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 March 31, 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
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(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 26,713,970 shares of common stock outstanding as of
May 9, 2000.
REALTY INCOME CORPORATION
Form 10-Q
March 31, 2000
Table of Contents
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<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...... 13
Item 3: Quantitative and Qualitative Disclosures About
Market Risk........................................ 29
PART II. OTHER INFORMATION
==========================
Item 6: Exhibits and Reports on Form 8-K................... 30
SIGNATURE................................................... 33
EXHIBIT INDEX............................................... 33
</TABLE>
Page 2
PART I. FINANCIAL INFORMATION
==============================
ITEM 1. FINANCIAL STATEMENTS
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
===========================
March 31, 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 $ 351,708 $ 350,517
Buildings and improvements 718,416 711,962
--------- ---------
1,070,124 1,062,479
Less accumulated depreciation
and amortization (201,520) (195,386)
--------- ---------
Net real estate 868,604 867,093
Cash and cash equivalents 2,103 773
Accounts receivable 3,180 3,407
Goodwill, net 18,822 19,053
Other assets 19,012 15,078
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Total assets $ 911,721 $ 905,404
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(table continued next page)
Page 3
(table continued)
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
===========================
March 31, 2000 and December 31, 1999
(dollars in thousands, except per share data)
2000 1999
(Unaudited)
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Distributions payable $ 4,856 $ 4,828
Accounts payable and accrued expenses 6,206 12,792
Other liabilities 3,841 3,753
Lines of credit payable 136,900 119,200
Notes payable 230,000 230,000
--------- ---------
Total liabilities 381,803 370,573
--------- ---------
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 99,403 99,679
Common stock and paid in capital,
par value $1.00 per share, 100,000,000
shares authorized, 26,793,470 and
26,822,164 shares issued and outstanding
in 2000 and 1999, respectively 636,002 636,611
Distributions in excess of net income (205,487) (201,459)
--------- ---------
Total stockholders' equity 529,918 534,831
--------- ---------
Total liabilities and
stockholders' equity $ 911,721 $ 905,404
========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
Page 4
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
=================================
For the three months ended March 31, 2000 and 1999
(dollars in thousands, except per share data)
(Unaudited)
<TABLE>
2000 1999
========== ==========
<S> <C> <C>
REVENUE
Rental $ 28,330 $ 23,948
Interest and other 25 38
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28,355 23,986
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EXPENSES
Depreciation and amortization 6,748 6,090
Interest 7,158 5,880
General and administrative 1,684 1,646
Property 515 441
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16,105 14,057
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Income from operations 12,250 9,929
Gain on sale of property 662 --
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Net income 12,912 9,929
Preferred stock dividend (2,428) --
---------- ----------
Net income available to common
stockholders $ 10,484 $ 9,929
========== ==========
Basic and diluted net income
available to common stockholders
per common share $ 0.39 $ 0.37
========== ==========
</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 three months ended March 31, 2000 and 1999
(dollars in thousands)
(Unaudited)
<TABLE>
2000 1999
========= =========
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,912 $ 9,929
Adjustments to net income:
Depreciation and amortization 6,748 6,090
Gain on sales of properties (662) --
Change in assets and liabilities:
Accounts receivable and
other assets 516 1,342
Accounts payable, accrued
expenses and other liabilities 1,754 2,277
--------- ---------
Net cash provided by
operating activities 21,268 19,638
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of properties 1,424 --
Acquisition of and additions
to properties (17,949) (39,685)
Increase in other assets (3,250) --
Payment of other liabilities -- (1,713)
--------- ---------
Net cash used in
investing activities (19,775) (41,398)
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(table continued on next page)
Page 6
<PAGE>
(continued)
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
=====================================
For the three months ended March 31, 2000 and 1999
(dollars in thousands)
(Unaudited)
2000 1999
========= =========
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from line of credit 31,800 47,000
Payments under line of credit (14,100) (27,900)
Distributions to common
stockholders (14,484) (13,679)
Distributions to preferred
stockholders (2,428) --
Purchase of common stock (675) --
Purchase of preferred stock (276) --
Proceeds from notes issued,
net of costs of $500 -- 19,500
--------- ---------
Net cash provided by (used in)
financing activities (163) 24,921
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Net increase in cash and
cash equivalents 1,330 3,161
Cash and cash equivalents,
beginning of period 773 2,533
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Cash and cash equivalents,
end of period $ 2,103 $ 5,694
========= =========
</TABLE>
For supplemental disclosures, see note 8.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
Page 7
REALTY INCOME CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
==========================================
March 31, 2000
(Unaudited)
1. Management Statement
The consolidated financial statements of Realty Income Corporation
("Realty Income", the "Company", "we", "our" or "us") 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 three months of 2000, we invested $8.7 million in two
new retail properties and properties under development with an initial
aggregate contractual lease rate of 10.7% and an average initial lease
term of 15 years.
During the first three months of 1999, we invested $40.8 million in 34
new retail properties and properties under development with an initial
aggregate contractual lease rate of 10.3% and an average initial lease
term of 14.6 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 certain
select properties, primarily to buyers using tax-deferred exchanges,
under Section 1031 of the IRS Code.
During the first quarter of 2000, we invested $2.9 million in Crest
Net Lease common stock, which is included in other assets. In
February 2000, we entered into a $25 million, revolving credit
facility with Crest Net Lease. As of March 31, 2000, our
outstanding loans to Crest Net Lease were $250,000.
Page 8
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 three months ended March 31,
2000 and 1999. As of March 31, 2000, a distribution of $0.18125 per
common share was declared (and was paid on April 17, 2000).
<TABLE>
Month 2000 1999
-------- -------- --------
<S> <C> <C>
January $ 0.1800 $ 0.1700
February 0.1800 0.1700
March 0.1800 0.1700
-------- -------- --------
Total $ 0.5400 $ 0.5100
======== ======== ========
</TABLE>
B. During the first quarter of 2000, we paid one quarterly
distribution of $0.5859 per share to our 9 3/8% Class B preferred
stockholders.
C. During the first quarter of 2000, we paid three monthly
distributions of $0.1979 per share, totaling $0.5937, to our 9 1/2%
Class C preferred stockholders.
5. Gain on Sales of Properties
For the three months ended March 31, 2000, we sold one restaurant
location for $1.4 million and recognized a gain of $662,000. For the
three months ended March 31, 1999, no properties were sold.
6. Net Income per Common 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 table 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
months ended March 31, 2000 and 1999.
Page 9
<PAGE>
6. Net Income per Common Share (continued)
<TABLE>
For the three months ended March 31, 2000 1999
---------- ----------
<S> <C> <C>
Weighted average shares used for
the basic net income per share
computation 26,815,391 26,822,382
Incremental shares from the assumed
exercise of stock options 1,537 3,030
---------- ----------
Adjusted weighted average shares
used for diluted net income
per share computation 26,816,928 26,825,412
=========== ==========
</TABLE>
For the three months ended March 31, 2000 and 1999, stock options of
275,805 and 161,397, respectively, were anti-dilutive and have been
excluded from the incremental shares from the assumed conversion of
stock options.
7. 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
three months of 2000, we purchased 32,300 shares of our common stock
at an average price of $20.90 and 14,300 shares of our Class B
preferred stock at an average price of $19.27, for a total investment
of $951,000.
8. Supplemental Disclosure of Cash Flow Information
Interest paid during the first three months of 2000 and 1999 was $5.0
million and $2.9 million, respectively.
In the first three months of 2000 and 1999, interest of $357,000 and
$294,000, respectively, was capitalized on properties under
development.
The following non-cash investing activities are included in the
accompanying consolidated financial statements:
In the first three months of 1999, the investment in properties
resulted in an increase in buildings and other liabilities of $1.3
million.
Page 10
<PAGE>
9. 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 nine 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 as of March 31, 2000 classified according to
the business of the respective tenants (dollars in thousands):
<TABLE>
Revenue
----------------------
For the quarter ended March 31, 2000 1999
-------- --------
<S> <C> <C>
Segment rental revenue:
Automotive parts $ 2,439 $ 2,074
Automotive service 1,675 1,630
Child care 6,929 6,174
Consumer electronics 1,426 1,414
Convenience stores 2,459 1,367
Home furnishings 1,533 1,702
Home improvement 987 841
Restaurants 3,535 3,428
Video rental 1,130 1,072
Other non-reportable segments 6,217 4,246
Reconciling items 25 38
-------- --------
Total revenue $ 28,355 $ 23,986
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Page 11
9. Segment Information (continued)
Assets
---------------------
March 31, December 31,
2000 1999
-------- --------
Segment net real estate:
Automotive parts $ 77,943 $ 77,075
Automotive service 50,127 50,499
Child care 155,066 156,617
Consumer electronics 48,256 48,593
Convenience stores 83,136 83,228
Home furnishings 63,966 64,408
Home improvement 39,250 39,507
Restaurants 85,661 86,903
Video rental 40,485 40,712
Other non-reportable segments 224,714 219,551
------- -------
Total segment net real estate 868,604 867,093
Reconciling items 43,117 38,311
-------- --------
Total assets $911,721 $905,404
======== ========
</TABLE>
Page 12
<PAGE>
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; and
- Future expenditures for development projects.
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 13
<PAGE>
GENERAL
- -------
Realty Income Corporation, a Maryland corporation ("Realty Income",
the "Company", "us", "our" or "we") is 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,
2000, we owned a diversified portfolio of 1,077 retail properties
located in 45 states with over 8.6 million square feet of leasable
space leased to 72 separate retail chains doing business in 23
separate retail industries. Of the 1,077 properties in the portfolio,
1,070 are single-tenant retail properties with the remainder being
multi-tenant properties. As of March 31, 2000, 1,052, or 98.3%, of
the 1,070 single-tenant properties were leased with an average
remaining lease term (excluding extension options) of approximately
8.5 years.
Our primary business objective is to generate dependable monthly
distributions from a consistent and predictable level of funds from
operations (or 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 14
<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, Realty Income has acquired
and leased back to regional and national retail chains 1,054
properties (including 36 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.
RECENT DEVELOPMENTS
- -------------------
ACQUISITION OF TWO PROPERTIES DURING THE FIRST QUARTER OF 2000.
During the first three months of 2000, we acquired two additional
properties (the "New Properties"). During the first three months of
2000, we invested $8.7 million in the New Properties and properties
under development (including accrued development costs of $800,000 at
March 31, 2000 and excluding estimated unfunded development costs on
properties under construction at March 31, 2000 of $10.7 million). We
also paid $11,000 for lease commissions and $60,000 for building
improvements on existing properties in our portfolio. The weighted
average annual unleveraged return on the $8.7 million invested in the
first three months of 2000 is estimated to be 10.7%, 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 the estimated
total costs of each property. Since it is possible that a tenant
Page 15
<PAGE>
could default on the payment of contractual rent, no assurance can be
given that the actual return on the funds invested will not differ
from the foregoing percentage.
The New Properties will contain approximately 14,600 leasable square
feet and are 100% leased under net leases, with an average initial
lease term of 15.0 years. 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.
INCREASE IN MONTHLY DISTRIBUTIONS TO COMMON STOCKHOLDERS. Monthly
distributions were increased in January 2000 by $0.0025 to $0.18 per
share and in April 2000 by $0.00125 to $0.18125 per share. We are
committed to our policy of paying distributions monthly to our common
stockholders. During the first three months of 2000, we paid three
distributions of $0.18 per share, totaling $0.54 per common share.
During the first three months of 1999, the Company paid three
distributions of $0.17 per share, totaling $0.51 per common share. In
March and April 2000, we declared distributions of $0.18125 per share,
which were paid on April 17, 2000 and payable on May 15, 2000,
respectively. The monthly distribution of $0.18125 per share
represents a current annualized distribution of $2.175 per share, and
an annualized distribution yield of approximately 10.1% based on the
last reported sale price of the Company's common stock on the NYSE of
$21.5625 on May 4, 2000. Although we expect to continue our policy of
paying monthly distributions, there can be no assurance that the
current level of distributions per share will be maintained by the
Company, that we will continue our pattern of increasing distributions
per share, or as to the actual distribution yield for any future
period.
FORMATION OF 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 certain select properties, primarily to buyers using tax-
deferred exchanges, under Section 1031 of the IRS Code.
During the first quarter of 2000, we invested $2.85 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
May 10, 2000, our outstanding loans to Crest Net Lease were
$1,250,000.
$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 can be used for the acquisition of property and for making
capital contributions to subsidiaries for the purpose of acquiring
properties.
Page 16
<PAGE>
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 April 30, 2000, we purchased 113,900 shares of
our common stock at an average price of $20.38 and 14,300 shares of
our Class B preferred stock at an average price of $19.27, for a total
investment of $2.6 million.
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 45 employees as of May 10, 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 a
working capital reserve. At March 31, 2000, Realty Income had cash
and cash equivalents totaling $2.1 million.
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.
Page 17
<PAGE>
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 April 30, 2000, borrowing capacity
of $65.4 million was available to us under the $200 million credit
facility and $21.9 million was available under the $25 million credit
facility. At that time, the outstanding balances on the $200 million
credit facility was $134.6 million with an effective interest rate of
7.38% and the outstanding balances on the $25 million credit facility
was $3.1 million with an effective interest rate of 7.35%. 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.
We expect to meet our long-term capital needs for the acquisition of
properties through the issuance of public or private debt or equity.
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
April 30, 2000, $34.5 million in value of common stock, preferred
stock and debt securities has been issued under the universal shelf
registration statement.
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 is best served by
having the majority of our 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
attractive for additional issuances of common stock. We 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. In 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, and by strategically selling properties that
have appreciated in value and investing the proceeds in new properties
that will generate rental revenue in excess of those generated by the
properties that were sold.
Page 18
<PAGE>
We received investment grade corporate credit ratings on our senior
unsecured debt from Duff & Phelps Rating Company, Moody's Investor
Service, Inc., and Standard & Poor's Rating Group in December 1996.
Currently, 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. 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 $14.5 million and $13.7
million during the first three months of 2000 and 1999, respectively.
During the first quarter of 2000, we paid cash distribution of $1.6
million to our Class B Preferred stockholders and $819,000 to our
Class C Preferred stockholders. We pay distributions quarterly on our
Class B Preferred and monthly on our Class C Preferred.
FUNDS FROM OPERATIONS ("FFO")
- -----------------------------
For the first quarter of 2000, FFO increased by $539,000 or 3.4% to
$16.5 million versus $16.0 million during the first 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
first quarter of 2000 and 1999 (dollars in thousands):
Page 19
<TABLE>
2000 1999
-------- --------
<S> <C> <C>
Net income available to
common stockholders $ 10,484 $ 9,929
Plus depreciation and amortization 6,748 6,090
Less:
Depreciation of furniture,
fixtures and equipment (33) (21)
Gain on sale of property (662) --
-------- --------
Total funds from operations $ 16,537 $ 15,998
======== ========
Distributions paid to
common stockholders $ 14,484 $ 13,679
FFO in excess of distributions
to common stockholders $ 2,053 $ 2,319
Diluted weighted average number
of common shares outstanding 26,816,928 26,825,412
</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 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 or to cash flows from
operating, investing, and financing activities as a measure of
liquidity or ability to make cash distributions or to pay debt
service.
Page 20
RESULTS OF OPERATIONS
- ---------------------
The following is a comparison of our results of operations for the
three months ended March 31, 2000 to the three months ended March 31,
1999.
Rental revenue was $28.3 million for the first quarter of 2000 versus
$23.9 million for the comparable quarter of 1999, an increase of $4.4
million or 18.4%. The increase in rental revenue was primarily due to
the acquisition of 110 properties during 1999. These properties
generated revenue of $3.75 million in 2000 compared to $150,000 in
1999, an increase of $3.6 million.
Of the 1,077 properties in the portfolio as of March 31, 2000, 1,070
are single-tenant properties with the remaining properties being
multi-tenant properties. Of the 1,070 single-tenant properties,
1,052, or 98.3%, were net leased with an average remaining lease term
(excluding extension options) of approximately 8.5 years. Of our
1,052 leased single-tenant properties, 1,044 or 99.2% 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 $306,000 during the first
quarter of 2000 and $214,000 in the comparable quarter of 1999. Same
store rents generated on the 923 leased properties owned during all of
both the first quarters of 2000 and 1999 increased by $328,000 or
1.4%, to $23.34 million from $23.02 million.
Approximately 52% of our annualized rental revenue is attributable to
properties that were acquired over the last four and one-quarter
years. A majority of the leases on these acquisitions provide for
rent increases after the fifth year of the lease. We anticipate
rental increases on some of these acquisitions to start in the second
half of the year 2000.
At March 31, 2000, 1,059 or 98.3% of the 1,077 properties in the
portfolio were under lease agreements with third party tenants. At
March 31, 2000, we had 18 properties that were not under lease, as
compared to 17 at December 31, 1999 and six at March 31, 1999. Of the
18 properties not leased at March 31, 2000, we sold one location in
April 2000 and we have issued letters of intent to sell five locations
and lease four other vacant locations. We anticipate these nine
locations to be leased or sold during the second or third quarter of
2000, although we cannot assure you that all of these properties can
be sold or leased within this period.
Page 21
<PAGE>
Depreciation and amortization was $6.7 million in the first quarter of
2000 versus $6.1 million in the first quarter of 1999. The increase
in 2000 was primarily due to depreciation of the 110 properties
acquired during 1999.
Interest expense in the first quarter of 2000 increased by $1.3
million to $7.2 million, as compared to $5.9 million in the first
quarter of 1999. The following is a summary of the five components of
interest expense for the first quarter of 2000 and 1999 (dollars in
thousands):
<TABLE>
2000 1999 Net Change
------- ------- ----------
<S> <C> <C> <C>
Interest on outstanding
loans and notes $ 6,939 $ 5,715 $ 1,224
Amortization of settlements
on treasury lock agreements 189 189 -
Credit facility commitment fees 123 65 58
Amortization of credit facility
origination costs and deferred
bond financing costs 264 205 59
Interest capitalized (357) (294) (63)
-------- -------- --------
Interest expense $ 7,158 $ 5,880 $ 1,278
======== ======== ========
Credit facilities and notes outstanding (dollars in thousands)
- ------------------------------------------------------------
Three months ended March 31, 2000 1999 Net Change
------- ------- ----------
<S> <C> <C> <C>
Average outstanding balances $354,163 $306,549 $ 47,614
Average interest rates 7.76% 7.56%
</TABLE>
Interest on outstanding loans and notes was $1.2 million higher in the
first quarter of 2000 than in 1999 primarily due to an increase of
$47.6 million in the average outstanding balances and a higher average
interest rate. During the first four 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.
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 and title search
fees. At March 31, 2000, 18 properties were available for lease as
compared to 17 at December 31, 1999 and six at March 31, 1999.
Page 22
<PAGE>
Property expenses were $515,000 in the first quarter of 2000 and
$441,000 in 1999. The $74,000 increase in property expenses is
primarily attributable to costs associated with vacant properties. We
anticipate property expenses to increase as we acquire additional
properties.
During the three months ended March 31, 2000, we sold one restaurant
location for $1.4 million and realized a gain of $662,000. We sold no
properties during the first quarter of 1999.
In the first quarter of 2000, we paid preferred stock dividends of
$2.4 million. No preferred stock was outstanding during the first
quarter of 1999.
In the first quarter of 2000 and 1999, our net income available to
common stockholders increased $555,000 or 5.6% to $10.5 million versus
$9.9 million in 1999. Rental revenue represented $4.4 million of the
increase and gain on sale of property represented $662,000. The
increase in rental revenue was due to an increase in rental revenue
from properties acquired in 1999 of $3.6 million. These increases
were substantially offset by an increase of $4.4 million in the
following expenses:
- Depreciation and amortization of $658,000; and
- Interest expense of $1.3 million; and
- Preferred stock dividends of $2.4 million.
PROPERTIES
- ----------
As of March 31, 2000, we owned a diversified portfolio of 1,077
properties located in 45 states with over 8.6 million square feet of
leasable space. At March 31, 2000, 1,052 or 98.3% of the 1,077
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.
Our net-leased retail properties are primarily leased to regional and
national retail chain store operators. The average leasable retail
space of the 1,077 properties is approximately 8,000 square feet on
approximately 56,400 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.
Page 23
<PAGE>
The following table sets forth certain information regarding our 1,077
properties classified according to the business of the respective
tenants (dollars in thousands):
<TABLE>
Annualized Percentage of Total
Rent as of Rental Revenue
Number April 1, 2000(1) for the Year
of ------------------- -------------------
Prop- Rental Percentage
Industry erties 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 144 10,107 8.6 8.6 7.8 9.1
Automotive Service 104 6,645 5.7 6.6 7.5 6.4
Book Stores 1 450 0.4 0.5 0.6 0.5
Business Services 1 124 0.1 0.1 * --
Child Care 336 28,323 24.2 25.3 29.2 35.9
Consumer Electronics 37 5,717 4.9 4.4 5.4 6.5
Convenience Stores 104 9,815 8.4 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 2.0 1.2 -- --
General Merchandise 11 687 0.6 0.6 * --
Grocery Stores 2 719 0.6 0.5 * --
Health and Fitness 7 3,966 3.4 0.6 0.1 --
Home Furnishings 34 6,085 5.2 6.5 7.8 5.6
Home Improvement 34 4,274 3.6 3.6 * --
Office Supplies 8 2,476 2.1 2.6 3.0 1.7
Pet Supplies and
Services 8 1,673 1.4 1.1 0.6 0.2
Private Education 6 1,695 1.4 1.2 0.9 --
Restaurants 176 14,349 12.2 13.3 16.2 19.8
Shoe Stores 4 890 0.8 1.1 0.8 0.2
Theaters 2 2,406 2.1 0.6 -- --
Video Rental 35 4,510 3.8 4.3 3.8 0.6
Other 10 6,501 5.5 5.7 6.0 7.3
- -------------------- ------ -------- ------ ------ ------ ------
Totals 1,077 $117,164 100.0% 100.0% 100.0% 100.0%
==================== ====== ======== ====== ====== ====== ======
</TABLE>
* Less than 0.1%
[FN]
(1) Annualized rental revenue is calculated by multiplying the
monthly contractual base rent as of April 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>
Page 24
<PAGE>
Of the 1,077 properties in the portfolio at April 1, 2000, 1,070 were
single-tenant properties with the remaining properties being multi-
tenant properties. As of April 1, 2000, 1,052 of the 1,070 single-
tenant properties, or 98.3%, were leased with an average remaining
lease term (excluding extension options) of approximately 8.5 years.
During the first quarter of 2,000, nine of our leases expired. Of
these leases, eight remain occupied by the same tenant and one
location is being marketed for lease or sale.
The following table sets forth certain information regarding the
timing of the lease term expirations (excluding extension options) on
our 1,052 net leased, single-tenant retail properties as of
March 31, 2000 (dollars in thousands).
<TABLE>
Number of Percent of
Leases Annualized) Annualized
Year Expiring (2) Rent (1) (2) Rent
- ------ ------------ -------------- ----------
<S> <C> <C> <C>
2000 39 $ 2,059 1.8%
2001 48 3,965 3.5
2002 82 6,553 5.8
2003 71 5,891 5.2
2004 118 9,894 8.8
2005 82 6,126 5.5
2006 28 2,535 2.3
2007 95 6,564 5.9
2008 66 5,685 5.1
2009 29 3,273 2.9
2010 42 3,380 3.0
2011 35 5,324 4.8
2012 50 5,761 5.1
2013 92 14,977 13.3
2014 42 7,078 6.3
2015 35 3,890 3.5
2016 13 2,015 1.8
2017 11 4,130 3.7
2018 16 1,614 1.4
2019 52 9,324 8.3
2024 2 605 0.5
2033 2 1,118 1.0
2034 2 570 0.5
- ------ ------- ---------- -------
Totals 1,052 $112,331 100.0%
====== ======= ========== =======
</TABLE>
[FN]
(1) Annualized rent is calculated by multiplying the monthly
contractual base rent as of April 1, 2000 for each of the properties
by 12 and adding the previous 12 month's historic percentage rent,
Page 25
<PAGE>
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.
(2) This table does not include seven multi-tenant properties and 18
vacant, unleased single-tenant properties owned by the Company. The
lease expirations for properties under construction are based on the
estimated date of completion of such properties.
</FN>
The following table sets forth certain state-by-state information
regarding Realty Income's property portfolio as of April 1, 2000
(dollars in thousands).
<TABLE>
Approximate Percent of
Number of Percent Leasable Annualized Annualized
State Properties Leased Square Feet Rent (1) Rent
- ------------ ---------- ------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Alabama 9 100% 63,300 $ 624 0.5%
Arizona 31 100 211,800 3,106 2.7
Arkansas 5 100 36,700 614 0.5
California 61 95 1,032,200 13,811 11.8
Colorado 46 96 295,100 4,124 3.5
Connecticut 10 100 223,800 2,979 2.5
Delaware 1 100 5,400 72 0.1
Florida 86 99 944,100 12,535 10.7
Georgia 59 97 330,900 5,520 4.7
Idaho 11 100 52,000 762 0.7
Illinois 35 100 258,300 3,644 3.1
Indiana 29 100 170,400 2,278 2.0
Iowa 10 100 67,900 694 0.6
Kansas 23 100 240,400 2,622 2.2
Kentucky 13 100 43,500 1,107 1.0
Louisiana 5 100 39,600 500 0.4
Maryland 8 100 48,300 731 0.6
Massachusetts 8 100 57,500 1,072 0.9
Michigan 10 100 68,100 974 0.8
Minnesota 25 96 261,500 2,510 2.1
Mississippi 16 100 152,100 1,285 1.1
Missouri 33 100 203,800 2,603 2.2
Montana 2 100 30,000 288 0.3
Nebraska 10 100 98,700 1,258 1.1
Nevada 7 100 86,400 1,322 1.1
New Hampshire 1 100 6,400 130 0.1
New Jersey 4 75 45,400 589 0.5
New Mexico 5 100 46,000 336 0.3
New York 20 95 253,300 4,723 4.0
North Carolina 33 91 174,200 2,939 2.5
(table continued next page)
Page 26
<PAGE>
(table continued)
Annualized
Approximate Rent (1) Percent of
Number of Percent Leasable (in thou- Annualized
State Properties Leased Square Feet sands) Rent
- ------------ ---------- ------- ----------- ---------- ----------
North Dakota 1 100 22,000 65 0.1
Ohio 67 100 341,200 5,413 4.6
Oklahoma 17 100 102,200 1,299 1.1
Oregon 17 100 92,400 1,232 1.1
Pennsylvania 23 100 168,600 2,310 2.0
South Carolina 48 98 147,000 3,983 3.4
South Dakota 2 100 12,600 170 0.2
Tennessee 25 96 221,300 2,652 2.3
Texas 155 99 1,288,700 13,994 11.9
Utah 8 100 51,700 703 0.6
Virginia 30 93 142,000 2,891 2.5
Washington 43 100 252,600 3,326 2.8
West Virginia 2 100 16,800 156 0.1
Wisconsin 19 100 231,900 2,952 2.5
Wyoming 4 100 20,100 266 0.2
- -------------- -------- ------- ----------- ---------- ---------
Totals/Average 1,077 98% 8,658,200 $117,164 100.0%
============== ======== ======= =========== ========== =========
</TABLE>
[FN]
(1) Annualized rent is calculated by multiplying the monthly
contractual base rent as of April 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 April 1, 2000, classified
according to the retail business types and the level of services they
provide (dollars in thousands).
Page 27
<PAGE>
<TABLE>
Percent of
Number of Annualized Annualized
Industry Properties Rent (1) Rent
- -------- ---------- ---------- ----------
<S> <C> <C> <C>
Tenants providing services
- --------------------------
Automotive Service 104 $ 6,645 5.7%
Child Care 336 28,323 24.2
Entertainment 6 2,293 2.0
Health and Fitness 7 3,966 3.4
Private Education 6 1,695 1.4
Theaters 2 2,406 2.0
Other 10 6,502 5.5
---------- ---------- ----------
471 51,830 44.2
---------- ---------- ----------
Tenants selling goods and services
- ----------------------------------
Automotive Parts 62 5,404 4.6
Business Services 1 124 0.1
Convenience Stores 104 9,815 8.4
Home Improvement 20 2,619 2.2
Pet Supplies and Services 6 1,205 1.0
Restaurants 176 14,349 12.3
Video Rental 35 4,510 3.9
---------- ---------- ----------
404 38,026 32.5
---------- ---------- ----------
Tenants selling goods
- ---------------------
Apparel Stores 4 2,799 2.4
Automotive Parts 82 4,703 4.0
Book Stores 1 450 0.4
Consumer Electronics 37 5,717 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 34 6,085 5.2
Home Improvement 14 1,655 1.4
Office Supplies 8 2,476 2.1
Pet Supplies 2 467 0.4
Shoe Stores 4 890 0.7
---------- ---------- ----------
202 27,308 23.3
---------- ---------- ----------
TOTALS 1,077 $ 117,164 100.0%
========== ========== ==========
</TABLE>
Page 28
<PAGE>
[FN]
(1) Annualized rent is calculated by multiplying the monthly
contractual base rent as of April 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.
Approximately 97.7% or 1,052 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
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 March 31, 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).
Page 29
<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 $205.2
Average
interest rate -- -- 7.99% 7.99%
Variable
rate debt $133.8 $3.1 -- $136.9 $136.9
Average
interest rate 7.34% 7.35 -- 7.34%
</TABLE>
[FN]
(1) $110 million matures in 2007, $100 million matures in 2008 and $20
million matures in 2009.
(2) We base the fair value of the fixed rate debt at March 31, 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
March 31, 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).
Page 30
<PAGE>
Exhibit No. Description
=========== ===========
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).
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).
Page 31
<PAGE>
Exhibit No. Description
=========== ===========
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).
10.1 $25 million Demand Promissory Note dated February 1,
2000 between Realty Income Corporation and Crest Net
Lease, Inc. filed herein.
10.2 Master Management Agreement dated January 1, 2000
between Realty Income Corporation and Crest Net Lease,
Inc. filed herein.
10.3 First Amendment dated March 24, 2000 to the $25 million
Revolving Credit Agreement dated February 1, 2000 (filed
herein).
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 32
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: May 12, 2000 -------------------------------------
Gary M. Malino, Senior Vice President
Chief Financial Officer (Principal
Financial and Accounting Officer)
EXHIBIT INDEX
=============
Exhibit No. Description
- ----------- ------------
10.1 $25 million Demand Promissory Note dated February 1,
2000 between Realty Income Corporation and Crest Net
Lease, Inc. filed herein.
10.2 Master Management Agreement dated January 1, 2000
between Realty Income Corporation and Crest Net Lease,
Inc. filed herein.
10.3 First Amendment dated March 24, 2000 to the $25 million
Revolving Credit Agreement dated February 1, 2000 (filed
herein).
27 Financial Data Schedule
Page 33
EXHIBIT 10.1
DEMAND PROMISSORY NOTE
February 1, 2000
ON DEMAND, FOR VALUE RECEIVED, the undersigned, Crest Net Lease, Inc.
a Delaware corporation ("Company"), HEREBY PROMISES TO PAY to the
order of Realty Income Corporation, a Maryland corporation (together
with its successors and assigns, "Holder"), the aggregate unpaid
amount of all advances, indebtedness, loans, payables and other
extensions of credit and obligations not to exceed $25 million,
(individually, an "Advance" and, collectively, "Advances") made by
Holder to Company, or otherwise owing by Company to Holder, from time
to time, as set forth on the books and records of Holder.
1. Definitions. For purposes of this Note, the following terms have
the meanings set forth below:
"Applicable Rate of Interest" means, at Company's option, either (1)
LIBOR + 2.50%, or (ii) Base Rate + 1.50%. Base Rate shall mean the
higher of (a) the current prime rate as reported in the Wall Street
Journal and (b) a rate of interest 1/2 of 1% over the effective
overnight Federal Funds Rate as published for such day by the Federal
Reserve Bank. Company will be required to indicate the Applicable
Rate of Interest applied on the date of each Advance.
"Fees" shall mean the following:
- $250,000 payable on the date of the first Advance; and
- $20,000 per annum, payable to Holder on January 31, of each year;
and
- 0.40% accrued per annum on $25 million (calculated on the basis
of a 360-day year for the actual number of days involved) payable
in arrears on the last business day of each calendar quarter; and
- $62,500 payable on the date of the first Advance after
February 1, 2002.
"Note" shall mean this Demand Promissory Note as originally executed
or if later amended, modified or supplemented, then, as so amended,
modified or supplemented.
"Note Obligation" shall mean all principal, interest (including
interest which accrues after the commencement of any case or
proceeding in bankruptcy, or for the reorganization of Company), fees,
charges, expenses, attorneys' fees and any other sum chargeable to
Company under this Note, and all principal and interest due in respect
of the Advances.
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<PAGE>
2. Payments. This Note may be prepaid at any time in whole or in
part from time to time without penalty or premium. The principal of
this Note is payable in lawful money of the United States of America
and in same day funds, without abatement, reduction, deduction,
counterclaim recoupment, defense or setoff, to Holder at any account
as Holder may designate. Each Advance made by Holder to Company, and
all payments made on account of principal, Applicable Rate of Interest
and Fees thereof, shall be recorded by Holder and, prior to any
transfer thereof, endorsed on the grid attached hereto, which is part
of this Note; provided, however, that any failure to make such
endorsement on such grid shall not limit or otherwise affect the
obligations of Company hereunder.
3. Holder Rights. Upon demand for payment hereunder, Holder is
hereby authorized at any time and from time to time, to the fullest
extent permitted by law, to set off and apply any indebtedness at any
time owing by Holder to or for the credit or the account of Company
against any and all of the obligations of Company now or hereafter
existing under this Note, irrespective of whether or not Holder shall
have made any demand under this Note and although such obligations may
be unmatured. Holder agrees promptly to notify Company after any such
set off and application; provided that the failure to give such notice
shall not affect the validity of such set off and application. The
rights of Holder under this Section are in addition to other rights
and remedies (including, without limitation, other rights of set off)
which Holder may have.
4. Waiver. Except as otherwise provided for in this Note, and to the
fullest extent permitted by applicable law, Company waives: (a)
presentment, notice, demand and protest, and notice of presentment,
dishonor, intent to accelerate, acceleration, protest, default,
nonpayment, maturity, release, compromise, settlement, extension or
renewal of this Note at any time held by Holder on which Company may
in any way be liable, and hereby ratifies and confirms whatever Holder
may do in this regard; (b) all rights to notice and a hearing prior to
Holder's taking possession or control of, or to Holder's replevy,
attachment or levy upon, any property, real or personal, tangible or
intangible of Company or any bond or security which might be required
by any court prior to allowing Holder to exercise any of its remedies;
and (c) the benefit of all valuation, appraisal and exemption laws.
Company acknowledges that it has been advised by counsel with respect
to this Note and the transactions evidenced hereby. No failure or
delay on the part of Holder in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right,
power or privilege. All rights and remedies existing hereunder are
cumulative to, and not exclusive of, any rights or remedies otherwise
available.
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<PAGE>
5. Lost or Destroyed Note. Upon receipt by Company of evidence
reasonably satisfactory to Company of the loss, theft, destruction or
mutilation of this Note, and in the case of any such loss, theft or
destruction, upon delivery of an indemnity reasonably satisfactory to
Company or, in case of any such mutilation, upon surrender and
cancellation of this Note, Company will issue a new Note of like tenor
in lieu of this Note.
6. Severability. Wherever possible, each provision of this Note
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Note shall be prohibited
by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining
provisions of this Note.
7. Amendment and Modification. Each of Company and Holder agrees
that no change, waiver, modification or amendment of this Note shall
be effective without the prior written approval of each.
8. Costs and Expenses. Company agrees to pay on demand all costs and
expenses, if any, including counsel fees and expenses, in connection
with the enforcement (whether through negotiations, legal proceedings
or otherwise) of this Note.
9. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN THAT STATE.
10. Successors and Assigns. This Note shall be binding upon Company
and its successors, and shall inure to the benefit of Holder and its
successors and permitted assigns (including Lender).
CREST NET LEASE, INC.
By:
------------------------------
Title:
------------------------------
Page 3
<PAGE>
ADVANCES AND PAYMENTS
<TABLE>
Amount Principal Applicable
of Paid or rate of
Date Advance Repaid Interest
- ---- ------- --------- ----------
<S> <C> <C> <C>
Fees and Unpaid Notation
Expenses Principal made by
- ---------------- --------- --------
<S> <C> <C>
Paid Accrued
- ---- -------
<S> <C>
</TABLE>
Page 4
FORM OF ENDORSEMENT
For value received, , hereby endorses to the
order of the Demand Promissory Note of
, dated , , payable to the
undersigned.
[HOLDINGS]
By:
---------------------------
Title:
---------------------------
Page 5
EXHIBIT 10.2
MASTER MANAGEMENT AGREEMENT
THIS MASTER MANAGEMENT AGREEMENT (this "Agreement"), made as of
January 1, 2000, by and between REALTY INCOME CORPORATION, a Maryland
corporation, having an office at 220 West Crest Street, Escondido,
California 92025 ("RI"), and CREST NET LEASE, INC., a Delaware
corporation, having an office at 220 West Crest Street, Escondido,
California 92025 ("Crest Net"). All capitalized terms that are not
defined herein shall have the meanings set forth on the list of
definitions attached hereto as Exhibit I.
RECITALS
WHEREAS, Crest Net intends to seek out and buy properties that meet
certain investment criteria;
WHEREAS, RI's officers, employees and contractors are experienced in
the business of real estate acquisition and management; and
WHEREAS, Crest Net desires to obtain certain administrative and other
services from RI in connection with the (i) identification of
properties suitable for acquisition by Crest Net, (ii) management,
operation, supervision and maintenance of properties it acquires, and
(iii) sale of the properties it acquires, RI desires to render such
services, as more fully described herein, on the terms and conditions
hereinafter set forth.
NOW THEREFORE, in consideration of the mutual promises and covenants
herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties
hereto agree as follows:
ARTICLE 1
ACQUISITION SERVICES
1.1 Acquisition Services. RI shall provide to Crest Net certain
services relating to the identification of Suitable Acquisitions, Due
Diligence with respect to Suitable Acquisitions and other Properties
approved by Crest Net, and the negotiation and documentation of
Property acquisitions, including those services described in this
Article 1 (collectively the "Acquisition Services").
1.2 Identification of Suitable Acquisitions. RI shall, in the
ordinary course of its business, seek to identify Properties that in
the good faith judgment of RI constitute Suitable Acquisitions. RI is
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under no obligation to Crest Net to identify, offer or provide any
information regarding any Properties that are also suitable Properties
for RI's portfolio, as determined in RI's sole discretion.
1.3 Procedures Upon Identification of Suitable Acquisitions.
(a) RI shall promptly inform Crest Net whenever it identifies a
Suitable Acquisition.
(b) RI shall promptly assemble the Suitable Acquisition
Information relating to such Suitable Acquisition and
deliver it to Crest Net.
(c) Together with delivery of the Suitable Acquisition
Information, RI shall deliver a notice to Crest Net that
(i) all the Suitable Acquisition Information relating to
such Potential Suitable Acquisition has been or is
simultaneously being delivered to Crest Net and (ii) upon
receipt by Crest Net of such notice, the Due Diligence
Period applicable to such Suitable Acquisition will begin to
run.
(d) Prior to and during the Due Diligence Period relating to any
Suitable Acquisition, RI shall perform Due Diligence
relating to Crest Net's potential purchase of such Suitable
Acquisition that it deems necessary or appropriate. As
promptly after receipt, but no later than ten (10) days
prior to the end of the applicable Due Diligence Period, RI
will deliver to Crest Net a copy of all the existing leases
for the Suitable Acquisition that are in RI's possession or
are reasonably available to RI and any other information
that is in RI's possession or is reasonably available to RI
that Crest Net has previously requested in writing from RI
that is reasonably necessary to determine whether the
Suitable Acquisition meets Crest Net's investment criteria.
To the extent that RI obtains third party reports relating
to such Suitable Acquisition, RI shall promptly deliver
copies of such reports to Crest Net. To the extent RI
obtains information about a materially adverse condition of
such Suitable Acquisition (including, without limitation, a
Terminable Defect) or information that leads it to believe
that any Suitable Acquisition Information previously
delivered was materially inaccurate, RI shall promptly
notify Crest Net of such condition or inaccuracy (which
notification obligation, and the obligation to deliver third
party reports pursuant to the preceding sentence, shall
continue after the end of the applicable Due Diligence
Period to and including the closing of the acquisition of
such Suitable Acquisition, if Crest Net gives an Acquisition
Approval Notice with respect to such Suitable Acquisition).
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(e) At any time on or prior to the last day of the Due Diligence
Period applicable to any Suitable Acquisition, Crest Net may
deliver an Acquisition Approval Notice to RI with respect to
such Suitable Acquisition.
(f) If Crest Net does not give an Acquisition Approval Notice
with respect to any Suitable Acquisition prior to the
completion of the Due Diligence Period, then RI shall have
no further obligation to Crest Net in connection with such
Suitable Acquisition.
1.4 Acquisition Negotiation and Documentation. Crest Net shall be
responsible for negotiating the terms of its purchase of any Property.
RI shall, at Crest Net's request, assist Crest Net in such
negotiations. RI shall assist Crest Net in preparing and reviewing
documents related to such acquisitions.
1.5 Other Properties. Nothing in this Article 1 shall preclude RI
from identifying to Crest Net any Property which it believes may be
appropriate for Crest Net but may not meet all of the criteria set
forth on Exhibit III. If RI identifies a Property to Crest Net that
does not meet all of the criteria set forth on Exhibit III, Crest Net
shall, in its sole discretion, provide notice to RI not later than
five (5) days after RI identifies such Property to Crest Net (i)
directing RI to proceed with Due Diligence on such Property on Crest
Net's behalf, in which case the procedures set forth in section 1.2
shall apply, or (ii) informing RI that it is not interested in
pursuing such Property, in which case RI shall have no further
obligation to Crest Net in connection with such Property.
ARTICLE 2
PROPERTY MANAGEMENT SERVICES
Crest Net shall appoint RI, or cause RI to be appointed, as the
Property Manager of each and every Property acquired by Crest Net
during the term of this Agreement (each, a "Crest Net Property"),
regardless of whether such Property was initially identified by RI or
was acquired without the involvement of RI. RI shall provide those
property management services as mutually agreed between the parties
and listed and describe in writing on a schedule which shall be signed
and dated by both parties and attached to this Agreement. Any services
listed on such a schedule shall become "Property Management Services"
for the purposes of this Agreement. At least annually the parties
shall review and modify as appropriate the scope and description of
the Property Management Services.
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ARTICLE 3
ADMINISTRATIVE SERVICES
3.1 General. RI shall, as mutually agreed from time to time by RI
and Crest Net, provide certain administrative services to Crest Net
including those listed in this Article 3 (collectively the
"Administrative Services"). Any services in addition to those
specified in this Article 3 which the parties mutually agree RI shall
provide to Crest Net shall be listed and described in writing on a
schedule which shall be signed and dated by both parties and attached
to this Agreement. Any services listed on such a schedule shall
become part of the Administrative Services for the purposes of this
Agreement. At least annually the parties shall review and modify as
appropriate the scope and description of the Administrative Services.
3.2 Accounting. RI shall (i) establish and maintain on an accrual
basis in accordance with generally accepted accounting principles
("GAAP"), consistently applied, accurate and complete books of account
with proper entries of all receipts, income and disbursements
pertaining to Crest Net, and (ii) establish and maintain such other
books, accounts and records as Crest Net reasonably requests RI to
maintain (the books, accounts and records described in clauses (i) and
(ii) are collectively referred to as the "Books and Records"). The
Books and Records shall be and remain the property of Crest Net and
shall be available to Crest Net and its representatives for inspection
at any time during regular business hours at RI's main office as set
forth in the preamble to this Agreement or at such other place or
places as are approved by Crest Net.
3.3 Financial Controls and Auditing. RI shall:
(a) Establish systems of internal control for receipt and
disbursement of funds, materials, supplies and other assets;
(b) Establish internal financial controls to maintain the
integrity of records and to promote efficiency;
(c) As necessary, coordinate and assist Crest Net with its
external audits;
(d) Prepare budgets and financial projections for Crest Net at
least annually; and
(e) Maintain the relationship with outside auditors and public
accountants.
3.4 Tax Reporting. RI shall prepare information to be presented to
outside accountants who will prepare Crest Net's federal, state and
local tax returns, including quarterly tax estimates, to the extent
required. Crest Net will be responsible for the costs of its annual
audit and preparation of tax returns by outside accountants.
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3.5 Cash Management and Finance. RI shall provide cash management
and assistance with financing including arrangements for bank credit
lines, long-term strategic planning for debt financing and development
of temporary investment programs.
3.6 Human Resources. RI shall be responsible for the Human Resources
requirements of Crest Net, including, but not limited to:
(a) All responsibilities associated with operating and
maintaining the payroll system for Crest Net employees
(Crest Net will be responsible for external payroll system
costs);
(b) Assisting in compliance with new and existing employee legal
requirements, including the Americans with Disabilities Act,
EEOC matters, and sexual harassment; and
(c) All responsibilities associated with operating any benefits
system that Crest Net, in its sole discretion, offers to
Crest Net employees.
(d) Crest Net shall be solely and exclusively responsible for
funding employee salaries and any benefit system it offers
to its employees. Nothing in this section is intended to
create any obligation or duty of RI to contribute to or fund
in any manner any employee's salary or benefits for Crest
Net employees.
3.7 Management Information Systems. RI shall be responsible for the
MIS requirements of Crest Net, including, without limitation, data
processing, maintaining computer systems, information storage and
establishing Internet web sites and intranet systems. Crest Net will
be responsible for the costs of repairs and replacement of it computer
systems or software and web site design.
3.8 Risk Management. RI shall provide a risk management program to
review possible loss exposures for Crest Net, recommend efficient
methods of protection either through the purchase of insurance, self-
insurance or other risk management techniques and arrange for the
purchase of insurance coverage. In addition, RI shall:
(a) Assist in the establishment of safety and security programs
to avoid or minimize risk and loss;
(b) Supervise investigation procedures, review claims, negotiate
and assist in, and evaluate proposals for, settlements;
(c) Secure, at Crest Net's expense, a commercial general
liability policy in the amount determined by RI; and
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(d) Secure, as reasonably determined, at Crest Net's expense,
policies for auto, crime, fiduciary, property, group travel,
employment practices, workers' compensation insurance,
directors and officers liability and/or umbrella liability.
3.9 Legal Services. RI shall have its internal staff perform or
arrange for legal services requested by Crest Net. Internal legal
services shall be billed at the rates set forth on Exhibit II. Legal
Services performed by outside law firms shall be billed at the rates
charged by those firms.
ARTICLE 4
COMPENSATION
4.1 Compensation for Acquisition Services, Property Management
Services and Administrative Services. As consideration for the
Acquisition Services, Property Management Services and Administrative
Services provided hereunder, Crest Net shall pay to RI an amount as
set forth below:
(a) RI shall use its good faith efforts in allocating the time
its employees and contractors devote to performing services
on behalf of Crest Net. On services that are billed on an
hourly basis, RI shall bill the time spent by its
professional staff or contractors at the rates set forth in
Exhibit II. RI shall update such Exhibit from time to time.
Employees or contractors not identified in Exhibit II will
be billed at their hourly rate, if the employee or
contractor is paid by the hour, or according to the rate RI
charges, or would charge, a third party for the same
services, if the employee or contractor is paid a salary.
The hourly rates of all employees and contractors providing
services hereunder shall at all times be commercially
reasonable and competitive. On services that are billed
based upon an individual property acquisition or a
percentage of revenue, RI shall bill such services at the
rates set forth in Exhibit II. RI shall update Exhibit II
from time to time. The rates and percentages charged shall
at all times be commercially reasonable and competitive.
(b) RI shall also charge Crest Net its cost for all incidental
and out-of-pocket costs and expenses incurred in providing
Acquisition, Property Management Services and Administrative
Services, including, but not limited to reasonable travel
and living expenses, supplies, charges for all long distance
telephone calls, and document reproduction.
4.2 Legal Services. Crest Net shall compensate RI for any legal
services provided to it in accordance with this Section 4.2. Attached
hereto as Exhibit II is a list of (x) RI's internal legal staff that
will be performing legal services and (y) the hourly rate that will
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initially be charged to Crest Net for each staff member. RI shall
update such list from time to time, and the hourly rates of all legal
staff members providing legal services shall at all times be
commercially reasonable and competitive. Fees and expenses incurred
with respect to outside counsel will be passed through to Crest Net.
4.3 Invoices. RI shall provide a reasonably detailed invoice to
Crest Net, within twenty (20) days after the end of each month, for
all Administrative and Acquisition Services provided in such month,
which invoice shall be accompanied by such corroborating documentation
as Crest Net may reasonably request from time to time. Amounts
payable under this Article 4 shall be paid in arrears on or before the
last day of the month in which Crest Net receives such invoice;
provided, however, that if the invoice is not timely sent by RI, the
amounts payable shall be due twenty five (25) days after the invoice
is actually sent by RI. If RI does not receive payment of any amount
due within the time provided for payment, such unpaid amount, after
second notice, shall bear interest at a rate equal to the lesser of
(i) the annual "prime" or "reference" rate then in effect by Bank of
America or (ii) the maximum rate permitted by applicable law from and
including the date on which payment should have been made until but
excluding the date on which payment is made.
4.4 Obligation to Pay. The fees and reimbursements provided for in
this Article 4 shall be in addition to other fees and reimbursements
provided for elsewhere in this Agreement. Crest Net shall be
responsible for compensating RI for its costs and expenses incurred
under Article 1 regardless of whether Crest Net has obtained fee title
to a Property identified to it by RI.
ARTICLE 5
ASSIGNMENT AND SUBCONTRACTING
5.1 Assignment. This Agreement and the rights and obligations
hereunder shall not be assigned by any party hereto without the prior
written consent of the other party hereto except as and to the extent
expressly permitted hereunder. Notwithstanding the foregoing, RI may
assign this Agreement in its entirety to any of its Subsidiaries.
5.2 Subcontracting. RI may engage one or more companies or persons,
including Affiliates or Subsidiaries of RI, to perform any one or more
of the services to be performed hereunder by RI; provided, however,
that RI shall not be released from its obligations hereunder by virtue
of such subcontracting.
ARTICLE 6
TERM AND TERMINATION
6.1 Term. The term of this Agreement shall commence on the date
first stated above and shall continue until midnight on the date
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preceding the second anniversary of the date hereof, unless this
Agreement shall be terminated in its entirety and the obligations of
the parties hereunder shall sooner cease and terminate in their
entirety, as hereinafter provided. However, the term of this
Agreement shall automatically extend for one-year periods unless
either Crest Net or RI provides the other with at least three (3)
months written notice of its intention to terminate this Agreement.
6.2 Termination Upon Breach. If either party shall commit a breach
of this Agreement (the "Breaching Party"), the other party (the "Non-
Breaching Party") may serve written notice upon the Breaching Party,
which notice shall set forth the details of such alleged breach. The
party to whom the notice is sent shall, within thirty (30) days after
its receipt of said notice, cure such breach; provided, however, that
if (x) the breach is a non-monetary breach and cannot reasonably be
cured within a thirty (30) day period and (y) the breaching party
commences action necessary to cure such breach within the thirty (30)
day period and thereafter prosecutes such cure with due diligence,
then the period of time within which such breach may be remedied shall
be extended so long as the breaching party continues to prosecute the
cure with due diligence. If the Breaching Party fails to cure the
breach within the applicable cure period (a "Breach Event"), then the
Non-Breaching Party may terminate this Agreement in its entirety.
Termination of this Agreement by the Non-Breaching Party shall be a
distinct, separate and cumulative remedy and shall not operate to
exclude or deprive the Non-Breaching Party of any other right or
remedy allowed it at law or in equity or elsewhere in this Agreement.
6.3 Termination due to Insolvency. If, at any time during the term
of this Agreement there shall be filed against RI or Crest Net in any
court, pursuant to any statute either of the United States or any
state, a petition in bankruptcy or insolvency or for reorganization or
for the appointment of a receiver or trustee of all or a portion of
the property of RI or Crest Net, and such petition is not discharged
within thirty (30) days after the filing thereof, or if RI or Crest
Net makes an assignment for the benefit of creditors, or petitions for
or enters into an arrangement, or permits this Agreement to be taken
under any writ of execution or attachment, then in any of such events,
the party who is not subject to the above-mentioned action(s) hereto
shall have the right to terminate this Agreement by giving written
notice, by certified mail, effective as of a particular date specified
in the notice.
6.4 Termination due to Risk to REIT Status. If RI shall determine in
good faith that RI's retention under any provision of this Agreement
pursuant to which it receives compensation shall or may deprive RI of
any material benefits appurtenant to RI's qualification as a real
estate investment trust ("REIT") under all applicable laws, including,
without limitation, the Internal Revenue Code of 1986, as amended from
time to time, then RI may, upon thirty (30) days notice to Crest Net,
terminate such provision of this Agreement to the extent necessary for
RI to avoid the deprivation of such benefits (it being agreed that if
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RI's waiver of its right to receive any compensation to which it is
entitled under this Agreement is necessary in order for RI not to be
so deprived of such material benefits appurtenant to RI's qualifi-
cation as a REIT, then (x) RI shall waive its right to receive such
compensation to the extent that, and for so long as, such waiver will
result in RI not being so deprived, and (y) for so long as such waiver
shall result in RI not being so deprived, RI shall have no right to
terminate the applicable provision of this Agreement pursuant to this
paragraph provided, however, in the event RI is required to waive its
right to receive compensation pursuant to this paragraph, RI shall
have the right to either (i) assign such provision, provided that RI
guarantees the duties and liabilities of the assignee under this
Agreement or (ii) terminate the provisions of this Agreement provided
that a replacement party reasonably acceptable to Crest Net has been
hired to replace RI and provide the services required under this
Agreement; and for so long as such assignment shall result in RI not
being so deprived, RI shall have no right to so terminate the
applicable provision of this Agreement). For purposes of the
foregoing, the determination as to whether RI will be deprived of
benefits appurtenant to its qualification as a REIT shall be made by
RI in its reasonable discretion.
6.5 Effect of Termination. Upon any termination of this Agreement in
whole, all of the obligations of any party hereto thereafter accruing
shall terminate immediately, except for any obligations that expressly
survive such termination.
ARTICLE 7
ARBITRATION
7.1 Procedure. All claims, disputes and other matters in question
between the parties arising out of or relating to this Agreement or
the breach thereof may be decided by arbitration in San Diego County,
California in accordance with rules of the American Arbitration
Association then applying. Either party may request arbitration at
any time after first attempting to resolve the matter in good faith
with the other party. Notice of the request for arbitration shall be
filed in writing with the other party to this Agreement and the
American Arbitration Association within a reasonable time after the
claim, dispute or other matter in question has arisen, and in no event
shall it be made after the date when institution of legal or equitable
proceedings based upon such claim, dispute or other matter in question
would be barred by the applicable statute of limitations. Unless the
other party, within ten (10) days of the receipt of such notice, sends
to the claimant a written objection to such arbitration proceedings,
then both parties shall be deemed to have elected to arbitrate such
dispute. In the absences of such agreement, either party may resort
to judicial proceedings.
7.2 Awards. In rendering any award, the arbitrator or arbitrators
shall not deviate from or add to the provisions of this Agreement.
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The award rendered in the arbitration shall be final, and judgment may
be entered upon it in accordance with applicable law in any court
having jurisdiction thereof. Reasonable costs, expenses and fees
(including, without limitation, attorneys' fees) of the prevailing
party in such arbitration shall be assessed against the non-prevailing
party in the award.
7.3 Continued Performance. RI shall continue to carry on its
obligations hereunder during any arbitration proceedings, and Crest
Net shall continue to make payments to RI in accordance with the terms
of this Agreement (which payments may be made to a court registry or
escrow agent if Crest Net disputes its obligations to make the same),
unless the matter in dispute concerns the termination of this
Agreement, in which event the parties must expressly agree in writing
that the parties shall continue to perform pending an award in the
arbitration proceedings.
ARTICLE 8
MISCELLANEOUS
8.1 Notices. All notices, demands, consents, approvals, waivers or
other communications (each, a "Notice") given by any party hereto to
any other party hereto under this Agreement shall be in writing and,
unless otherwise required by law, shall be sent (a) by hand, (b) by
United States Mail, certified or registered, postage prepaid, return
receipt requested, or (c) by a nationally-recognized overnight
carrier, in each case addressed to the party to be notified at the
address for such party specified in the preamble of this Agreement, or
to such other place in the continental United States as any party may
from time to time designate by at least 20 days' notice to the other
parties hereto. Each Notice shall be deemed to have been given on the
date such Notice is actually received as evidenced by a written
receipt therefor, and in the event of failure to deliver by reason of
changed address of which no Notice was given or refusal to accept
delivery, as of the date of such failure.
8.2 Amendment. This Agreement cannot be changed or modified, varied
or altered except by an agreement, in writing, executed by each of the
parties hereto.
8.3 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
8.4 Liability to Third Parties. Except as otherwise expressly
provided in this Agreement, all expenses, debts and liabilities
incurred to third parties in accordance with the terms hereof, or
incurred by Crest Net directly, are and shall be obligations of, and
paid by Crest Net, and RI shall not be liable for any such obligations
by reason of its management, supervision or operation of any Crest Net
Property.
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8.5 Indemnification. Except for willful misconduct or gross
negligence, each party shall indemnify, defend and hold harmless the
other party, and their respective officers and employees, from any
loss, cost, liability and expense, including, but not limited to,
reasonable counsel fees, that results from a party's performance of
its obligations hereunder in accordance with the terms hereof. The
indemnification obligations set forth in this Section shall survive
the expiration or earlier termination of this Agreement.
8.6 REIT Status. Notwithstanding anything in this Agreement to the
contrary, RI shall not be entitled to receive, and Crest Net shall not
be obligated to pay, any compensation otherwise payable under this
Agreement to the extent that, in the opinion of RI's tax counsel, the
accrual or receipt by RI of such compensation would cause RI to fail
to qualify as a REIT for United States federal income tax purposes.
Any amounts paid by Crest Net to RI in excess of the amount that RI is
permitted to receive pursuant to this agreement shall be treated as an
advance by such party, repayable by RI within five (5) business days
after written demand thereof from such party with interest at the
Applicable Federal Rate.
8.7 Attorneys' Fees. In the event of litigation, including
arbitration, between RI and Crest Net arising out of the terms of this
Agreement, the other party shall pay the reasonable legal fees, costs
and expenses of the prevailing party relating to such litigation.
8.8 Entire Agreement. This Agreement, together with its exhibits and
schedules, constitutes the entire agreement between RI and Crest Net
relative to the subject matter hereof. Any previous agreement between
the parties is superseded by this Agreement. This Agreement may be
executed in multiple counterparts, each of which shall constitute an
original, but all of which shall constitute one document.
8.9 Devotion of Time; Non-Exclusivity. RI agrees to devote to the
business and affairs of Crest Net and its Properties such time and to
render such services as a prudent business person, in good faith,
would deem necessary to conduct such business and affairs efficiently,
and otherwise to keep, observe and perform fully and punctually all of
its obligations under this Agreement; provided, however, that RI shall
not be obligated to devote its services to Crest Net on an exclusive
basis. It is expressly understood that RI may engage in any other
business, investment or profession, including the construction,
development, ownership, operation and management of or investment in
real estate so long as such other business, investment or profession
shall not adversely affect RI's performance under this Agreement.
8.10 Ownership of Materials; Confidentiality. All estimates,
projections, studies, reports, charts, recommendations, surveys,
plans, drawings, agreements and other data, information, documents and
work in any way relating to Crest Net's Properties prepared and done
by RI pursuant hereto or otherwise in the possession of RI shall be
and remain the property of Crest Net. Throughout the term of this
Page 11
<PAGE>
Agreement, RI shall promptly furnish Crest Net with accurate, current
and complete copies of all such data and materials with respect to the
Properties. Immediately following any termination of this Agreement,
RI shall turn over to Crest Net originals, and where no originals are
available, copies of all such data and materials in RI's possession,
and Crest Net shall have the right to use the same without further
compensation to RI. RI agrees, for itself and all persons retained or
employed by RI in performing its services hereunder, to hold in strict
confidence and not to use or disclose to others any confidential or
proprietary information of Crest Net heretofore or hereafter disclosed
to RI or to any such persons (all information obtained or provided
relating to Crest Net or the Properties's financial condition or
otherwise designated as such by Crest Net conclusively being deemed
confidential, including, but not limited to, any data, information,
plans, programs, processes, test results, costs, operations or
identities of tenants which may come within the knowledge of RI in the
performance of, or as a result of, its services), except where: (a)
Crest Net specifically authorizes the disclosure of any information to
others or such disclosure reasonably results from the performance of
RI's duties hereunder; or (b) such written data or information
previously and lawfully shall have been made publicly available by
parties other than RI.
8.11 Relationship of the Parties. Nothing contained in this
Agreement shall be deemed or construed as creating a partnership,
joint venture, co-ownership, agency, or employee-employer relationship
between Crest Net and RI. The relationship of RI to Crest Net is that
of any independent contractor. RI and Crest Net agree not to
represent to third parties a contrary relationship nor to take any
action from which third parties reasonably could infer that RI and
Crest Net are partners, joint venturers, co-owners, agents, or
employee-employer. Any breach by Crest Net or RI of this provision
shall be considered a material breach of this Agreement.
8.12 Remedies Cumulative. Except as otherwise may be expressly
provided to the contrary herein, all rights, powers, privileges and
remedies afforded to the parties by this Agreement shall be cumulative
and in addition to, and not in substitution for or exclusive of, any
other right, power, privilege or remedy provided for in this Agreement
or hereafter existing at law, in equity or otherwise.
8.13 Waiver. Except as otherwise may be expressly provided to the
contrary herein: (a) no failure to exercise or delay in exercising by
any party hereto any right or remedy consequent upon a breach, and no
failure to insist upon or delay in insisting upon the strict
performance, or any provision of this Agreement shall constitute or
operate as a waiver thereof or of any other right or remedy of any
other provision hereof or of any subsequent breach of the same or any
other provision hereof, and such party shall retain all rights and
remedies provided for herein or by applicable law with respect to the
same or of any subsequent act or omission which constitutes such
breach or non-performance; and (b) no partial exercise of any right or
Page 12
<PAGE>
remedy shall preclude any other or further exercise thereof or other
exercise of any other right or remedy provided for herein or now or
hereafter existing at law, in equity or otherwise. A waiver in one or
more instances of any provision hereof shall apply to the particular
instance and at the particular time only, and no such waiver shall be
deemed a continuing waiver. No provision of this Agreement to be
performed or complied with by any party, and no breach thereof, shall
be waived, altered or terminated except by a written instrument
executed by the other party. No waiver of any breach shall affect or
alter this Agreement, but each and every provision of this Agreement
shall continue in full force and effect with respect to any other then
existing or subsequent breach thereof. No course of dealing between
the parties shall operate as waiver of any of their respective rights,
powers or privileges under this Agreement.
8.14 Further Assurances. Each party to this Agreement agrees that at
any time and from time to time after the date hereof it will, at its
own cost and expenses, immediately following the reasonable request of
the other party hereto, promptly execute, acknowledge (if necessary)
and deliver, or cause to be promptly executed, acknowledged (if
necessary) and delivered, such agreements, assignment, certificates,
statements, instruments and documents, and promptly take, or promptly
cause to be taken, such other and further steps and actions, in either
case as may be required by law or as reasonably shall be deemed
necessary by the other party hereto in order to more fully effected
evidence or carry out the intents and purposes of this Agreement.
8.15 Invalidity of Particular Provisions. If any provision of this
Agreement or the application thereof to any party or circumstance
shall, for any reason or to any extent, be held to be invalid, illegal
or unenforceable in any respect, the remainder of this Agreement, as
well as the application to such party or circumstances other than
those as to which it is held invalid, illegal or unenforceable, shall
not be affected thereby, and, to the extent permitted by law, this
Agreement shall be legal and valid and be enforced to the fullest
extent permitted by law if such invalid, illegal or unenforceable
provision had never been included herein; it being intended by Crest
Net and RI that each of the provisions hereof shall be severable.
Moreover, it is the intention of the parties hereto that if any
provision of this Agreement is capable of two constructions, one of
which would render the provision void and the other of which would
render the provision valid, then the provision shall have the meaning
which renders it valid.
8.16 Captions; Gender and Number.
(a) The captions contained in this Agreement: (i) have been
inserted for convenience only; (ii) shall not be deemed or
constructed to be part of this Agreement; (iii) do not in
any way define, limit, enlarge, modify or describe the
Page 13
<PAGE>
scope or intent of this Agreement; and (iv) shall not be
construed as governing or otherwise affecting this
Agreement or the interpretation or construction of any
provision hereof.
(b) This Agreement shall be so construed that whenever
applicable the use of the singular number shall include the
plural number, the use of the plural number shall include
the singular number, and the use of the feminine, masculine
or neuter gender shall include the other genders.
IN WITNESS WHEREOF, the parties hereto have hereunto executed this
Master Management Agreement as of the date and year first above
written.
REALTY INCOME CORPORATION,
a Maryland corporation
By:
--------------------------------
Name:
Title
CREST NET LEASE, INC.,
a Delaware corporation
By:
--------------------------------
Name:
Title:
Page 14
<PAGE>
EXHIBIT I
DEFINITIONS
"Acquisition Approval Notice" shall mean, with respect to any Suitable
Acquisition, a notice delivered to RI that Crest Net desires to
purchase such Suitable Acquisition.
"Affiliate" shall mean, as to any entity, any other entity which,
directly or indirectly, is in control of, is controlled by, or is
under common control with, such entity. For purposes this definition,
"control" (including, with correlative meanings, the terms "controlled
by" and "under common control with") shall mean either (a) for any
entity whose stock is publicly owned and traded either (i) ownership
or voting control, directly or indirectly, of 50% or more of the
voting stock, partnership interests or other beneficial ownership
interests of the entity in question or (ii) the power to direct,
whether by contract or otherwise, the management of such entity or (b)
for any entity whose stock is not publicly owned and traded either (i)
ownership or voting control, directly or indirectly, of 20% or more of
the voting stock, partnership interests or other beneficial ownership
interests of the entity in question or (ii) the power to direct,
whether by contract or otherwise, the management of such entity.
"Due Diligence" shall mean, with respect to any Suitable Acquisition,
all necessary or desirable due diligence to be performed with respect
to the potential purchase of a Suitable Acquisition.
"Due Diligence Period" shall mean, with respect to any Suitable
Acquisition, the period that commences upon the receipt by Crest Net
of the last item of the Suitable Acquisition Information and
terminates on the latest to occur of the (i) sixty (60) days after
such commencement or (ii) thirty (30) days after Crest Net receives a
Purchase Contract applicable to such Suitable Acquisition.
"Portfolio" shall mean a group of two or more Properties that must be
purchased simultaneously (i.e., the seller of such Properties is
unwilling to sell any one or more of the Properties in such group
without simultaneously selling all the other Properties in such
group).
"Property" shall mean any real estate property that might be suitable
for acquisition by RI or Crest Net.
"Purchase Contract" shall mean, with respect to any Suitable
Acquisition, either (i) a fully-negotiated contract of sale with
respect to such Suitable Acquisition that has been presented by the
seller for execution by Crest Net, or (ii) a contract of sale with
respect to such Suitable Acquisition that may be terminated by Crest
Net without penalty to Crest Net at any time during the Due Diligence
Period applicable to such Suitable Acquisition.
Page 15
<PAGE>
"Subsidiary" shall mean any entity in which RI has at least a 50%
direct or indirect ownership interest.
"Suitable Acquisition" shall mean any Property that satisfies all of
the criteria set forth on Exhibit III to the Agreement, whether it is
a single property, one or more properties within a Portfolio, or an
entire Portfolio. The term Suitable Acquisition does not include a
Property that RI, in its sole discretion, determines would fit within
its own investment criteria and that RI proposes to acquire for its
own Portfolio.
"Suitable Acquisition Information" shall mean, with respect to any
Suitable Acquisition, the following information with respect to such
Suitable Acquisition:
(i) the location and address of such Suitable Acquisition
(including any maps in RI's possession), photographs of such
Suitable Acquisition (to the extent such photographs are in
RI's possession), a site or layout plan and a complete
physical description of such Suitable Acquisition;
(ii) a rent roll that includes all information available to RI on
renewal options, termination options and "kick-outs", as well
as information on recoveries;
(iii) the price at which such Suitable Acquisition (or the
Portfolio in which such Suitable Acquisition is located) is
being offered by the seller, including any acquisition
reserves;
(iv) a pro forma for the current year; three years of historical
operating statements that show both income and expenses to
the extent such three years of historical information is in
RI's possession or control; as well as a copy of RI's
discounted cash flow projection and the supporting
underwriting assumptions;
(v) a copy of current demographic information, if available;
(vi) any term sheets, letters of intent, draft contracts of sale
and due diligence materials in RI's possession or otherwise
reasonably available to RI; and
(vii) if such Suitable Acquisition is part of a Portfolio, RI's
good faith determination of the fair market value of each
Property in such Portfolio (the aggregate of which will equal
the purchase price at which the seller is offering the
applicable Portfolio).
Page 16
<PAGE>
"Terminable Defect" shall mean any of the following conditions
relating to any Suitable Acquisition: (i) a material environmental
liability; (ii) a material defect in the title to the Property such
that title insurance cannot be obtained providing coverage against
same; or (iii) a material structural defect.
Page 17
EXHIBIT II
1. Property Management Fee 1% of Revenue
2. Accounting fee $1,000 per month
Transaction fee of $250 per
completed property
Transaction fee of $1,000 per
development property
3. Internal Legal
- Hourly -
Senior Attorney $200
Attorney 150
Attorney Assistant 85
Secretarial 50
4. Computer Consultant
- Hourly - $100
5. Acquisition Commission 2% of total cost of property
acquired
6. Benefits to be reimbursed by Crest Net
- 401 K
- Health Insurance
- Dental Insurance
- Life Insurance
- Disability Insurance
- Dividends on restricted stock vested after January 1, 2000
7. Costs to be paid by Crest Net
- Cellular phone
- Phone useage
- ADP payroll fee
- Pac Bell phone line
- Long distance charges
- Computer and software repairs and replacement
- Outside audit
- Tax preparation
- General comprehensive liability insurance
- Other insurance policies
- Outside legal counsel
Page 18
EXHIBIT III
CREST NET LEASE TARGET INVESTMENTS
1. Net leased single tenant retail land or land and building located
within the United States;
2. Completed or to-be-built projects;
3. Located within or in close proximity to a major MSA;
4. Leased to a national, strong regional retail company or a multi-
unit franchisee of a nationally known franchise;
5. Leased for a minimum of fifteen (15) years with increases to the
base rent at least every five (5) years or if leased for less than
fifteen years, the current rent must be substantially below market
rents and the tenant must be producing a high sales volume from
the location;
6. Can be financed on an amortizing, non-recourse , non-cross
collateralized basis with a relatively high degree of fixed rate
leverage (target of 70-75% of the fair market value);
7. Priced at wholesale providing for a profit upon resale to a
passive real estate investor.
Page 19
EXHIBIT 10.3
Investment & Corporate Banking
111 West Monroe St.
20th Floor East
Chicago, Illinois, U.S.A. 60603
(312) 461-7219
March 24, 2000
Mr. Michael Pfeiffer
Executive Vice President, General Counsel
Realty Income Corporation
220 West Crest Street
Escondido, CA 92025-1707
RE: $25 Million Revolving Credit Agreement between Bank of Montreal
and Realty Income Corporation dated February 1, 2000 (the
"Credit Agreement")
Dear Michael:
As we discussed by telephone today, this letter will confirm the Bank
of Montreal consents to the following change in the captioned Credit
Agreement:
The final sentence of Section 2.02, paragraph (a) "Procedure for Pro
Rata Loans" shall be amended to allow EuroDollar Prorata Loans in the
minimum aggregate amount of $1,000,000. This amount is reduced from
the $5,000,000 currently in the document. The remainder of the Credit
Agreement shall be unchanged.
Michael, I'm glad we could help and I trust this change will be
satisfactory.
Yours truly,
Greg K. Steele
Vice President
Real Estate Capital Markets
GKS/gks
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
This Schedule contains summary financial information extracted from
the registrant's Balance Sheet as of March 31, 2000 and Income
Statement for the three months ended March 31, 2000 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER>1
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-30-2000
<CASH> 2,103,000
<SECURITIES> 0
<RECEIVABLES> 3,180,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> <F1> 0
<PP&E> 1,070,124,000
<DEPRECIATION> (201,520,000)
<TOTAL-ASSETS> 911,721,000
<CURRENT-LIABILITIES> <F1> 0
<BONDS> 366,900,000
<COMMON> 636,002,000
0
99,403,000
<OTHER-SE> (205,487,000)
<TOTAL-LIABILITY-AND-EQUITY> 911,721,000
<SALES> 0
<TOTAL-REVENUES> 28,355,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,947,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,158,000
<INCOME-PRETAX> 12,912,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,912,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,912,000
<EPS-BASIC> .39
<EPS-DILUTED> .39
<FN>
Current assets and current liabilities are not applicable to
the Company under current industry standards.
</FN>
</TABLE>
