UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
=========
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2000, or
==================
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
COMMISSION FILE NUMBER 1-13318
==============================
REALTY INCOME CORPORATION
=========================
(Exact name of registrant as specified in its charter)
MARYLAND
========
(State or other jurisdiction of incorporation or organization)
33-0580106
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(I.R.S. Employer Identification No.)
220 WEST CREST STREET, ESCONDIDO, CALIFORNIA 92025
===================================================
(Address of principal executive offices)
(760) 741-2111
==============
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
There were 26,563,519 shares of common stock outstanding as of
November 10, 2000.
REALTY INCOME CORPORATION
Form 10-Q
September 30, 2000
Table of Contents
-----------------
<TABLE>
PART I. FINANCIAL INFORMATION Page
============================== ----
<S> <C> <C>
Item 1: Financial Statements
Consolidated Balance Sheets........................ 3
Consolidated Statements of Income.................. 5
Consolidated Statements of Cash Flows.............. 6
Notes to Consolidated Financial Statements......... 8
Item 2: Management's Discussion and Analysis Of
Financial Condition and Results Of Operations...... 14
Item 3: Quantitative and Qualitative Disclosures About
Market Risk........................................ 36
PART II. OTHER INFORMATION
==========================
Item 6: Exhibits and Reports on Form 8-K................... 37
SIGNATURE................................................... 39
EXHIBIT INDEX............................................... 39
</TABLE>
Page 2
PART I. FINANCIAL INFORMATION
==============================
ITEM 1. FINANCIAL STATEMENTS
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
===========================
As of September 30, 2000 and December 31, 1999
(dollars in thousands, except per share data)
<TABLE>
2000 1999
(Unaudited)
=========== =========
<S> <C> <C>
ASSETS
Real estate, at cost:
Land $ 363,587 $ 338,489
Buildings and improvements 692,122 678,763
--------- ---------
1,055,709 1,017,252
Less accumulated depreciation
and amortization (196,407) (179,421)
--------- ---------
Net real estate held for investment 859,302 837,831
Real estate held for sale, net 52,718 29,262
--------- ---------
Net real estate 912,020 867,093
Cash and cash equivalents 5,297 773
Accounts receivable 3,558 3,407
Goodwill, net 18,360 19,053
Other assets 13,794 15,078
--------- ---------
Total assets $ 953,029 $ 905,404
========= =========
Continued on next page
Page 3
<PAGE>
(continued)
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
===========================
As of September 30, 2000 and December 31, 1999
(dollars in thousands, except per share data)
2000 1999
(Unaudited)
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Distributions payable $ 6,770 $ 4,828
Accounts payable and accrued expenses 8,194 12,792
Other liabilities 4,883 3,753
Lines of credit payable 186,300 119,200
Notes payable 230,000 230,000
--------- ---------
Total liabilities 436,147 370,573
--------- ---------
Stockholders' equity
Preferred stock and paid in capital,
par value $1.00 per share, 20,000,000
shares authorized, 4,125,700 and
4,140,000 shares issued and outstanding
in 2000 and 1999, respectively 99,368 99,679
Common stock and paid in capital,
par value $1.00 per share, 100,000,000
shares authorized, 26,601,419 and
26,822,164 shares issued and outstanding
in 2000 and 1999, respectively 631,802 636,611
Distributions in excess of net income (214,288) (201,459)
--------- ---------
Total stockholders' equity 516,882 534,831
--------- ---------
Total liabilities and
stockholders' equity $ 953,029 $ 905,404
========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
Page 4
<PAGE>
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
=================================
For the three and nine months ended September 30, 2000 and 1999
(dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/00 9/30/99 9/30/00 9/30/99
======== ======== ======== ========
<S> <C> <C> <C> <C>
REVENUE
Rental $ 29,180 $ 26,870 $ 85,859 $ 75,682
Gain on sale of
real estate held
for resale 558 -- 558 --
Interest and other 147 30 264 106
-------- -------- -------- --------
29,885 26,900 86,681 75,788
-------- -------- -------- --------
EXPENSES
Interest 8,184 6,100 22,813 18,025
Depreciation and
amortization 6,913 6,660 20,505 18,987
General and
administrative 1,863 1,754 5,358 5,155
Property 536 478 1,517 1,356
Other 269 -- 193 --
-------- -------- -------- --------
17,765 14,992 50,386 43,523
-------- -------- -------- --------
Income from operations 12,120 11,908 36,295 32,265
Gain on sales of in-
vestment properties 231 1,236 1,831 1,236
-------- -------- -------- --------
Net income 12,351 13,144 38,126 33,501
Preferred stock
dividends (2,428) (2,163) (7,284) (2,792)
-------- -------- -------- --------
Net income available
to common
stockholders $ 9,923 $ 10,981 $ 30,842 $ 30,709
======== ======== ======== ========
Basic and diluted
net income per
common share $ 0.37 $ 0.41 $ 1.15 $ 1.14
======== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
Page 5
<PAGE>
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
=====================================
For the nine months ended September 30, 2000 and 1999
(dollars in thousands)
(Unaudited)
<TABLE>
2000 1999
========= =========
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 38,126 $ 33,501
Adjustments to net income:
Depreciation and amortization 20,505 18,987
Acquisition of real estate
held for resale (26,349) --
Proceeds from sale of real estate
held for resale 3,508 --
Gain on sale of real estate
held for resale (558) --
Gain on sales of investment properties (1,831) (1,236)
Change in assets and liabilities:
Accounts receivable and
other assets 1,732 2,120
Accounts payable, accrued
expenses and other liabilities 5,010 2,501
--------- ---------
Net cash provided by
operating activities 40,143 55,873
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of
investment properties 5,768 7,910
Acquisition of and additions
to real estate (53,576) (154,150)
Increase in other assets (450) --
Payment of other liabilities -- (1,713)
--------- ---------
Net cash used in
investing activities (48,258) (147,953)
--------- ---------
Continued on next page
Page 6
(continued)
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
=====================================
For the nine months ended September 30, 2000 and 1999
(dollars in thousands)
(Unaudited)
2000 1999
========= =========
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from lines of credit 130,400 184,500
Payments under lines of credit (63,300) (166,800)
Distributions to common
stockholders (43,612) (41,642)
Distributions to preferred
stockholders (5,402) (2,792)
Proceeds from stock offerings,
net of offering costs of $3,821 in
1999 and $35 in 2000 (35) 99,679
Purchase of common stock (5,352) --
Purchase of preferred stock (276) --
Proceeds from other stock issuances 216 --
Proceeds from notes issued, net of
costs of $501 -- 19,499
--------- ---------
Net cash provided by
financing activities 12,639 92,444
--------- ---------
Net increase in cash and
cash equivalents 4,524 364
Cash and cash equivalents,
beginning of period 773 2,533
--------- ---------
Cash and cash equivalents,
end of period $ 5,297 $ 2,897
========= =========
</TABLE>
For supplemental disclosures, see note 9.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
Page 7
<PAGE>
REALTY INCOME CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
==========================================
September 30, 2000
(Unaudited)
1. Management Statement
The consolidated financial statements of Realty Income Corporation
("Realty Income", the "Company", "we" or "our") were prepared from our
books and records without audit and include all adjustments
(consisting of only normal recurring accruals) necessary to present a
fair statement of results for the interim periods presented. Readers
of this quarterly report should refer to our audited financial
statements for the year ended December 31, 1999, which are included in
our 1999 Annual Report on Form 10-K, as certain disclosures which
would substantially duplicate those contained in such audited
financial statements have been omitted from this report.
2. Property Acquisitions
During the first nine months of 2000, we invested $44.8 million in 11
new retail properties and properties under development. These 11
properties are located in nine states and will contain approximately
530,000 leasable square feet and are 100% leased, with an average
initial lease term of 18.2 years. We also exchanged two properties
with one of our tenants for two other properties owned by that tenant
(see note 9A).
During the first nine months of 2000, Crest Net Lease, a subsidiary of
Realty Income, invested $26.3 million in eight new retail properties.
One of these properties has been sold and seven properties are held
for sale.
During the first nine months of 1999, we invested $157.5 million in
104 new retail properties and properties under development. These 104
properties are located in 24 states and contain approximately 866,600
leasable square feet and are 100% leased, with an average initial
lease term of 17.6 years.
3. Investment in Subsidiary
In January 2000, we formed Crest Net Lease, Inc., of which we own 95%
of the common stock, all of which is non-voting, and certain members
of management own 5% of the common stock, all of which is voting
stock. Crest Net Lease was created to actively buy and sell
properties, primarily to buyers using tax-deferred exchanges, under
Section 1031 of the Internal Revenue Code of 1986, as amended.
The financial statements of Crest Net Lease have been consolidated.
All intercompany transactions have been eliminated in consolidation.
Page 8
<PAGE>
4. Distributions Paid and Payable
A. Realty Income pays distributions monthly to our common
stockholders. The following is a summary of the monthly cash
distributions per common share for the nine months ended September 30,
2000 and 1999. As of September 30, 2000, a distribution of $0.18375
per common share was declared (and was paid on October 16, 2000).
<TABLE>
Month 2000 1999
-------- -------- --------
<S> <C> <C>
January $ 0.18000 $ 0.1700
February 0.18000 0.1700
March 0.18000 0.1700
April 0.18125 0.1725
May 0.18125 0.1725
June 0.18125 0.1725
July 0.18250 0.1750
August 0.18250 0.1750
September 0.18250 0.1750
--------- -------- --------
Total $ 1.63125 $ 1.5525
======== ======== ========
</TABLE>
B. In May 1999, we issued 9 3/8% Class B preferred stock. During the
first nine months of 2000, we paid three quarterly distributions of
$0.5859 per share to our 9 3/8% Class B preferred stockholders. The
September 2000 distribution was paid on October 2, 2000. During the
second and third quarter of 1999, we paid quarterly distribution of
$0.2279 and $0.5859 per share, respectively, to these stockholders.
C. In July 1999, we issued 9 1/2% Class C preferred stock. During the
first nine months of 2000, we paid nine monthly distributions of
$0.1979 per share to our 9 1/2% Class C preferred stockholders. The
September 2000 distribution was paid on October 2, 2000. During the
third quarter of 1999, we paid two monthly distribution of $0.1979 per
share to these stockholders.
5. Gain on Sale of Real Estate Held for Resale
For the three and nine months ended September 30, 2000, we recognized
a gain of $558,000 on the sale of real estate by our subsidiary Crest
Net Lease.
6. Gain on Sales of Investment Properties
For the nine months ended September 30, 2000, we sold nine properties
for $5.8 million and recognized a gain of $1.8 million. For the three
and nine months ended September 30, 1999, we sold one property for
$7.9 million and recognized a gain of $1.2 million.
Page 9
6. Gain on Sales of Investment Properties (continued)
For the three months ended September 30, 2000, we sold three
properties for $2.2 million and recognized a gain of $231,000.
7. Net Income per Share
Basic net income per common share is computed by dividing net income
available to common stockholders by the weighted average number of
common shares outstanding during each period. Diluted net income per
common share is computed by dividing the amount of net income
available to common stockholders for the period by the number of
common shares that would have been outstanding assuming the issuance
of common shares for all potentially dilutive common shares
outstanding during the reporting period.
The following is a reconciliation of the denominator of the basic net
income per common share computation to the denominator of the diluted
net income per common share computation, for the three and nine months
ended September 30, 2000 and 1999:
<TABLE>
Three Months Ended
9/30/00 9/30/99
---------- ----------
<S> <C> <C>
Weighted average shares used for
the basic net income
per share computation 26,649,315 26,822,244
Incremental shares from the assumed
exercise of stock options 22,158 5,047
---------- ----------
Adjusted weighted average shares
used for diluted net income
per share computation 26,671,473 26,827,291
=========== ==========
Nine Months Ended
9/30/00 9/30/99
---------- ----------
Weighted average shares used for
the basic net income
per share computation 26,722,408 26,822,323
Incremental shares from the assumed
exercise of stock options 13,752 4,082
---------- ----------
Adjusted weighted average shares
used for diluted net income
per share computation 26,736,160 26,826,405
========== ==========
</TABLE>
Page 10
7. Net Income per Share (continued)
For the three months ended September 30, 2000 and 1999, stock options
of 436,352 and 168,047, respectively, were anti-dilutive and have been
excluded from the incremental shares from the assumed conversion of
stock options.
For the nine months ended September 30, 2000 and 1999, stock options
of 447,552 and 168,047, respectively, were anti-dilutive and have been
excluded from the incremental shares from the assumed conversion of
stock options.
8. Purchases of Realty Income Securities
In January 2000, our Board of Directors authorized the purchase of up
to $10 million of our outstanding common and preferred shares and
senior debt securities during the next 12 months. During the first
nine months of 2000, we purchased 246,600 shares of our common stock
at an average price of $21.70 and 14,300 shares of our Class B
preferred stock at an average price of $19.27, for a total investment
of $5.6 million.
9. Supplemental Disclosure of Cash Flow Information
Interest paid during the first nine months of 2000 and 1999 was $19.0
million and $14.6 million, respectively.
In the first nine months of 2000 and 1999, interest of $991,000 and
$1.2 million, respectively, was capitalized to properties under
development. For the three months ended September 30, 2000 and 1999,
interest of $267,000 and $544,000, respectively, was so capitalized.
The following non-cash investing and financing activities are included
in the accompanying consolidated financial statements:
A. In September 2000, we exchanged two properties leased by one of
our tenants for two other properties owned by that tenant. The
properties relinquished resulted in the following non-cash changes (in
thousands):
Land $( 5,964)
Building $(17,336)
Accumulated depreciation $ 645
The properties received in the exchange resulted in the following non-
cash changes (in thousands):
Land $ 3,933
Building $ 18,722
Page 11
9. Supplemental Disclosure of Cash Flow Information (continued)
B. In the first nine months of 1999, the investment in properties
resulted in an increase in buildings and other liabilities of $3.7
million.
10. Segment Information
We evaluate performance and make resource allocation decisions on a
property by property basis. For financial reporting purposes, we have
grouped our tenants into 12 reportable segments based upon the
business the tenants are in. All of the properties have been acquired
separately and are incorporated into one of the applicable segments.
Revenue is the only component of segment profit and loss we measure.
Since our revenue is primarily from net leases, expenditures for
additions to long-lived assets were to acquire additional properties.
The following tables set forth certain information regarding the
properties owned by us, classified according to the business of the
respective tenants as of September 30, 2000 (dollars in thousands):
<TABLE>
Three Months Ended Nine Months Ended
Revenue for the: 9/30/00 9/30/99 9/30/00 9/30/99
------- ------- ------- -------
<S> <C> <C> <C> <C>
Segment rental revenue:
Apparel $ 700 $ 700 $ 2,100 $ 2,100
Automotive parts 2,343 2,243 7,115 6,436
Automotive service 1,684 1,770 5,059 5,137
Child care 7,018 6,513 20,795 18,915
Consumer electronics 1,405 1,447 4,309 4,345
Convenience stores 2,292 2,232 7,217 5,118
Health and fitness 807 111 1,851 332
Home furnishings 1,751 1,725 4,895 5,161
Home improvement 375 915 2,019 2,537
Restaurants 3,556 3,411 10,562 10,249
Theaters 670 229 1,873 229
Video rental 1,128 1,128 3,386 3,315
Other non-reportable
segments 5,451 4,446 14,678 11,808
Reconciling items 705 30 822 106
------- ------- ------- -------
Total revenue $29,885 $26,900 $86,681 $75,788
======= ======= ======= =======
</TABLE>
Page 12
10. Segment Information (continued)
<TABLE>
Assets
----------------------------
September 30, December 31,
As of: 2000 1999
------------- ------------
<S> <C> <C>
Segment net real estate:
Apparel $ 24,408 $ 24,989
Automotive parts 75,571 75,149
Automotive service 47,784 50,499
Child care 151,907 156,617
Consumer electronics 48,927 49,966
Convenience stores 82,139 83,227
Health and fitness 33,931 26,079
Home furnishings 67,506 64,408
Home improvement 35,844 36,631
Restaurants 83,729 86,903
Theaters 48,184 22,428
Video rental 39,889 40,712
Other non-reportable segments 172,201 149,485
------- -------
Total segment net real estate 912,020 867,093
Reconciling items 41,009 38,311
-------- --------
Total assets $953,029 $905,404
======== ========
</TABLE>
Page 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
--------------------------
This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. When used in this quarterly report, the
words estimated, anticipated and similar expressions are intended to
identify forward-looking statements. 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
- Profitability of our subsidiary, Crest Net Lease.
Future events and actual results, financial and otherwise, may differ
materially from the results discussed in the forward-looking
statements. In particular, some of the factors that could cause
actual results to differ materially are:
- Our continued qualification as a real estate investment trust;
- General business and economic conditions;
- Competition;
- Interest rates;
- Accessibility of debt and equity capital markets;
- Other risks inherent in the real estate business including
tenant defaults, potential liability relating to environmental
matters; and
- Illiquidity of real estate investments.
Additional factors that may cause risks and uncertainties include
those discussed in the sections entitled "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999.
Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date that this quarterly report
was filed with the Securities and Exchange Commission. We undertake
no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date of this quarterly report or to reflect
the occurrence of unanticipated events. In light of these risks and
uncertainties, the forward-looking events discussed in this quarterly
report might not occur.
Page 14
<PAGE>
GENERAL
-------
Realty Income Corporation, a Maryland corporation ("Realty Income",
the "Company", "our" or "we") was organized to operate as an equity
real estate investment trust ("REIT"). We are a fully integrated,
self-administered real estate company with in-house acquisition,
leasing, legal, retail and real estate research, portfolio management
and capital markets expertise. As of September 30, 2000, we owned a
diversified portfolio of 1,078 retail properties located in 46 states
with over 9.1 million square feet of leasable space. Of the 1,078
properties in the portfolio, 1,072 are single-tenant retail properties
with the remainder being multi-tenant properties. As of September 30,
2000, 1,043, or 97.3%, of the 1,072 single-tenant properties were
leased with an average remaining lease term (excluding extension
options) of approximately 8.1 years. In addition, as of September 30,
2000, our subsidiary, Crest Net Lease, owned seven retail properties
located in five states with approximately 355,000 square feet of
leaseable space. These seven properties, which are held for sale, are
100% leased with an average initial lease term of 19.4 years.
Our primary business objective is to generate dependable monthly
distributions from a consistent and predictable level of funds from
operations ("FFO") per share. Additionally, we generally will seek to
increase distributions to stockholders and FFO per share through both
active portfolio management and the acquisition of additional
properties.
Our portfolio management focus includes:
- Contractual rent increases on existing leases;
- Rental increases at the termination of existing leases when
market conditions permit; and
- The active management of our property portfolio,
including selective sales of properties.
Our acquisition of additional properties adheres to a focused strategy
of acquiring primarily:
- Freestanding, single-tenant, retail properties;
- Properties leased to regional and national retail chains; and
- Properties under long-term, net lease agreements.
We typically acquire, then lease back, retail store locations from
chain store operators, providing capital to the operators for
continued expansion and other corporate purposes. Our acquisitions
and investment activities are concentrated in well-defined target
markets and focus generally on middle-market retailers providing goods
and services that satisfy basic consumer needs.
Page 15
<PAGE>
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.
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 tenant agrees to pay a minimum monthly rent and
property operating 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 tenant'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 potential for growth
in rental income.
Since 1970 and through December 31, 1999, we have acquired and leased
back to regional and national retail chains 1,054 properties
(including 36 properties that have been sold) and have 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.
RECENT DEVELOPMENTS
-------------------
ACQUISITION OF PROPERTIES DURING THE FIRST NINE MONTHS OF 2000.
During the first nine months of 2000, we acquired 11 additional
properties (the "New Properties"). During the first nine months of
2000, we invested $44.8 million in the New Properties, which includes
investments of $12.7 million for properties under development.
Estimated unfunded development costs on properties under construction
at September 30, 2000 totaled $3.4 million. During the first nine
months of 2000, we capitalized $183,000 for re-leasing costs and
$87,000 for building improvements on existing properties in our
portfolio.
The New Properties will contain approximately 529,600 leasable square
feet and are 100% leased under net leases, with an average initial
lease term of 18.2 years. Two of the New Properties are pre-leased
and under construction, pursuant to contracts under which the tenants
have agreed to develop the properties (with development costs funded
by Realty Income) and to begin paying rent when the premises open for
business.
Page 16
<PAGE>
In September 2000, we exchanged two properties leased by one of our
tenants for two other properties owned by that tenant. Both the
properties exchanged and received were valued at $22.7 million.
$25 MILLION UNSECURED REVOLVING CREDIT FACILITY. In February 2000, we
entered into a $25 million, three-year, revolving credit facility with
the Bank of Montreal, which expires in February 2003. This credit
facility has been and is expected to be used for the acquisition of
property and for making capital contributions to subsidiaries for the
purpose of acquiring properties.
INCREASE IN MONTHLY DISTRIBUTIONS TO COMMON SHAREHOLDERS. Monthly
distributions were increased in January 2000 by $0.0025 to $0.18 per
share and in April, July and October 2000 by $0.00125 to $0.18125,
$0.1825 and $0.18375 per share, respectively. The increase in October
was our 12th consecutive quarterly increase. We continue our policy
of paying distributions monthly. During the first nine months of
2000, we paid three distributions of $0.18 per share, three
distributions of $0.18125 per share and three distributions of $0.1825
per share, totaling $1.63125 per share. During the first nine months
of 1999, we paid three distributions of $0.17 per share, three
distributions of $0.1725 per share and three distributions of $0.1750
per share, totaling $1.5525 per share. In September and October 2000,
we declared distributions of $0.18375 per share, which were paid on
October 16, 2000 and payable on November 15, 2000, respectively. The
monthly distribution of $0.18375 per share represents a current
annualized distribution of $2.205 per share, and an annualized
distribution yield of approximately 9.41% based on the last reported
sale price of the Company's Common Stock on the NYSE of $23.44 on
November 6, 2000. Although we expect to continue our policy of paying
monthly distributions, there can be no assurance that the current
level of distributions will be maintained by the Company, that will we
continue our pattern of increasing distributions per share, or as to
the actual distribution yield for any future period.
STOCK AND SENIOR DEBT REPURCHASE PROGRAM. In January 2000, our Board
of Directors authorized the purchase of up to $10 million of our
outstanding common and preferred shares and senior debt securities
during the next 12 months. The purchases will be funded using
available working capital that consists primarily of cash flow from
operations. Through November 6, 2000, we purchased 284,500 shares of
our common stock at an average price of $21.87 and 14,300 shares of
our Class B preferred stock at an average price of $19.27, for a total
investment of $6.5 million.
FORMATION OF CREST NET LEASE. In January 2000, we formed Crest Net
Lease, Inc., of which we own 95% of the common stock, all of which is
non-voting, and certain members of management own 5% of the common
stock, all of which is voting stock. Crest Net Lease was created to
actively buy and sell properties, primarily to buyers using tax-
deferred exchanges, under Section 1031 of the Internal Revenue Code of
1986, as amended.
Page 17
<PAGE>
During the first nine months of 2000, we invested $8.6 million in
Crest Net Lease common stock. In February 2000, we entered into a $25
million, revolving credit facility with Crest Net Lease. As of
November 7, 2000, our outstanding loans to Crest Net Lease were $14.6
million. The financial statements of Crest Net Lease have been
consolidated into Realty Income's financial statements. All material
intercompany transactions have been eliminated in consolidation.
During the first nine months of 2000, Crest Net Lease invested $26.4
million in eight retail properties. Estimated unfunded development
costs on one property under construction at September 30, 2000 totaled
$1.6 million. These eight properties were located in six states and
contained approximately 391,500 leasable square feet and were 100%
leased, with an average initial lease term of 19.5 years.
During the third quarter of 2000, Crest Net Lease sold real estate and
we recognized a gain of $558,000. The seven properties held for sale
by Crest Net Lease at September 30, 2000 are anticipated to be sold
within six months.
The following is a summary of Crest Net Lease's balance sheet as of
September 30, 2000 (dollars in thousands):
<TABLE>
<S> <C>
Real estate held for sale $ 23,896
Other assets 3,785
--------
Total assets $ 27,681
========
Liabilities $ 18,390
Stockholders' equity 9,291
--------
Total liabilities and
stockholders' equity $ 27,681
========
</TABLE>
The following is a summary of Crest Net Lease's statement of net
income for the quarter and nine months ended September 30, 2000
(dollars in thousands):
Page 18
<PAGE>
<TABLE>
Three Nine
months months
ended ended
9/30/00 9/30/00
------- -------
<S> <C> <C>
Rent & other revenue $ 1,012 $ 1,048
Expenses 605 757
------- -------
Net income $ 407 $ 291
======= =======
</TABLE>
OTHER INFORMATION
-----------------
Realty Income's common stock is listed on the New York Stock Exchange
("NYSE") under the symbol "O", our central index key ("CIK") number is
726728 and cusip number is 756109-104.
Realty Income's 8.25% Monthly Income Senior Notes, due 2008, are
listed on the NYSE under the symbol "OUI". The cusip number of these
Monthly Income Senior Notes is 756109-203.
Realty Income's 9 3/8% Class B cumulative redeemable preferred stock
are listed on the New York Stock Exchange ("NYSE") under the symbol
"OprB". The cusip number of the Class B Preferred is 756109-302.
Realty Income's 9 1/2% Class C cumulative redeemable preferred stock
is listed on the NYSE under the symbol "OprC". The cusip number of
the Class C Preferred is 756109-500.
Realty Income has 46 employees as of November 6, 2000.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash and Cash Equivalents
Realty Income is organized for the purpose of operating as an equity
REIT which acquires and leases properties and distributes to
stockholders, in the form of monthly cash distributions, a substantial
portion of its net cash flow generated from leases on its retail
properties. We intend to retain an appropriate amount of cash as
working capital. At September 30, 2000, we had cash and cash
equivalents totaling $5.3 million.
Page 19
<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. We intend,
however, to use additional sources of capital to fund property
acquisitions and to repay our credit facilities.
Capital Funding
We have a $200 million, three-year revolving, unsecured acquisition
credit facility that expires in December 2002 and a $25 million,
three-year revolving, unsecured credit facility that expires in
February 2003. The credit facilities currently bear interest at
1.225% over the London Interbank Offered Rate, or LIBOR, and offers us
other interest rate options. As of November 6, 2000, borrowing
capacity of $40.2 million was available to us under the $200 million
credit facility and $1.4 million was available under the $25 million
credit facility. At that time, the outstanding balances on the $200
million credit facility was $159.8 million with an effective interest
rate of 7.83% and the outstanding balances on the $25 million credit
facility was $23.6 million with an effective interest rate of 7.85%.
These credit facilities have been and are expected to be used to
acquire additional retail properties leased to national and regional
retail chains under long-term lease agreements. Any additional
borrowings will increase our exposure to interest rate risk.
In June 1999, we filed a universal shelf registration statement with
the Securities and Exchange Commission covering up to $400 million in
value of common stock, preferred stock and debt securities. Through
September 30, 2000, $34.5 million in value of common stock, preferred
stock and debt securities has been issued under the universal shelf
registration statement.
We believe that our shareholders are best served by a conservative
capital structure. As of November 6, 2000, our total outstanding
credit facility borrowings and outstanding notes were $413.4 million
or approximately 36.3% of our total capitalization of $1.1 billion
(defined as shares of our common stock outstanding multiplied by the
last reported sales price of the common stock on the NYSE on
November 6, 2000 of $23.44 per share plus the liquidation value of the
Class B Preferred Stock, the Class C Preferred Stock, the outstanding
borrowings on the credit facilities and outstanding notes at
November 6, 2000).
Historically, we have met our long-term capital needs through the
issuance of common stock, preferred stock and investment grade long-
term unsecured debt. We believe that the Company should have the
majority of its future issuances of securities be in the form of
common stock. We will issue common stock when we believe that the
share price of our common stock is at a level that allows for the
proceeds of any offering to be invested on an accretive basis into
additional properties or to pay down any short-term borrowings on our
credit facilities. We do not presently view our price per share as
Page 20
<PAGE>
attractive for additional issuances of common stock and do not
anticipate issuing additional shares of common stock until we
determine the common stock price has risen to acceptable levels. In
addition, we seek to maintain a conservative debt level on our balance
sheet, which should result in conservative interest and fixed charge
coverage ratios. We do not anticipate issuing significant amounts of
additional debt until additional equity can also be issued to offset
the increase in debt. If the share price levels do not increase and
we do not issue additional equity or debt, we will reduce our level of
property acquisitions. Under these circumstances, we intend to
achieve our growth objectives by investing cash flow in excess of
distributions in additional retail properties and purchases of our
outstanding securities. In addition, we intend to strategically sell
properties that have appreciated in value and invest the proceeds in
new properties that will generate rental revenue in excess of those
generated by the properties that were sold.
We received investment grade corporate credit ratings on our senior
unsecured debt from Fitch IBCA, Duff & Phelps Rating Company, Moody's
Investor Service, Inc., and Standard & Poor's Rating Group in December
1996. Currently, Fitch IBCA, Duff & Phelps has assigned a rating of
BBB, Moody's has assigned a rating of Baa3, and Standard & Poor's has
assigned a rating of BBB- to our senior debt. These ratings could
change based upon, among other things, our results of operations and
financial condition.
We have also received credit ratings from the same rating agencies on
our preferred stock. Fitch IBCA, Duff & Phelps Rating Company has
assigned a rating of BBB-, Moody's Investor Service, Inc. has assigned
a rating of Ba1, and Standard & Poor's Rating Group has assigned a
rating of BB+. These ratings could change based upon, among other
things, our results of operations and financial condition.
Distributions
We pay monthly distributions to our common stockholders. We paid cash
distributions to our common stockholders of $43.6 million and $41.6
million during the first nine months of 2000 and 1999, respectively.
We pay distributions quarterly to our Class B Preferred stockholders.
We paid cash distributions to our Class B Preferred stockholders of
$3.2 million and $2.3 million during the first nine months of 2000 and
1999, respectively. Class B Preferred distributions of $1.6 million
payable as of September 30, 2000 were paid on October 2, 2000.
We pay distributions monthly to our Class C Preferred stockholders.
We paid cash distributions to our Class C Preferred stockholders of
$2.2 million and $546,000 during the first nine months of 2000 and
1999, respectively. Class C Preferred distributions of $273,000
payable as of September 30, 2000 were paid on October 2, 2000.
Page 21
FUNDS FROM OPERATIONS ("FFO")
-----------------------------
For the third quarter of 2000, FFO increased by $194,000 or 1.2% to
$16.6 million versus $16.4 million during the third quarter of 1999.
The following is a reconciliation of net income available to common
stockholders to FFO, and information regarding distributions paid and
diluted weighted average number of common shares outstanding for the
third quarter of 2000 and 1999 (dollars in thousands):
<TABLE>
Three months ended September 30,
--------------------------------
2000 1999
-------- --------
<S> <C> <C>
Net income available to
common stockholders $ 9,923 $ 10,981
Plus depreciation and amortization 6,913 6,660
Less:
Depreciation of furniture,
fixtures and equipment (31) (25)
Gain on sales of
investment properties (231) (1,236)
-------- --------
Total funds from operations $ 16,574 $ 16,380
======== ========
Distributions paid to
common stockholders $ 14,594 $ 14,082
FFO in excess of distributions
to common stockholders $ 1,980 $ 2,298
Diluted weighted average number
of common shares outstanding 26,671,473 26,827,291
</TABLE>
For the first nine months of 2000, FFO increased by $1.0 million or
2.1% to $49.4 million versus $48.4 million during the same period of
1999. The following is a reconciliation of net income available to
common stockholders to FFO, and information regarding distributions
paid and diluted weighted average number of common shares outstanding
for the first nine months of 2000 and 1999 (dollars in thousands):
Page 22
<TABLE>
Nine months ended September 30,
-------------------------------
2000 1999
-------- --------
<S> <C> <C>
Net income available to
common stockholders $ 30,842 $ 30,709
Plus depreciation and amortization 20,505 18,987
Less:
Depreciation of furniture,
fixtures and equipment (99) (69)
Gain on sales of
investement properties (1,831) (1,236)
-------- --------
Total funds from operations $ 49,417 $ 48,391
======== ========
Distributions paid to
common stockholders $ 43,612 $ 41,642
FFO in excess of distributions
to common stockholders $ 5,805 $ 6,749
Diluted weighted average number
of common shares outstanding 26,736,160 26,826,405
</TABLE>
We consider FFO to be an appropriate measure of the performance of an
equity REIT. Financial analysts use FFO in evaluating REITs and FFO
can be one measure of a REIT's ability to make cash distribution
payments. Presentation of this information provides the reader with
an additional measure to compare the performance of different REITs,
although it should be noted that not all REITs calculate FFO the same
way so comparisons with other REITs may not be meaningful.
We define FFO as net income available to common stockholders, plus
depreciation and amortization of assets uniquely significant to the
real estate industry, reduced by gains and increased by losses on (i)
sales of investment property and (ii) extraordinary and "unusual"
items.
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 Realty Income's performance. In addition, FFO should
not be considered an alternative to reviewing our cash flows from
operating, investing, and financing activities as a measure of
liquidity, of our ability to make cash distributions or our ability to
pay interest payments.
Page 23
<PAGE>
RESULTS OF OPERATIONS
---------------------
The following is a comparison of our results of operations for the
three and nine months ended September 30, 2000 to the three and nine
months ended September 30, 1999.
Revenue
Rental revenue was $29.2 million for the third quarter of 2000 versus
$26.9 million for the comparable quarter of 1999, an increase of 8.6%
or $2.3 million. The increase in rental revenue was primarily due to
the acquisition of 110 properties during 1999. These properties
generated revenue of $4.1 million in the third quarter of 2000
compared to $2.5 million in the third quarter of 1999, an increase of
$1.6 million. Included in rental revenue for the third quarter of
2000 is $514,000 from properties owned by Crest Net Lease that are
held for sale.
Rental revenue was $85.9 million for the first nine months of 2000
versus $75.7 million for the comparable period of 1999, an increase of
13.5% or $10.2 million. The increase in rental revenue was primarily
due to the acquisition of 110 properties during 1999. These
properties generated revenue of $11.8 million in the first nine months
of 2000 compared to $3.6 million in the first nine months of 1999, an
increase of $8.2 million. Included in rental revenue for the first
nine months of 2000 is $542,000 from properties owned by Crest Net
Lease, that are held for sale.
Of the 1,078 properties in the portfolio as of September 30, 2000,
1,072 are single-tenant properties with the remaining properties being
multi-tenant properties. Of the 1,072 single-tenant properties,
1,043, or 97.3%, were net leased with an average remaining lease term
(excluding extension options) of approximately 8.1 years. Of our
1,043 leased single-tenant properties, 1,032 or 98.9% were under
leases that provide for increases in rents through:
- Base rent increases tied to a consumer price index with
adjustment ceilings;
- Overage rent based on a percentage of the tenants' gross
sales; or
- Fixed increases.
Some leases contain more than one of these clauses. Percentage rent,
which is included in rental revenue, was $275,000 and $273,000 during
the third quarter of 2000 and 1999, respectively. Percentage rent was
$658,000 and $594,000 during the first nine months of 2000 and 1999,
respectively. Same store rents generated on 901 leased properties
owned during all of both the third quarter of 2000 and 1999 increased
by 1.8%, to $22.9 million from $22.5 million. Same store rents
generated on the same 901 leased properties owned during all of both
the first nine months of 2000 and 1999 increased by 1.2%, to $68.1
million from $67.3 million.
Page 24
Many of our leases call for rent increases every five years. Over the
past four years we have acquired approximately $596 million in new
properties that now represent approximately 53% of our total
portfolio. These properties are due to generate their initial rent
increases from 2003 to 2006. As such, we believe our same store rent
growth is likely to accelerate with the onset of rent increases from
the newer properties over the next few years.
Our portfolio of quality retail real estate owned under 10-20 year net
leases continues to perform well and provide dependable lease revenue
supporting the payment of monthly dividends. As of September 30,
2000, our property portfolio of 1,078 properties was 97.3% leased with
only 29 properties available for lease.
Of the 29 properties not leased at September 30, 2000, transactions to
lease or sell 16 properties were underway or completed. We anticipate
these transactions to be completed during the fourth quarter of 2000
or early 2001; although we cannot assure you that all of these
properties can be sold or leased within this period.
During the first half of 2000 we successfully resolved a situation
involving the vacancy of nine of our properties leased to Econo Lube
'N Tune. This situation had nominal impact on operating results
during the first and second quarters of 2000.
During the third quarter of 2000, we made progress in the re-lease of
21 properties formerly occupied by Flooring America that became vacant
during the quarter. As of November 6, 2000, transactions were
underway or completed on 12 of the 21 properties, which leaves us with
just nine properties to be re-leased or sold. The Flooring America
stores are generally in excellent retail locations that lend
themselves to a wide variety of retail uses. In addition, the rents
previously received on these properties were mainly at prevailing
market rents. We believe we will complete the re-tenanting of the
remaining nine properties during the first quarter of 2001 and will
ultimately recapture 93% of the lease revenue previously derived from
Flooring America.
During the third quarter of 2000, Crest Net Lease sold real estate and
we recognized a gain on the sale of $558,000. As of September 30,
2000, Crest Net Lease has invested $23.9 million in seven properties
held for sale. We believe that Crest Net Lease will carry an average
inventory of $25.0 million in real estate on an ongoing basis.
Page 25
Expenses
The following is a summary of the five components of interest expense
for the third quarter of 2000 and 1999 (dollars in thousands):
<TABLE>
Three months ended September 30, 2000 1999 Net Change
------- ------- ----------
<S> <C> <C> <C>
Interest on outstanding
loans and notes $ 7,864 $ 6,183 $ 1,681
Amortization of settlements
on treasury lock agreements 189 189 --
Credit facility commitment fees 128 64 64
Amortization of credit facility
origination costs and deferred
bond financing costs 269 208 61
Interest capitalized (266) (544) 278
-------- -------- --------
Interest expense $ 8,184 $ 6,100 $ 2,084
======== ======== ========
</TABLE>
Credit facility and notes outstanding (dollars in thousands)
------------------------------------------------------------
<TABLE>
Three months ended September 30, 2000 1999 Net Change
------- ------- ---------
<S> <C> <C> <C>
Average outstanding balances $395,242 $333,349 $ 61,893
Average interest rates 7.92% 7.36%
</TABLE>
Interest on outstanding loans and notes was $1.7 million higher in the
third quarter of 2000 than in 1999 primarily due to an increase of
$61.9 million in the average outstanding balances and an increase of
56 basis points in our average interest rate. During the first nine
months of 2000 LIBOR has increased, which has increased the interest
rates on our credit facilities and our cost of short-term borrowings.
It is possible that economic conditions may lead to further increases
in LIBOR.
Page 26
The following is a summary of the five components of interest expense
for the first nine months of 2000 and 1999 (dollars in thousands):
<TABLE>
Nine months ended September 30, 2000 1999 Net Change
------- ------- ----------
<S> <C> <C> <C>
Interest on outstanding
loans and notes $ 22,056 $ 17,826 $ 4,230
Amortization of settlements
on treasury lock agreements 567 567 --
Credit facility commitment fees 380 194 186
Amortization of credit facility
origination costs and deferred
bond financing costs 801 620 181
Interest capitalized (991) (1,182) 191
-------- -------- --------
Interest expense $ 22,813 $ 18,025 $ 4,788
======== ======== ========
</TABLE>
Credit facility and notes outstanding (dollars in thousands)
------------------------------------------------------------
<TABLE>
Nine months ended September 30, 2000 1999 Net Change
------- ------- ----------
<S> <C> <C> <C>
Average outstanding balances $375,379 $320,584 $ 54,795
Average interest rates 7.85% 7.43%
</TABLE>
Interest on outstanding loans and notes was $4.2 million higher during
the first nine months of 2000 than in 1999 due to an increase of $54.8
million in the average outstanding balances and an increase of 42
basis points in our average interest rate.
Our debt service coverage ratio for the nine months ended
September 30, 2000 was 3.5 times. The debt service coverage ratio is
calculated by dividing earnings before interest, taxes and
depreciation and amortization (EBITDA) by interest expense. Our
EBITDA for the nine months ended September 30, 2000 was $80.2 million.
Depreciation and amortization was $6.9 million in the third quarter of
2000 versus $6.7 million in the third quarter of 1999. Depreciation
and amortization was $20.5 million in the first nine months of 2000
versus $19.0 million in the first nine months of 1999. The increase
in 2000 was primarily due to depreciation of the 110 properties
acquired during 1999.
Page 27
General and administrative expenses increased by $109,000 to $1.9
million in the third quarter of 2000 versus $1.8 million in the third
quarter of 1999. General and administrative expenses as a percentage
of revenue decreased to 6.2% in the third quarter of 2000 as compared
to 6.5% in 1999. Included in general and administrative expenses for
2000 are $86,000 of expenses attributable to Crest Net Lease.
General and administrative expenses increased by $203,000 to $5.4
million in the first nine months of 2000 versus $5.2 million in the
first nine months of 1999. General and administrative expenses as a
percentage of revenue decreased to 6.2% in the first nine months of
2000 as compared to 6.8% in 1999. Included in general and
administrative expenses for the 2000 are $213,000 of expenses
attributable to Crest Net Lease.
Property expenses are broken down into costs associated with non-net
leased multi-tenant properties, unleased single-tenant properties and
general portfolio expenses. Expenses related to the multi-tenant and
unleased single-tenant properties include, but are not limited to,
property taxes, maintenance, insurance, utilities, property
inspections, bad debt expense and legal fees. General portfolio costs
include, but are not limited to, insurance, legal, property
inspections and title search fees. At September 30, 2000, 29
properties were available for lease, as compared to 17 at December 31,
1999 and eight at September 30, 1999.
Property expenses were $536,000 in the third quarter of 2000 and
$478,000 in 1999. The $58,000 increase in property expenses is
primarily attributable to costs associated with properties available
for lease.
Property expenses were $1.52 million in the first nine months of 2000
and $1.36 million in the first nine months of 1999. The $160,000
increase in property expenses is primarily attributable to costs
associated with properties available for lease.
Other expenses, relating to Crest Net Lease income taxes, were
$269,000 for the third quarter of 2000 and $193,000 year to date.
During the third quarter of 2000, we sold three properties for a total
of $2.2 million and recognized a gain of $231,000. During the third
quarter of 2000, we also exchanged two properties leased by one of our
tenants for two other properties owned by that tenant. The properties
exchanged and received were valued at $22.7 million, no gain was
recognized on the exchange.
During the three and nine months ended September 30, 1999, we sold one
property for $7.9 million and recognized a gain of $1.2 million.
During the first nine months of 2000, we sold nine properties for a
total of $5.8 million and recognized a gain of $1.8 million.
Page 28
As part of our active portfolio management program, we sell selected
investment properties in order to optimize performance, returns and
improve the quality of our portfolio. This is accomplished by selling
assets when we believe the reinvestment of the sales proceeds will
generate higher returns or to enhance the credit quality of our real
estate portfolio. As of September 30, 2000, we held real estate for
sale with a carrying amount of $52.7 million. Additionally, we
anticipate selling properties from our portfolio, which have not yet
been specifically identified. We anticipate we will receive up to $50
million in proceeds from the sale of properties during the next 12
months. We intend to invest these proceeds into new property
acquisitions.
Preferred stock dividends paid or accrued during the third quarter of
2000 were $2.4 million, as compared to $2.2 million in the third
quarter of 1999. Preferred stock dividends paid or accrued during the
first nine months of 2000 were $7.3 million, as compared to $2.8
million in the first nine months of 1999. Preferred distributions of
$1.9 million accrued as of September 30, 2000 were paid on October 2,
2000. Our outstanding preferred stock was issued during the second
and third quarters of 1999.
Net Income
In the third quarter of 2000 and 1999, our net income available to
common stockholders decreased $1.1 million or 10.0% to $9.9 million
versus $11.0 million in 1999.
In the first nine months of 2000 and 1999, our net income available to
common stockholders increased $100,000 or 0.3% to $30.8 million versus
$30.7 million in 1999.
PROPERTIES
----------
As of September 30, 2000, we owned a diversified portfolio of 1,078
properties located in 46 states with over 9.1 million square feet of
leasable space. In addition to our real estate portfolio, our
subsidiary Crest Net Lease owned seven properties. Our portfolio of
retail properties is leased to 74 retail chains doing business in 23
retail industries. At September 30, 2000, 1,043 or 96.8% of the 1,078
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 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.
Page 29
<PAGE>
Our net leased retail properties are primarily leased to regional and
national retail chain store operators. The average leasable retail
space of the 1,078 properties is approximately 8,500 square feet on
approximately 60,000 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>
Annualized Percentage of Total
Rent as of Rental Revenue for
Number Oct. 1, 2000(1)(2) the Year
of --------------------- -------------------
Prop-
erties Rental Percentage
Industry (1) Revenue of Total 1999 1998 1997
-------------------- ------ -------- ---------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Apparel Stores 4 $ 2,799 2.4% 3.8% 4.1% 0.7%
Automotive Parts 142 10,147 8.6 8.6 7.8 9.1
Automotive Service 101 6,806 5.8 6.6 7.5 6.4
Book Stores 2 572 0.5 0.5 0.6 0.5
Business Services 1 124 0.1 0.1 * --
Child Care 336 28,589 24.1 25.3 29.2 35.9
Consumer Electronics 38 5,859 4.9 4.4 5.4 6.5
Convenience Stores 103 9,815 8.3 7.2 6.1 5.5
Craft and Novelty 2 425 0.4 0.4 * --
Drug Stores 1 235 0.2 0.2 0.1 --
Entertainment 6 2,293 1.9 1.2 -- --
General Merchandise 11 687 0.6 0.6 * --
Grocery Stores 2 719 0.6 0.5 * --
Health and Fitness 7 3,940 3.3 0.6 0.1 --
Home Furnishings 35 6,641 5.6 6.5 7.8 5.6
Home Improvement 32 1,648 1.4 3.6 * --
Office Supplies 8 2,476 2.1 2.6 3.0 1.7
Pet Supplies and
Services 8 1,697 1.4 1.1 0.6 0.2
Private Education 6 1,703 1.4 1.2 0.9 --
Restaurants 174 14,177 12.0 13.3 16.2 19.8
Shoe Stores 4 890 0.7 1.1 0.8 0.2
Theaters 10 5,209 4.4 0.6 -- --
Video Rental 35 4,510 3.8 4.3 3.8 0.6
Other 10 6,492 5.5 5.7 6.0 7.3
-------------------- ------ -------- ------ ------ ------ ------
Totals 1,078 $118,453 100.0% 100.0% 100.0% 100.0%
==================== ====== ======== ====== ====== ====== ======
</TABLE>
* Less than 0.1%
Page 30
<PAGE>
[FN]
(1) This table does not include seven properties owned by Crest Net
Lease which are held for sale. Crest Net Lease is a subsidiary of
Realty Income.
(2) Annualized rental revenue is calculated by multiplying the
monthly contractual base rent as of October 1, 2000 for each of the
properties by 12 and adding the previous 12 month's historic
percentage rent, which totaled $1.7 million (i.e., additional rent
calculated as a percentage of the tenant's gross sales above a
specified level.) For properties under construction, an estimated
contractual base rent is used based upon the estimated total costs of
each property.
</FN>
Of the 1,078 properties in the portfolio at September 30, 2000, 1,072
were single-tenant properties with the remaining properties being
multi-tenant properties. As of September 30, 2000, 1,043 of the 1,072
single-tenant properties, or 97.3%, were net leased with an average
remaining lease term (excluding extension options) of approximately
8.1 years.
The following table sets forth certain information regarding the
timing of the lease term expirations (excluding extension options) on
our 1,043 net leased, single-tenant retail properties as of
October 1, 2000 (dollars in thousands):
<TABLE>
Number of Percent of
Leases Annualized Annualized
Year Expiring (1) Rent (1) (2) Rent
------ ------------ -------------- ----------
<S> <C> <C> <C>
2000 32 $ 1,729 1.5%
2001 50 4,174 3.7
2002 81 6,515 5.8
2003 73 6,112 5.4
2004 117 9,958 8.8
2005 84 6,369 5.6
2006 28 2,553 2.3
2007 95 6,597 5.8
2008 66 5,752 5.1
2009 31 3,461 3.1
2010 44 3,775 3.3
2011 35 5,343 4.7
2012 49 5,712 5.0
2013 75 12,739 11.2
2014 42 6,839 6.0
2015 35 4,009 3.5
2016 13 2,017 1.8
2017 11 4,130 3.7
(table continued on the next page)
Page 31
Number of Percent of
Leases Annualized Annualized
Year Expiring (1) Rent (1) (2) Rent
------ ------------ -------------- ----------
<S> <C> <C> <C>
2018 16 1,614 1.4
2019 51 8,757 7.7
2020 9 2,920 2.6
2024 2 605 0.5
2033 2 1,118 1.0
2034 2 570 0.5
------ ------- ---------- -------
Totals 1,043 $113,368 100.0%
====== ======= ========== =======
</TABLE>
[FN]
(1 This table does not include six multi-tenant properties and
twenty-nine vacant, unleased single-tenant properties owned by the
Company and seven properties owned by Crest Net Lease. 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 October 1, 2000 for each of the properties
by 12 and adding the previous 12 month's historic percentage rent,
which totaled $1.7 million (i.e., additional rent calculated as a
percentage of the tenant's gross sales above a specified level). For
the properties under construction, an estimated contractual base rent
is used based upon the estimated total costs of each property.
</FN>
The following table sets forth certain state-by-state information
regarding Realty Income's property portfolio as of October 1, 2000
(dollars in thousands).
<TABLE>
Approximate Percent of
Number of Percent Leasable Annualized Annualized
State Properties(1) Leased Square Feet Rent(1)(2) Rent
---------- ------------- ------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Alabama 10 90% 125,200 $ 887 0.8%
Alaska 1 100 70,600 285 0.2
Arizona 30 97 196,400 2,844 2.4
Arkansas 5 100 36,700 614 0.5
California 58 98 1,024,100 13,834 11.7
Colorado 45 100 292,600 4,041 3.4
Connecticut 10 100 223,800 2,983 2.5
Delaware 1 100 5,400 72 0.1
(table continued on the next page)
Page 32
Approximate Percent of
Number of Percent Leasable Annualized Annualized
State Properties(1) Leased Square Feet Rent(1)(2) Rent
---------- ------------- ------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Florida 87 89 966,600 11,529 9.7
Georgia 60 97 428,400 6,029 5.1
Idaho 11 100 52,000 770 0.7
Illinois 35 100 259,100 3,672 3.1
Indiana 29 97 170,400 2,177 1.8
Iowa 10 100 67,900 698 0.6
Kansas 23 96 240,500 2,593 2.2
Kentucky 13 100 43,500 1,104 0.9
Louisiana 5 100 39,600 508 0.4
Maryland 8 100 48,300 734 0.6
Massachusetts 8 100 53,900 1,101 0.9
Michigan 10 100 68,100 979 0.8
Minnesota 25 96 261,500 2,549 2.2
Mississippi 16 100 152,100 1,286 1.1
Missouri 33 100 204,700 2,582 2.2
Montana 2 100 30,000 288 0.2
Nebraska 10 90 98,400 1,076 0.9
Nevada 7 86 86,400 1,262 1.1
New Hampshire 1 100 6,400 133 0.1
New Jersey 4 100 45,400 782 0.7
New Mexico 5 80 46,000 181 0.2
New York 20 100 253,300 4,851 4.1
North Carolina 32 94 171,400 2,812 2.4
North Dakota 1 100 22,000 65 0.1
Ohio 68 100 387,900 5,605 4.7
Oklahoma 17 100 102,200 1,300 1.1
Oregon 19 100 210,800 2,080 1.8
Pennsylvania 23 100 168,300 2,310 2.0
South Carolina 48 100 147,000 3,999 3.4
South Dakota 2 100 12,600 172 0.1
Tennessee 25 96 221,300 2,663 2.2
Texas 154 98 1,284,000 13,742 11.6
Utah 8 88 51,700 601 0.5
Virginia 31 97 271,700 4,582 3.9
Washington 44 100 294,000 3,602 3.0
West Virginia 2 100 16,800 158 0.1
Wisconsin 18 100 167,700 2,052 1.7
Wyoming 4 100 20,100 266 0.2
-------------- -------- ------- ----------- ---------- ---------
Totals/Average 1,078 97% 9,146,800 $118,453 100.0%
============== ======== ======= =========== ========== =========
</TABLE>
[FN]
(1) This table does not include seven properties owned by Crest Net
Lease which are held for sale. Crest Net Lease is a subsidiary of
Realty Income.
Page 33
<PAGE>
(2) Annualized rent is calculated by multiplying the monthly
contractual base rent as of October 1, 2000 for each of the properties
by 12 and adding the previous 12 month's historic percentage rent,
which totaled $1.7 million (i.e., additional rent calculated as a
percentage of the tenant's gross sales above a specified level). For
the properties under construction, an estimated contractual base rent
is used based upon the estimated total costs of each property.
</FN>
The following table sets forth certain information regarding the
properties owned by Realty Income as of October 1, 2000, classified
according to the retail business types and the level of services they
provide (dollars in thousands):
<TABLE>
Percent of
Number of Annualized Annualized
Industry Properties (1) Rent (1)(2) Rent
-------- ------------- ------------ ----------
<S> <C> <C> <C>
Tenants providing services
--------------------------
Automotive Service 101 $ 6,806 5.8%
Child Care 336 28,589 24.1
Entertainment 6 2,293 1.9
Health and Fitness 7 3,940 3.3
Private Education 6 1,703 1.4
Theaters 10 5,209 4.4
Other 10 6,492 5.5
---------- ---------- ----------
476 55,032 46.4
---------- ---------- ----------
Tenants selling goods and services
----------------------------------
Automotive Parts (with installation) 63 5,505 4.7
Business Services 1 124 0.1
Convenience Stores 103 9,815 8.3
Home Improvement 19 271 0.2
Pet Supplies and Services 6 1,230 1.0
Restaurants 174 14,177 12.0
Video Rental 35 4,510 3.8
---------- ---------- ----------
401 35,632 30.1
---------- ---------- ----------
(table continued on the next page)
Page 34
Percent of
Number of Annualized Annualized
Industry Properties (1) Rent (1)(2) Rent
-------- ------------- ------------ ----------
<S> <C> <C> <C>
Tenants selling goods
---------------------
Apparel Stores 4 2,799 2.4
Automotive Parts 79 4,642 3.9
Book Stores 2 572 0.5
Consumer Electronics 38 5,859 4.9
Craft and Novelty 2 425 0.4
Drug Stores 1 235 0.2
General Merchandise 11 687 0.6
Grocery Stores 2 719 0.6
Home Furnishings 35 6,641 5.6
Home Improvement 13 1,377 1.2
Office Supplies 8 2,476 2.1
Pet Supplies 2 467 0.4
Shoe Stores 4 890 0.7
---------- ---------- ----------
201 27,789 23.5
---------- ---------- ----------
TOTALS 1,078 $ 118,453 100.0%
========== ========== ==========
</TABLE>
[FN]
(1) This table does not include seven properties owned by Crest Net
Lease which are held for sale. Crest Net Lease is a subsidiary of
Realty Income.
(2) Annualized rent is calculated by multiplying the monthly
contractual base rent as of October 1, 2000 for each of the properties
by 12 and adding the previous 12 month's historic percentage rent,
which totaled $1.7 million (i.e., additional rent calculated as a
percentage of the tenant's gross sales above a specified level). For
the properties under construction, an estimated contractual base rent
is used based upon the estimated total costs of each property.
</FN>
IMPACT OF INFLATION
===================
Tenant leases generally provide for limited increases in rent as a
result of increases in the tenant's sales volumes, increases in the
consumer price index, and/or fixed increases. We expect that
inflation will cause these lease provisions to result in increases in
rent over time. However, during times when inflation is greater than
increases in rent as provided for in the leases, rent increases may
not keep up with the rate of inflation.
Page 35
<PAGE>
Approximately 96.8% or 1,043 of the properties in the portfolio are
leased to tenants under net leases in which the tenant is responsible
for property costs and expenses. These features in the leases reduce
our exposure to rising property expenses due to inflation.
Inflation and increased costs may have an adverse impact on the
tenants if increases in the tenant's operating expenses exceed
increases in revenue.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
====================================================================
We are exposed to interest rate changes primarily as a result of our
credit facilities and long-term debt used to maintain liquidity and
expand our real estate investment portfolio and operations. Our
interest rate risk management objective is to limit the impact of
interest rate changes on earnings and cash flows and to lower our
overall borrowing costs. To achieve our objectives we borrow our long
term debt primarily at fixed rates and may selectively enter into
derivative financial instruments such as interest rate lock
agreements, interest rate swaps and caps in order to mitigate our
interest rate risk on a related financial instrument. We are not a
party to any derivative financial instruments at September 30, 2000.
We do not enter into any transactions for speculative or trading
purposes.
Our interest rate risk is monitored using a variety of techniques.
The table below presents the principal amounts, weighted average
interest rates, fair values and other terms required by year of
expected maturity to evaluate the expected cash flows and sensitivity
to interest rate changes (dollars in table in millions).
<TABLE>
Expected Maturity Data
-----------------------
There- Fair
2002 2003 after Total Value (2)
---- ---- ------ ------ ---------
<S> <C> <C> <C> <C> <C>
Fixed rate
debt -- -- $230.0(1) $230.0 $207.9
Average
interest rate -- -- 7.99% 7.99%
Variable
rate debt $161.9 $24.4 -- $186.3 $186.3
Average
interest rate 7.87% 7.89% -- 7.88%
</TABLE>
[FN]
(1) $110 million matures in 2007, $100 million matures in 2008 and $20
million matures in 2009.
Page 36
<PAGE>
(2) We base the fair value of the fixed rate debt at September 30,
2000 on the closing market price or indicative price per each note.
The fair value of the variable rate debt approximates its carrying
value because its terms are similar to those available in the market
place.
</FN>
The table incorporates only those exposures that exist as of
September 30, 2000, it does not consider those exposures or positions
that could arise after that date. As a result, our ultimate realized
gain or loss with respect to interest rate fluctuations would depend
on the exposures that arise during the period, our hedging strategies
at the time, and interest rates.
PART II. OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
Exhibit No. Description
=========== ===========
3.1 Articles of Incorporation of the Company (filed as
Appendix B to the Company's Proxy Statement dated
March 28, 1997 ("1997 Proxy Statement") and
incorporated herein by reference).
3.2 Articles Supplementary of the Class A Junior
Participating Preferred Stock of Realty Income
Corporation (filed as exhibit A of exhibit 1 to Realty
Income's registration statement on Form 8-A, dated
June 26, 1998, and incorporated herein by reference).
3.3 Bylaws of the Company (filed as Appendix C to the
Company's 1997 Proxy Statement and incorporated
herein by reference).
3.4 Articles Supplementary to the Articles of Incorporation
of Realty Income Corporation classifying and designating
the Class B Preferred Stock (filed as exhibit 4.1 to the
Company's Form 8-K dated May 24, 1999 and incorporated
herein by reference).
3.5 Articles Supplementary to the Articles of Incorporation
of Realty Income Corporation classifying and designating
the Class C Preferred Stock (filed as exhibit 4.1 to the
Company's Form 8-K dated July 29, 1999 and incorporated
herein by reference).
Page 37
Exhibit No. Description
=========== ===========
4.1 Pricing Committee Resolutions and Form of 7.75%
Notes due 2007 (filed as Exhibit 4.2 to the
Company's Form 8-K dated May 5, 1997 and
incorporated herein by reference).
4.2 Indenture dated as of May 6, 1997 between the
Company and The Bank of New York (filed as Exhibit
4.1 to the Company's Form 8-K dated May 5, 1997 and
incorporated herein by reference).
4.3 First Supplemental Indenture dated as of
May 28, 1997, between the Company and The Bank of
New York (filed as Exhibit 4.3 to the Company's
Form 8-B and incorporated herein by reference).
4.4 Rights Agreement, dated as of June 25, 1998, between
Realty Income Corporation and The Bank of New York
(filed as an exhibit 1 to the Company's registration
statement on Form 8-A, dated June 26, 1998, and
incorporated herein by reference).
4.5 Pricing Committee Resolutions (filed as an exhibit 4.2
to Realty Income's Form 8-K, dated October 27, 1998
and incorporated herein by reference).
4.6 Form of 8.25% Notes due 2008 (filed as an exhibit 4.3 to
Realty Income's Form 8-K, dated October 27, 1998
and incorporated herein by reference).
4.7 Indenture dated as of October 28, 1998 between
Realty Income and The Bank of New York (filed as exhibit
4.1 to Realty Income's Form 8-K, dated October 27, 1998
and incorporated herein by reference).
4.8 Pricing Committee Resolutions and Form of 8% Notes due
2009 (filed as exhibit 4.2 to Realty Income's Form 8-K,
dated January 21, 1999 and incorporated herein by
reference).
27 Financial Data Schedule, filed herein
B. No reports on Form 8-K were filed by registrant during the
quarter for which this report is filed.
Page 38
SIGNATURE
==========
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REALTY INCOME CORPORATION
(Signature and Title) /s/ GARY M. MALINO
Date: November 10, 2000 ------------------
Gary M. Malino
Executive Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
EXHIBIT INDEX
Exhibit No. Description
=========== ===========
27 Financial Data Schedule
Page 39
