid and
nonassessable and will have no preemptive rights.
You should refer 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 the preferred stock;
2. the number of shares of the preferred stock offered, the liquidation
preference per share and the offering price of the preferred stock;
3. the dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation thereof applicable to the preferred stock;
4. whether the preferred stock is cumulative or not and, if cumulative, the
date from which dividends on the preferred stock shall accumulate;
5. the procedures for any auction and remarketing, if any, for the preferred
stock;
6. the provision for a sinking fund, if any, for the preferred stock;
7. any voting rights of the preferred stock;
8. the provision for redemption, if applicable, of the preferred stock;
9. any listing of the preferred stock on any securities exchange;
10. the terms and conditions, if applicable, upon which the 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 the
preferred stock;
12. any limitations on actual, beneficial or constructive ownership and
restrictions on transfer, in each case as may be appropriate to preserve
our REIT status;
13. the relative ranking and preferences of the preferred stock as to dividend
rights and rights upon liquidation, dissolution or winding up of our
affairs;
14. whether liquidation preferences on preferred stock will be counted as
liabilities of ours 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 our affairs; and
16. any other specific terms, preferences, rights, limitations or restrictions
of the preferred stock.
RANK
Unless otherwise specified in the applicable prospectus supplement, the
preferred stock will rank, with respect to rights to the payment of dividends
and distribution of our assets and rights upon our liquidation, dissolution or
winding up:
- senior to all classes or series of common stock and to all equity
securities ranking junior to the preferred stock rights to the payment of
dividends and distribution of our assets and rights upon our liquidation,
dissolution or winding up;
- on a parity with all equity securities issued by us with terms
specifically providing that those equity securities rank on a parity with
the preferred stock with respect to rights to the payment of
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dividends and distribution of our assets and rights upon our liquidation,
dissolution or winding up; and
- junior to all equity securities issued by us with terms specifically
providing that those equity securities rank senior to the preferred stock
with respect to rights to the payment of dividends and distribution of our
assets and rights upon our liquidation, dissolution or winding up.
For these purposes, the term "equity securities" does not include
convertible debt securities.
DIVIDENDS
Holders of shares of our preferred stock of each series or class shall be
entitled to receive, when, as and if authorized and declared by our board of
directors, out of our assets legally available for payment, dividends at rates
and on dates and terms as will be set forth in the applicable prospectus
supplement. Each dividend shall be payable to holders of record as they appear
on our stock transfer books on the record dates as shall be fixed by our board
of directors.
Dividends on any series or class of our 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 our 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 that dividend payment date, and we 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 that series or class for any
period unless:
- if the 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
- if the series or class of preferred stock does not have 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 the payment on the
preferred stock of such series or class.
When dividends are not paid in full (or a sum sufficient for the full
payment thereof is not 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 that series or
class, then all dividends authorized on shares of preferred stock of that series
or class and any other series or class of preferred stock ranking on a parity as
to dividends with that preferred stock shall be authorized pro rata so that the
amount of dividends authorized per share on the preferred stock of that 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 and unpaid 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
the 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: if that
series or class of preferred stock has a cumulative dividend, full cumulative
dividends on the preferred stock of such series or class
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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 if that 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 ours ranking junior to the
preferred stock of that series or class as to dividends and as to the
distribution of assets upon liquidation, dissolution or winding up of the
Company) 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 class
or series of stock of ours ranking junior to or on a parity with the preferred
stock of that series or class as to dividends or as to the distribution of
assets upon liquidation, dissolution or winding up of the Company, nor shall any
shares of the common stock or any other stock of ours ranking junior to or on a
parity with the preferred stock of that series or class as to dividends or as to
the distribution of assets upon liquidation, dissolution or winding up of the
Company 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 us (except by conversion into or exchange
for other stock of ours ranking junior to the preferred stock of that series or
class as to dividends and as to the distribution of assets upon liquidation,
dissolution or winding up of the Company); provided, however, that the foregoing
shall not prevent the purchase or acquisition of shares of our stock to preserve
our status as a REIT for federal and/or state income tax purposes.
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 that series or class that remains payable.
If we properly designate any portion of a dividend as a "capital gain
dividend," a holder's share of such capital gain dividend will be an amount
which bears the same ratio to the total amount of dividends (as determined for
Federal income tax purposes) paid to such holder for the year as the aggregate
amount designated as a capital gain dividend bears to the aggregate amount of
all dividends (as determined for Federal income tax purposes) paid on all
classes of our stock for the year.
REDEMPTION
If the applicable prospectus supplement so states, the shares of preferred
stock will be subject to mandatory redemption or redemption at our option, in
whole or in part, in each case on the terms, at the times and at the redemption
prices set forth in that 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
that preferred stock that shall be redeemed by us 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 our stock, the terms of that preferred stock
may provide that, if no such stock shall have been issued or to the extent the
net proceeds from any issuance are insufficient to pay in full the aggregate
redemption price then due, that preferred stock shall automatically and
mandatorily be converted into shares of our applicable stock pursuant to
conversion provisions specified in the applicable prospectus supplement.
Notwithstanding the foregoing, unless:
- if the 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
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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
- if the series or class of preferred stock does not have a cumulative
dividend, full dividends on the preferred stock of that 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 that series or class of preferred stock shall be redeemed
unless all outstanding shares of preferred stock of that series or class are
simultaneously redeemed; provided, however, that the foregoing shall not prevent
the purchase or acquisition of shares of preferred stock of that series or class
to preserve our 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 that
series or class; and
- if the series or class of preferred stock has a cumulative dividend, full
cumulative dividends on all outstanding shares of that 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
- if that series or class of preferred stock does not have a cumulative
dividend, full dividends on the preferred stock of that 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,
we 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 ours ranking junior to the preferred stock of that series or class
as to dividends and upon liquidation, dissolution and winding up of the
Company); provided, however, that the foregoing shall not prevent the purchase
or acquisition of shares of preferred stock of such series or class to preserve
our 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 that 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 us and those shares may be redeemed pro rata from the holders of record of
those shares in proportion to the number of those shares held by such holders
(with adjustments to avoid redemption of fractional shares) or any other
equitable method determined by us.
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 our stock
transfer books, and notice of redemption will also be given by publication in
The Wall Street Journal or, if such newspaper is not then being published,
another newspaper of general circulation in The City of New York, such
publication to be made at least once a week for two successive weeks commencing
not less than 30 nor more than 60 days prior to the redemption date. Each notice
shall state:
- The redemption date;
- The number of shares and series or class of the preferred stock to be
redeemed;
- The redemption price;
- The place or places (which shall include a place in the Borough of
Manhattan, The City of New York) where certificates for the preferred
stock are to be surrendered for payment of the redemption price;
- That dividends on the shares to be redeemed will cease to accumulate on
the redemption date; and
- The date on which the holder's conversion rights, if any, as to those
shares shall terminate.
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If fewer than all the shares of preferred stock of any series or class are
to be redeemed, the notice mailed to each holder thereof shall also specify the
number of shares of preferred stock to be redeemed from each 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 the redemption
have been irrevocably set aside by us 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 the shares of preferred stock,
the shares of preferred stock shall no longer be deemed outstanding and all
rights of the holders of the shares will 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 the series or class of preferred stock
to be redeemed.
Notwithstanding the foregoing, the persons who were holders of record of
shares of any class or series of 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 the redemption of those shares
of preferred stock will not include that dividend. Except as provided in the
preceding sentence and except to the extent that accrued and unpaid dividends
are payable as part of the redemption price, we will make no payment or
allowance for unpaid dividends, whether or not in arrears, on shares of
preferred stock called for redemption.
Subject to applicable law and the limitation on purchases when dividends on
a series or class of preferred stock are in arrears, we 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
our affairs, then, before any distribution or payment will be made to the
holders of common stock or any other series or class of stock ranking junior to
any series or class of preferred stock in the distribution of assets upon any
liquidation, dissolution or winding up of our affairs, the holders of that
series or class of preferred stock shall be entitled to receive, subject to the
preferential rights of the holders of shares of any class or series of our stock
ranking senior to such series or class of preferred stock with respect to our
distribution of assets upon liquidation, dissolution or winding up, out of our
assets 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 the 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 our remaining assets. If, upon any such
voluntary or involuntary liquidation, dissolution or winding up, the legally
available assets 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 that series or class of
preferred stock in the distribution of assets upon liquidation, dissolution or
winding up, then the holders of that 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, our remaining assets will be distributed
among the holders of any other classes or series of stock ranking junior to that
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
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of shares. For those purposes, the consolidation or merger of us with or into
any other entity, or the sale, lease, transfer or conveyance of all or
substantially all of our property or business, shall not be deemed to constitute
a liquidation, dissolution or winding up of our affairs.
VOTING RIGHTS
Except as may be set forth in the applicable prospectus supplement, whenever
dividends on any shares of preferred stock shall be in arrears for six or more
quarterly dividend periods, whether or not consecutive, the number of directors
constituting our Board of Directors will be automatically increased by two and
the holders of such series or class of 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 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
Realty Income at the request of the holders of record of at least 10% of the
outstanding shares of any class or series of preferred stock upon which voting
rights have been conferred and are exercisable (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 the vote will be held at the earlier of the next
annual or special meeting of shareholders), and at each subsequent annual
meeting until all dividends accumulated on those shares of preferred stock for
all past dividend periods and the then current dividend period shall have been
fully paid or declared and a sum sufficient for the payment thereof set aside
for payment. In that case, the right of the preferred stock to elect those two
directors will cease and the term of office of the two directors will
automatically terminate and the number of directors constituting the Board of
Directors will be reduced accordingly.
If a special meeting is not called by us within 30 days after a request from
the holders of preferred stock as described above, then the holders of record of
at least 10% of the outstanding shares of any class or series of preferred stock
upon which voting rights have been conferred and are exercisable may designate a
holder to call the meeting at our expense.
So long as any shares of any class or series of 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 any class or series of preferred
stock outstanding that is affected by the following at the time given in person
or by proxy, either in writing or at a meeting (with each series or class of
preferred stock that is affected by the following 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 that series or class of
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 for such series or class of preferred stock, 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; or
- Enter into any share exchange that affects such series or class of
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 such series or class
of preferred stock remains outstanding without a material adverse change
to its terms and rights or is converted into or exchanged for preferred
stock of the surviving or resulting entity having preferences, rights,
dividends, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption identical to those
of such series or class of preferred stock;
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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 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 and the distribution of assets upon liquidation, dissolution and
winding up, shall not be deemed to materially and adversely affect any right,
preference, privilege or voting power of the series or class of preferred stock
or the holders thereof.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which the vote would otherwise be required shall be
effected, all outstanding shares of 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 the 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. The 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 us, the events requiring an adjustment of the conversion
price and provisions affecting conversion in the event of the redemption of the
preferred stock.
RESTRICTIONS ON OWNERSHIP
For us to qualify as a REIT under the Code, 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 to include certain entities) during
the last half of a taxable year. To assist us in meeting this requirement and
certain other requirements relating to our tax status as a REIT, we may take
certain actions to limit the actual, beneficial or constructive ownership by a
single person or entity of our 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
INTERNAL REVENUE CODE REQUIREMENTS
To maintain our REIT status under the 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 Code to include certain entities) during
the last half of a taxable year. In addition, if we, or an owner of 10% or more
of us, actually or constructively owns 10% or more of a tenant of ours (or a
tenant of any partnership in which we are a partner), the rent received by us
(either directly or through any such partnership) from that 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 proportionate part
of a shorter taxable year.
TRANSFER RESTRICTIONS IN CHARTER
Because we expect to continue to qualify as a REIT, our charter contains
restrictions on the ownership and transfer of common stock which are intended to
assist us in complying with applicable Code
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requirements. Our 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, appropriately referred to as 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 constructively own
more than 9.8% of our outstanding common stock and thus violate the ownership
limit, or any other limit as provided in our charter or as otherwise permitted
by our board of directors. Our 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 our status as a REIT.
As a condition of such waiver, our board of directors may require an opinion of
counsel satisfactory to it and/or undertakings or representations from the
applicant with respect to preserving our REIT status.
Our charter further prohibits (i) any person from actually or constructively
owning shares of our common stock that would result in our being "closely held"
under Section 856(h) of the Code or otherwise cause us to fail to qualify as a
REIT, and (ii) any person from transferring shares of our common stock if such
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 to acquire actual or constructive
ownership of shares of our common stock that will violate any of the foregoing
restrictions on transferability and ownership is required to give notice to us
immediately and provide us with such other information as we may request in
order to determine the effect of such transfer on our status as a REIT. The
foregoing restrictions on transferability and ownership will not apply if our
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 our charter.
Except as otherwise described above, any change in the ownership limit would
require an amendment to our charter.
EFFECT OF VIOLATION OF TRANSFER PROVISIONS
According to our 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 provided in our charter or as otherwise permitted by our
board of directors, or result in our being "closely held" under Section 856(h)
of the Code or otherwise cause us to fail to qualify as a REIT, then any such
purported transfer will be void and of no force or effect with respect to the
purported transferee, referred to as the prohibited transferee, as to that
number of shares in excess of the ownership limit or such other limit, and the
prohibited 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 such excess shares, the prohibited owner, shall cease to own any right or
interest) 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 us as 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 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 prohibited transferee or prohibited owner) will be
required to sell such excess shares to a person or entity who could own the
shares without violating the ownership limit, or any other limit as provided in
our charter or as otherwise permitted by our 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.
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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 (described in our 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 us 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 us 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 we have already taken irreversible corporate action,
then the trustee shall not have the authority to rescind and recast that vote.
Any dividend or other distribution paid to the prohibited transferee or
prohibited owner (prior to the discovery by us 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 any
other limit as provided in our charter or as otherwise permitted by our board of
directors, then our charter provides that the transfer of the excess shares will
be void.
In addition, shares of our 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 (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, the market price at
the time of such devise or gift) and (ii) the market price on the date we, or
our designee, accepts such offer. We 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 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 prohibited
transferee or prohibited owner.
If any purported transfer of shares of common stock would cause us 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 our 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 Realty Income that might involve a premium price for the common stock or
otherwise be in the best interest of stockholders.
COMPLIANCE WITH TREASURY REGULATIONS
As set forth in the Treasury Regulations, every owner of a specified
percentage (or more) of the outstanding shares of our common stock must file a
completed questionnaire with us containing information regarding their ownership
of such shares. Under current Treasury Regulations, the percentage will be set
between 0.5% and 5.0%, depending upon the number of record holders of our shares
of common stock. Under our charter, each stockholder shall upon demand be
required to disclose to us in writing such information as we may request in
order to determine the effect, if any, of such stockholder's actual and
constructive ownership of common stock on our status as a REIT and to ensure
compliance with the ownership limit, or any other limit as provided in our
charter or as otherwise permitted by our board of directors.
We expect that any shares of preferred stock we issue would be subject to
restrictions similar to those described above with respect to our common stock.
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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS TO
REALTY INCOME CORPORATION
THE FOLLOWING IS A SUMMARY OF THE FEDERAL INCOME TAX CONSIDERATIONS TO US
WHICH ARE ANTICIPATED TO BE MATERIAL TO PURCHASERS OF OUR SECURITIES. THIS
SUMMARY IS BASED ON CURRENT LAW, IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX
ADVICE. THE TAX TREATMENT OF A HOLDER OF ANY OF OUR SECURITIES WILL VARY
DEPENDING UPON THE TERMS OF THE SPECIFIC SECURITIES ACQUIRED BY SUCH HOLDER, AS
WELL AS THE HOLDER'S PARTICULAR SITUATION. THIS DISCUSSION DOES NOT ATTEMPT TO
ADDRESS ANY ASPECTS OF FEDERAL INCOME TAXATION RELATING TO HOLDERS OF THE
SECURITIES. FEDERAL INCOME TAX CONSIDERATIONS RELEVANT TO HOLDERS OF THE
SECURITIES MAY BE PROVIDED IN THE APPLICABLE PROSPECTUS SUPPLEMENT RELATING
THERETO. YOU ARE URGED TO REVIEW THE APPLICABLE PROSPECTUS SUPPLEMENT IN
CONNECTION WITH THE PURCHASE OF ANY OF OUR SECURITIES.
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. 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 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
SECURITIES, 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 REALTY INCOME CORPORATION
GENERAL. We elected to be taxed as a real estate investment trust under
Sections 856 through 860 of the Internal Revenue Code, commencing with our
taxable year ended December 31, 1994. We believe we have been organized and have
operated in a manner which allows us to qualify for taxation as a real estate
investment trust under the Internal Revenue Code commencing with our taxable
year ended December 31, 1994. We intend to continue to operate in this manner.
However, no assurance can be given that we have operated or will continue to
operate in a manner so as to qualify or remain qualified as a real estate
investment trust. See "--Failure to Qualify."
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The sections of the Internal Revenue Code that relate to the qualification
and operation as a real estate investment trust are highly technical and
complex. The following describes the material aspects of these sections of the
Internal Revenue Code that govern the federal income tax treatment of a real
estate investment trust. This summary is qualified in its entirety by the
Internal Revenue Code, relevant rules and treasury regulations promulgated under
the Internal Revenue Code, and administrative and judicial interpretations of
the Internal Revenue Code, and these rules and treasury regulations.
Unless we specify otherwise in the applicable prospectus supplement, as a
condition of the closing of each offering of equity securities under this
prospectus, our tax counsel will render an opinion to the underwriters of the
offering to the effect that, commencing with our taxable year ended December 31,
1994, we have been organized and have operated in conformity with the
requirements for qualification and taxation as a real estate investment trust
under the Internal Revenue Code, and our proposed method of operation will
enable us to continue to meet the requirements for qualification and taxation as
a real estate investment trust under the Internal Revenue Code. It must be
emphasized that this opinion will be based on various assumptions and
representations made by us as to factual matters, including representations made
by us in this prospectus, the applicable prospectus supplement and a factual
certificate provided by one of our officers. Our counsel will have no obligation
to update its opinion subsequent to its date. Moreover, such qualification and
taxation as a real estate investment trust depends upon our ability to meet the
various qualification tests imposed under the Internal Revenue Code and
discussed below, relating to our actual annual operating results, asset
diversification, distribution levels and diversity of stock ownership, the
results of which have not been and will not be reviewed by our tax counsel.
Accordingly, no assurance can be given that the actual results of our operation
for any particular taxable year will satisfy such requirements. See "--Failure
to Qualify."
If we qualify for taxation as a real estate investment trust, we generally
will not be required to pay federal corporate income taxes on our net income
that is currently distributed to our stockholders. This treatment substantially
eliminates the "double taxation" that generally results from investment in a
corporation. Double taxation means taxation once at the corporate level when
income is earned and once again at the stockholder level when such income is
distributed. We will be required to pay federal income taxes, however, as
follows:
- We will be required to pay tax at regular corporate rates on any
undistributed "real estate investment trust taxable income," including
undistributed net capital gains.
- We may be required to pay the "alternative minimum tax" on our items of
tax preference.
- If we have (a) 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 (b) other nonqualifying income from
foreclosure property, we will be required to pay tax at the highest
corporate rate on this income. Foreclosure property is generally defined
as property acquired through foreclosure or after a default on a loan
secured by the property or on a lease of the property.
- We will be required to pay a 100% tax on any net income from prohibited
transactions. Prohibited transactions are, in general, sales or other
taxable dispositions of property, other than foreclosure property, held
primarily for sale to customers in the ordinary course of business.
- If we fail to satisfy the 75% or 95% gross income test, as described
below, but have maintained our qualification as a real estate investment
trust, we will be required to pay a 100% tax on an amount equal to (a) the
gross income attributable to the greater of the amount by which we fail
the 75% or 95% gross income test multiplied by (b) a fraction intended to
reflect our profitability.
- We will be required to pay a 4% excise tax on the excess of the required
distribution over the amounts actually distributed if we fail to
distribute during each calendar year at least the sum of (a) 85% of our
ordinary income for the year, (b) 95% of our real estate investment trust
capital gain net income for the year, and (c) any undistributed taxable
income from prior periods.
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- If we acquire any asset from a corporation which is or has been a C
corporation in a transaction in which the basis of the asset in our hands
is determined by reference to the basis of the asset in the hands of the C
corporation, and we subsequently recognize gain on the disposition of the
asset during the ten-year period beginning on the date on which we
acquired the asset, then under treasury regulations not yet promulgated we
will be required to pay tax at the highest regular corporate tax rate on
this gain to the extent of the excess of (a) the fair market value of the
asset over (b) our adjusted basis in the asset, in each case determined as
of the date on which we acquired the asset. A C corporation is generally
defined as a corporation required to pay full corporate-level tax. The
results described in this paragraph with respect to the recognition of
such gain assume that we will make an election under Internal Revenue
Service Notice 88-19 and that the availability or nature of such election
is not modified as proposed in President Clinton's Year 2000 Federal
Budget Proposal.
REQUIREMENTS FOR QUALIFICATION AS A REAL ESTATE INVESTMENT TRUST. The
Internal Revenue Code defines a real estate investment trust as a corporation,
trust or association:
1. that is managed by one or more trustees or directors;
2. that issues transferable shares or transferable certificates to evidence
beneficial ownership;
3. that would be taxable as a domestic corporation, but for Sections 856
through 860 of the Internal Revenue Code;
4. that is not a financial institution or an insurance company within the
meaning of the Internal Revenue Code;
5. that is beneficially owned by 100 or more persons;
6. not more than 50% in value of the outstanding stock of which is owned,
actually or constructively, by five or fewer individuals, including
specified entities, during the last half of each taxable year; and
7. that meets other tests, described below, regarding the nature of its income
and assets and the amount of its distributions.
The Internal Revenue Code provides that conditions 1 to 4, inclusive, 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 twelve months, or during a proportionate
part of a taxable year of less than twelve months. Conditions 5 and 6 do not
apply until after the first taxable year for which an election is made to be
taxed as a real estate investment trust. For purposes of condition 6, specified
tax-exempt entities, including pension funds, generally are treated as
individuals, except a "look-through" exception applies with respect to pension
funds.
We believe that we have satisfied conditions 1 through 7 inclusive. In
addition, our charter provides for restrictions regarding the ownership and
transfer of our shares. These restrictions are intended to assist us in
continuing to satisfy the share ownership requirements described in 5 and 6
above. These stock ownership and transfer restrictions are described in
"Restrictions on Ownership and Transfer of Capital Stock." These restrictions,
however, may not ensure that we will, in all cases, be able to satisfy the share
ownership requirements described in 5 and 6 above. If we fail to satisfy these
share ownership requirements, our status as a real estate investment trust will
terminate. If, however, we comply with the rules contained in the treasury
regulations that require us to ascertain the actual ownership of our shares and
we do not know, or would not have known through the exercise of reasonable
diligence, that we failed to meet the requirement described in condition 6
above, we will be treated as having met this requirement. See "--Failure to
Qualify."
In addition, a corporation may not elect to become a real estate investment
trust unless its taxable year is the calendar year. We have and will continue to
have a calendar taxable year.
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OWNERSHIP OF A PARTNERSHIP INTEREST. We own an interest in a partnership
and may acquire interests in one or more new partnerships or limited liability
companies. Income tax regulations provide that if we are a partner in a
partnership or member of a limited liability company, we will be deemed to own
our proportionate share of the assets of the partnership or limited liability
company. Also, we will be deemed to be entitled to our proportionate share of
the income of the partnership or limited liability company, as the case may be.
The character of the assets and gross income of the partnership or limited
liability company, as the case may be, retains the same character in our hands
for purposes of Section 856 of the Internal Revenue Code, including satisfying
the gross income tests and the asset tests. Thus, our proportionate share of the
assets, liabilities and items of income of the partnership in which we own an
interest are treated as our assets, liabilities and items of income for purposes
of applying the requirements described in this prospectus, including the income
and asset tests described below. We have included a brief summary of the rules
governing the federal income taxation of the partnerships and their partners
below in "--Tax Aspects of the Partnerships."
QUALIFIED REAL ESTATE INVESTMENT TRUST SUBSIDIARIES. We own a number of
properties through wholly owned subsidiaries that we believe will be treated as
"qualified REIT subsidiaries" under Internal Revenue Code Section 856(i). A
qualified rust REIT subsidiary will not be treated as a separate corporation,
and all assets, liabilities, and items of income, deduction, and credit of a
qualified REIT subsidiary shall be treated as assets, liabilities and such
items, as the case may be, of the real estate investment trust. Thus, in
applying the requirements described in this prospectus, our qualified REIT
subsidiaries will be ignored, and all assets, liabilities and items of income,
deduction and credit of such subsidiaries will be treated as our assets,
liabilities and such items. A qualified REIT subsidiary will not be subject to
federal income tax, and our ownership of the voting stock of a qualified REIT
subsidiary will not violate the restrictions against ownership of securities of
any one issuer which constitutes more than 10% of such issuer's voting
securities or more than 5% of the value of our total assets.
INCOME TESTS. We must satisfy two gross income requirements annually to
maintain our qualification as a real estate investment trust.
- First, each taxable year we must derive directly or indirectly at least
75% of our gross income, excluding gross income from prohibited
transactions, from (a) investments relating to real property or mortgages
on real property, including "rents from real property" and, in some
circumstances, interest, or (b) specified types of temporary investments.
- Second, each taxable year we must derive at least 95% of our gross income,
excluding gross income from prohibited transactions, from (a) the real
property investments described above, (b) dividends, interest and gain
from the sale or disposition of stock or securities, or (c) any
combination of the foregoing.
For these purposes, the term "interest" generally does not include any
amount received or accrued, directly or indirectly, if the termination of all or
some of the amount depends in any way on the income or profits of any person. An
amount received or accrued generally will not be excluded from the term
"interest," however, solely by reason of being based on a fixed percentage or
percentages of receipts or sales.
Rents we receive will qualify as "rents from real property" in satisfying
the gross income requirements for a real estate investment trust described above
only if the following conditions are met:
- the amount of rent must not be based in any way on the income or profits
of any person. An amount received or accrued generally will not be
excluded from the term "rents from real property," however, solely by
reason of being based on a fixed percentage or percentages of receipts or
sales;
- the Internal Revenue Code provides that rents received from a tenant will
not qualify as "rents from real property" in satisfying the gross income
tests if we, or an actual or constructive owner of
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10% or more of our capital stock, actually or constructively owns 10% or
more of the interests in such tenant;
- 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 personal
property will not qualify as "rents from real property"; and
- for rents received to qualify as "rents from real property," we generally
must not operate or manage the property or furnish or render services to
the tenants of the property, subject to a 1% de minimis exception, other
than through an independent contractor from whom we derive no revenue. We
may, however, directly perform 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.
Examples of such services include the provision of light, heat, or other
utilities, trash removal and general maintenance of common areas.
We do not intend to receive rent which fails to qualify as "rents from real
property." However, we may have failed to satisfy, and may continue to fail to
satisfy, some of the conditions described above to the extent these failures
will not, based on the advice of our tax counsel, jeopardize our status as a
real estate investment trust.
If we fail to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, we may nevertheless qualify as a real estate investment trust
for the year if we are entitled to relief under the Internal Revenue Code.
Generally, we may avail ourselves of the relief provisions if:
- our failure to meet these tests was due to reasonable cause and not due to
willful neglect;
- we attach a schedule of the sources of our income to our 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 we would
be entitled to the benefit of these relief provisions. For example, if we fail
to satisfy the gross income tests because nonqualifying income that we
intentionally accrue or receive exceeds the limits on nonqualifying income, the
Internal Revenue Service could conclude that our failure to satisfy the tests
was not due to reasonable cause. If these relief provisions do not apply to a
particular set of circumstances, we will not qualify as a real estate investment
trust. As discussed above in "--Taxation of Realty Income Corporation--General,"
even if these relief provisions apply, and we retain our status as a real estate
investment trust, a tax would be imposed with respect to our nonqualifying
income. We may not always be able to maintain compliance with the gross income
tests for real estate investment trust qualification despite our periodic
monitoring of our income.
PROHIBITED TRANSACTION INCOME. Any gain realized by us on the sale of any
property held as inventory or other property held primarily for sale to
customers in the ordinary course of business will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. Our gain includes
our share of any such gain realized by any partnerships or limited liability
companies in which we own an interest or by our qualified REIT subsidiaries.
This prohibited transaction income may also adversely affect our ability to
satisfy the income tests for qualification as a real estate investment trust.
Under existing law, whether property is held as inventory or primarily for sale
to customers in the ordinary course of a trade or business depends on all the
facts and circumstances surrounding the particular transaction. We intend to
hold our properties for investment with a view to long-term appreciation, to
engage in the business of acquiring, developing and owning our properties and
other properties. We intend to make occasional sales of our properties as are
consistent with our investment objectives. The Internal Revenue Service may
contend, however, that one or more of these sales is subject to the 100% penalty
tax.
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ASSET TESTS. At the close of each quarter of our taxable year, we also must
satisfy three tests relating to the nature and diversification of our assets:
- First, at least 75% of the value of our total assets, including assets
held by our qualified REIT subsidiaries and our allocable share of the
assets held by any partnerships and limited liability companies in which
we own an interest, must be represented by real estate assets, cash, cash
items and government securities. For purposes of this test, real estate
assets include stock or debt instruments that are purchased with the
proceeds of a stock offering or a public debt offering with a term of at
least five years, but only for the one year period beginning on the date
we received such proceeds.
- Second, not more than 25% of our total assets may be represented by
securities, other than those securities includable in the 75% asset test.
- Third, of the investments included in the 25% asset class, the value of
any one issuer's securities may not exceed 5% of the value of our total
assets and we may not own more than 10% of any one issuer's outstanding
voting securities.
After initially meeting the asset tests at the close of any quarter, we will
not lose our status as a real estate investment trust for failure to satisfy the
asset tests at the end of a later quarter solely by reason of changes in asset
values. If we fail to satisfy the asset tests because we acquire securities or
other property during a quarter, we can cure this failure by disposing of
sufficient nonqualifying assets within 30 days after the close of that quarter.
For this purpose, an increase in our interests in a partnership or limited
liability company will be treated as an acquisition of a portion of the
securities or other property owned by the partnership or limited liability
company. We believe we have maintained and intend to continue to maintain
adequate records of the value of our assets to ensure compliance with the asset
tests. In addition, we intend to take such other actions within the 30 days
after the close of any quarter as may be required to cure any noncompliance. If
we fail to cure noncompliance with the asset tests within this time period, we
would cease to qualify as a real estate investment trust.
ANNUAL DISTRIBUTION REQUIREMENTS. To maintain our qualification as a real
estate investment trust, we are required to distribute dividends, other than
capital gain dividends, to our stockholders in an amount at least equal to the
sum of:
- 95% of our "REIT taxable income"; and
- 95% of our after tax net income, if any, from foreclosure property; minus
- the excess of the sum of specified items of noncash income over 5% of
"REIT taxable income" as described above. Our "REIT taxable income" is
computed without regard to the dividends paid deduction and our net
capital gain. For purposes of this test, non-cash income means income
attributable to leveled stepped rents, original issue discount on purchase
money debt, or a like-kind exchange that is later determined to be
taxable.
In addition, if we dispose of any asset we acquired from a corporation which
is or has been a C corporation in a transaction in which our basis in the asset
is determined by reference to the basis of the asset in the hands of the C
corporation within the ten-year period following our acquisition of such asset,
we would be required, pursuant to treasury regulations which have not yet been
promulgated, to distribute at least 95% of the after-tax gain, if any,
recognized by us on the disposition of the asset, to the extent such gain does
not exceed the excess of (a) the fair market value of the asset on the date we
acquired the asset over (b) our adjusted basis in the asset on the date we
acquired the asset.
These distributions must be paid in the taxable year to which they relate,
or in the following taxable year if they are declared before we timely file our
tax return for such year and if paid on or before the first regular dividend
payment after such declaration. The amount distributed must not be preferential.
To avoid this treatment, every shareholder of the class of stock to which a
distribution is made must be treated
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the same as every other shareholder of that class, and no class of stock may be
treated other than according to its dividend rights as a class. To the extent
that we do not distribute all of our net capital gain or distribute at least
95%, but less than 100%, of our "REIT taxable income," as adjusted, we will be
required to pay tax on this income at regular ordinary and capital gain
corporate tax rates. We believe we have made and intend to continue to make
timely distributions sufficient to satisfy these annual distribution
requirements.
We expect that our "REIT taxable income" will be less than our cash flow due
to the allowance for depreciation and other non-cash charges in computing "REIT
taxable income." Accordingly, we anticipate that we will generally have
sufficient cash or liquid assets to enable us to satisfy the distribution
requirements described above. However, it is possible that we may not have
sufficient cash or other liquid assets to meet these distribution requirements
due to timing differences between the actual receipt of income and actual
payment of deductible expenses, and the inclusion of income and deduction of
expenses in arriving at our taxable income. If these timing differences occur,
in order to meet the distribution requirements, we may need to arrange for
short-term, or possibly long-term, borrowings or need to pay dividends in the
form of taxable stock dividends.
We may be able to rectify an inadvertent failure to meet the distribution
requirement for a year by paying "deficiency dividends" to stockholders in a
later year, which may be included in our deduction for dividends paid for the
earlier year. Thus, we may be able to avoid being subject to tax on amounts
distributed as deficiency dividends. We will be required, however, to pay
interest to the Internal Revenue Service based upon the amount of any deduction
claimed for deficiency dividends.
Furthermore, we would be required to pay a 4% excise tax on the excess of
the required distribution over the amount, if any, by which our actual annual
distributions during a calendar year are less than the sum of 85% of our
ordinary income for the year, 95% of our capital gain income for the year and
any undistributed taxable income from prior periods. Distributions with
declaration and record dates falling in the last three months of the calendar
year, which are made by the end of January immediately following such year, will
be treated as made on December 31 of the prior year. Any taxable income and net
capital gain on which this excise tax is imposed for any year is treated as an
amount distributed during that year for purposes of calculating such tax.
DISTRIBUTION OF ACQUIRED EARNINGS. In addition to the above annual
distribution requirements, a real estate investment trust is not allowed to
have, at the end of any taxable year, accumulated earnings and profits
attributable to non-real estate investment trust years. In 1995, R.I.C. Advisor,
Inc., a California corporation ("R.I.C. Advisor"), merged with and into us (the
"Merger"). As a result of the Merger, we were treated as having acquired the
earnings and profits of R.I.C. Advisor. We were required to distribute such
earnings and profits prior to the close of 1995. We believe that we made, or
were deemed to make, distributions to our stockholders which were sufficient to
timely distribute such earnings and profits. However, if the Internal Revenue
Service determines that we did not distribute all of such earnings and profits
prior to the end of 1995, we would fail to qualify as a real estate investment
trust for 1995 and perhaps for subsequent years. See "--Failure to Qualify."
TAX ASPECTS OF THE PARTNERSHIPS. In general, partnerships and limited
liability companies which are taxed as partnerships are "pass-through" entities
which are not required to pay federal income tax. Rather, partners or members
are allocated their proportionate shares of the items of income, gain, loss,
deduction and credit of a partnership or limited liability company, as the case
may be. Partners or members are potentially required to pay tax on such income,
without regard to whether the partners or members receive a distribution from
the partnership or limited liability company. If the partnership or limited
liability company was treated as an association taxable as a corporation for
federal income tax purposes, the partnership or limited liability company would
be treated as a taxable entity and, depending upon or our interests in the
partnership or limited liability company, this could jeopardize our ability to
qualify as a real estate investment trust. See "--Failure to Qualify" below for
a discussion of the effect of our failure to
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meet such tests for a taxable year. We believe that the partnership in which we
own an interest will be treated for federal income tax purposes as a
partnership, rather than an association taxable as a corporation. No assurance
can be given that the Internal Revenue Service will not successfully challenge
the federal income tax status as a partnership of any partnership or limited
liability company in which we own an interest.
FAILURE TO QUALIFY. If we fail to qualify for taxation as a real estate
investment trust in any taxable year, and the relief provisions of the Internal
Revenue Code do not apply, we will be required to pay tax, including any
alternative minimum tax and possibly increased state and local taxes, on our
taxable income at regular corporate rates. Distributions to stockholders in any
year in which we fail to qualify as a real estate investment trust will not be
deductible by us and we will not be required to distribute any amounts to our
stockholders. As a result, we anticipate that our failure to qualify as a real
estate investment trust would reduce the cash available for distribution by us
to our stockholders. In addition, if we fail to qualify as a real estate
investment trust, stockholders will be required to pay tax on all distributions
to them at ordinary income rates to the extent of our current and accumulated
earnings and profits. In this event, corporate distributees may be eligible for
the dividends received deduction. Unless entitled to relief under specific
statutory provisions, we will also be disqualified from taxation as a real
estate investment trust for the four taxable years following the year during
which we lost our qualification. It is not possible to state whether in all
circumstances we would be entitled to this statutory relief. In addition,
President Clinton's Year 2000 Federal Budget Proposal contains a provision
which, if enacted in its present form, 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 impose a substantial tax
upon our reelection to be taxed as a real estate investment trust.
OTHER TAX CONSEQUENCES. We may be required to pay state or local taxes in
various state or local jurisdictions, including those in which we transact
business. Our 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.
PLAN OF DISTRIBUTION
We 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. We also may, from time to time, authorize
underwriters acting as our 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 us 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
us 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 us will be described, in the applicable prospectus
supplement.
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Underwriters, dealers and agents may be entitled, under agreements entered
into with us, 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 us and our
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. Our 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. We may elect to list any series of debt
securities or preferred stock on an exchange or NASDAQ, but are 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.
If so indicated in any Prospectus Supplement, the Company will authorize
agents and underwriters or dealers to solicit offers by certain purchasers to
purchase Securities from the Company at the public offering price set forth in
the prospectus supplement pursuant to delayed delivery contracts providing for
payment and delivery on a specified date in the future. Such contracts will be
subject to only those conditions set forth in the applicable prospectus
supplement, and such prospectus supplement will set forth the commission payable
for solicitation of such offers.
EXPERTS
The consolidated financial statements and financial statement schedule of
Realty Income Corporation and Subsidiaries as of December 31, 1998 and 1997 and
for each of the years in the three-year period ended December 31, 1998 included
in Realty Income Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 and incorporated by reference herein have been audited
by KPMG LLP, independent certified public accountants, and have been
incorporated herein by reference in reliance upon the reports of KPMG 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 us by Ballard Spahr
Andrews & Ingersoll, LLP and Latham & Watkins.
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.
The registration statement on Form S-3, of which this prospectus is a part,
summarizes some of the material provisions of contracts and other documents that
we refer you to. Since this 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 and schedules to our
registration statement and the reports, proxy statements and other information
filed by us with the SEC.
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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;
- 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.
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, 1998;
- Quarterly Report on Form 10-Q for the quarter ended March 31, 1999;
- Current Report on Form 8-K dated January 22, 1999;
- Current Report on Form 8-K dated May 24, 1999;
- Information relating to executive compensation in our Definitive Proxy
Statement on Schedule 14A dated March 30, 1999;
- The description of our common stock contained in our Registration
Statement on Form 8-A (file no. 001-13374), including any subsequently
filed amendments and reports filed for the purpose of updating the
description;
- The description of our 9 3/8% Class B Cumulative Redeemable Preferred
Stock contained in our Registration Statement on Form 8-A (file no.
001-13374), including any subsequently filed amendments and reports filed
for the purpose of updating the description;
- The description of our 8 1/4% Monthly Income Senior Notes contained in our
Registration Statement on Form 8-A (File no. 001-13374) including any
subsequently filed amendments and reports filed for the purpose of
updating the description; and
- The description of our Class A Junior Participating Preferred Stock
contained in our Registration Statement on Form 8-A (File No. 001-13374)
including any subsequently filed amendments and reports filed for the
purpose of updating the description.
We also incorporate by reference the documents listed below that we file
with the SEC after the date of this prospectus but before any 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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1,200,000 SHARES
[LOGO]
9 1/2% CLASS C CUMULATIVE REDEEMABLE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
EVEREN SECURITIES, INC.
FIRST UNION CAPITAL MARKETS CORP.
PAINEWEBBER INCORPORATED
SALOMON SMITH BARNEY
SUTRO & CO. INCORPORATED
JULY 27, 1999
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