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 June 30, 2007, or
[ ]
Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act
of 1934
Commission
File Number 1-13374
REALTY
INCOME CORPORATION
(Exact
name of
registrant as specified in its charter)
Maryland
|
|
33-0580106
|
(State
or
Other Jurisdiction of
|
|
(IRS
Employer
|
Incorporation
or Organization)
|
|
Identification
Number)
|
220
West
Crest Street, Escondido, California 92025
(Address
of
Principal Executive Offices)
Registrant’s
telephone number, including area code: (760)
741-2111
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
[ ]
Indicate
by check
mark whether the registrant is a large accelerated filer, an accelerated
filer,
or a non-accelerated filer (as defined in Act Rule 12b-2 of the Exchange
Act).
Large
accelerated
filer [ X ] Accelerated filer
[ ] Non-accelerated filer
[ ]
Indicate
by check
mark whether the registrant is a shell company (as defined in Rule 12b-2
of the
Exchange
Act). Yes [ ] No [
X ]
There
were
101,071,994 shares of common stock outstanding as of July 30, 2007.
REALTY
INCOME CORPORATION
Form
10-Q
June
30,
2007
Table
of
Contents
PART
I. FINANCIAL INFORMATION
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Page
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Item
1:
|
Financial
Statements
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3
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4
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5
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6
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Item
2:
|
Management’s
Discussion and Analysis of Financial Condition
and
Results
of Operations
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16
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17
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19
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21
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25
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33
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35
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40
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40
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40
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Item
3:
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41
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Item
4:
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42
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PART
II. OTHER INFORMATION
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Item
1A:
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42
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Item
4:
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42
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Item
6:
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43
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45
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PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
REALTY
INCOME
CORPORATION AND SUBSIDIARIES
June
30, 2007 and
December 31, 2006
(dollars
in
thousands, except per share data)
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
(unaudited)
|
|
|
|
|
Real
estate,
at cost:
|
|
|
|
|
|
|
Land
|
|
$ |
989,765
|
|
|
$ |
958,770
|
|
Buildings
and
improvements
|
|
|
1,848,271
|
|
|
|
1,785,203
|
|
|
|
|
2,838,036
|
|
|
|
2,743,973
|
|
Less
accumulated depreciation and amortization
|
|
|
(432,314 |
) |
|
|
(396,854 |
) |
Net
real
estate held for investment
|
|
|
2,405,722
|
|
|
|
2,347,119
|
|
Real
estate
held for sale, net
|
|
|
74,775
|
|
|
|
137,962
|
|
Net
real
estate
|
|
|
2,480,497
|
|
|
|
2,485,081
|
|
Cash
and cash
equivalents
|
|
|
8,914
|
|
|
|
10,573
|
|
Accounts
receivable
|
|
|
6,019
|
|
|
|
5,953
|
|
Goodwill
|
|
|
17,206
|
|
|
|
17,206
|
|
Other
assets,
net
|
|
|
32,256
|
|
|
|
27,695
|
|
Total
assets
|
|
$ |
2,544,892
|
|
|
$ |
2,546,508
|
|
|
|
|
|
|
|
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|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
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|
Distributions
payable
|
|
$ |
14,933
|
|
|
$ |
15,096
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|
Accounts
payable and accrued expenses
|
|
|
26,227
|
|
|
|
27,004
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|
Other
liabilities
|
|
|
10,724
|
|
|
|
8,416
|
|
Line
of
credit payable
|
|
|
10,000
|
|
|
|
--
|
|
Notes
payable
|
|
|
920,000
|
|
|
|
920,000
|
|
Total
liabilities
|
|
|
981,884
|
|
|
|
970,516
|
|
|
|
|
|
|
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|
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Commitments
and contingencies
|
|
|
|
|
|
|
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Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock and paid in capital, par value $1.00 per share,
|
|
|
|
|
|
|
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|
20,000,000
shares authorized, 13,900,000 shares issued
|
|
|
|
|
|
|
|
|
and
outstanding in 2007 and 2006
|
|
|
337,790
|
|
|
|
337,781
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|
Common
stock
and paid in capital, par value $1.00 per share,
|
|
|
|
|
|
|
|
|
200,000,000
shares authorized, 101,070,652 and 100,746,226
|
|
|
|
|
|
|
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|
shares
issued
and outstanding in 2007 and 2006, respectively
|
|
|
1,543,269
|
|
|
|
1,540,365
|
|
Distributions
in excess of net income
|
|
|
(318,051 |
) |
|
|
(302,154 |
) |
Total
stockholders’ equity
|
|
|
1,563,008
|
|
|
|
1,575,992
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|
Total
liabilities and stockholders’ equity
|
|
$ |
2,544,892
|
|
|
$ |
2,546,508
|
|
The
accompanying notes to consolidated financial statements are
an integral
part of these
statements.
|
REALTY
INCOME
CORPORATION AND SUBSIDIARIES
For
the three and
six months ended June 30, 2007 and 2006
(dollars
in
thousands, except per share data)
(unaudited)
|
|
Three
Months Ended 6/30/07
|
|
|
Three
Months Ended 6/30/06
|
|
|
Six
Months
Ended
6/30/07
|
|
|
Six
Months
Ended
6/30/06
|
|
|
|
|
|
|
|
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|
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|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
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|
Rental
|
|
$ |
70,480
|
|
|
$ |
55,704
|
|
|
$ |
139,629
|
|
|
$ |
110,735
|
|
Other
|
|
|
213
|
|
|
|
765
|
|
|
|
2,365
|
|
|
|
851
|
|
|
|
|
70,693
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|
|
|
56,469
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|
|
|
141,994
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|
|
|
111,586
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|
|
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|
|
|
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|
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|
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|
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EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Depreciation
and amortization
|
|
|
18,518
|
|
|
|
14,782
|
|
|
|
36,643
|
|
|
|
28,285
|
|
Interest
|
|
|
13,029
|
|
|
|
11,930
|
|
|
|
25,449
|
|
|
|
25,127
|
|
General
and
administrative
|
|
|
5,838
|
|
|
|
4,354
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|
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|
10,929
|
|
|
|
8,600
|
|
Property
|
|
|
964
|
|
|
|
685
|
|
|
|
1,849
|
|
|
|
1,545
|
|
Income
taxes
|
|
|
353
|
|
|
|
231
|
|
|
|
598
|
|
|
|
462
|
|
|
|
|
38,702
|
|
|
|
31,982
|
|
|
|
75,468
|
|
|
|
64,019
|
|
Income
from
continuing operations
|
|
|
31,991
|
|
|
|
24,487
|
|
|
|
66,526
|
|
|
|
47,567
|
|
Income
from
discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate
acquired for resale by Crest
|
|
|
4,282
|
|
|
|
537
|
|
|
|
6,030
|
|
|
|
1,416
|
|
Real
estate
held for investment
|
|
|
663
|
|
|
|
1,616
|
|
|
|
704
|
|
|
|
2,545
|
|
|
|
|
4,945
|
|
|
|
2,153
|
|
|
|
6,734
|
|
|
|
3,961
|
|
Net
income
|
|
|
36,936
|
|
|
|
26,640
|
|
|
|
73,260
|
|
|
|
51,528
|
|
Preferred
stock cash dividends
|
|
|
(6,063 |
) |
|
|
(2,351 |
) |
|
|
(12,127 |
) |
|
|
(4,702 |
) |
Net
income
available to common stockholders
|
|
$ |
30,873
|
|
|
$ |
24,289
|
|
|
$ |
61,133
|
|
|
$ |
46,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
available to common stockholders per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from
continuing operations, basic and diluted
|
|
$ |
0.26
|
|
|
$ |
0.25 |
|
|
$ |
0.54 |
|
|
$ |
0.50
|
|
Net
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.31
|
|
|
$ |
0.28
|
|
|
$ |
0.61
|
|
|
$ |
0.55
|
|
Diluted
|
|
$ |
0.31
|
|
|
$ |
0.27
|
|
|
$ |
0.61
|
|
|
$ |
0.54
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
100,133,094
|
|
|
|
88,305,175
|
|
|
|
100,111,734
|
|
|
|
85,791,994
|
|
Diluted
|
|
|
100,246,112
|
|
|
|
88,466,024
|
|
|
|
100,304,617
|
|
|
|
85,988,206
|
|
The
accompanying notes to consolidated financial statements are an integral
part of
these statements.
REALTY
INCOME
CORPORATION AND SUBSIDIARIES
For
the six months
ended June 30, 2007 and 2006
(dollars
in
thousands)(unaudited)
|
|
2007
|
|
|
2006
|
|
CASH
FLOWS
FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
income
|
|
$ |
73,260
|
|
|
$ |
51,528
|
|
Adjustments
to net income:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
36,643
|
|
|
|
28,285
|
|
Income
from
discontinued operations:
|
|
|
|
|
|
|
|
|
Real
estate
acquired for resale
|
|
|
(6,030 |
) |
|
|
(1,416 |
) |
Real
estate
held for investment
|
|
|
(704 |
) |
|
|
(2,545 |
) |
Gain
on sales
of land
|
|
|
(1,806 |
) |
|
|
--
|
|
Gain
on
reinstatement of property carrying value
|
|
|
--
|
|
|
|
(716 |
) |
Amortization
of share-based compensation
|
|
|
2,196
|
|
|
|
1,643
|
|
Cash
provided
by (used in) discontinued operations:
|
|
|
|
|
|
|
|
|
Real
estate
acquired for resale
|
|
|
(536 |
) |
|
|
(10 |
) |
Real
estate
held for investment
|
|
|
128
|
|
|
|
448
|
|
Investment
in real estate acquired for resale
|
|
|
--
|
|
|
|
(8,737 |
) |
Proceeds
from sales of real estate acquired for resale
|
|
|
65,778
|
|
|
|
10,195
|
|
Collection
of mortgage note receivable by Crest
|
|
|
8
|
|
|
|
1,333
|
|
Change
in
assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable and other assets
|
|
|
990
|
|
|
|
4,528
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
2,330
|
|
|
|
222
|
|
Net
cash
provided by operating activities
|
|
|
172,257
|
|
|
|
84,758
|
|
CASH
FLOWS
FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from
sales of investment properties:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
3,842
|
|
|
|
--
|
|
Discontinued operations
|
|
|
1,493
|
|
|
|
5,423
|
|
Acquisition
of and improvements to investment properties
|
|
|
(97,672 |
) |
|
|
(146,392 |
) |
Restricted
escrow funds acquired in connection with
|
|
|
|
|
|
|
|
|
acquisitions
of investment properties
|
|
|
(2,648 |
) |
|
|
--
|
|
Intangibles
acquired in connection with acquisitions of
|
|
|
|
|
|
|
|
|
investment
properties
|
|
|
(319 |
) |
|
|
--
|
|
Net
cash used
in investing activities
|
|
|
(95,304 |
) |
|
|
(140,969 |
) |
CASH
FLOWS
FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Borrowings
from lines of credit
|
|
|
135,400
|
|
|
|
166,000
|
|
Payments
under lines of credit
|
|
|
(125,400 |
) |
|
|
(220,400 |
) |
Proceeds
from
stock offerings, net of offering costs of $6,278 in 2006
|
|
|
--
|
|
|
|
120,550
|
|
Cash
distributions to common stockholders
|
|
|
(76,863 |
) |
|
|
(60,496 |
) |
Cash
dividends to preferred stockholders
|
|
|
(12,457 |
) |
|
|
(4,702 |
) |
Proceeds
from
other stock issuances
|
|
|
708
|
|
|
|
301
|
|
Net
cash
provided by (used in) financing activities
|
|
|
(78,612 |
) |
|
|
1,253
|
|
Net
decrease
in cash and cash equivalents
|
|
|
(1,659 |
) |
|
|
(54,958 |
) |
Cash
and cash
equivalents, beginning of period
|
|
|
10,573
|
|
|
|
65,704
|
|
Cash
and cash
equivalents, end of period
|
|
$ |
8,914
|
|
|
$ |
10,746
|
|
For
supplemental
disclosures, see note 11.
The
accompanying notes to consolidated financial statements are an integral
part of
these statements.
REALTY
INCOME
CORPORATION AND SUBSIDIARIES
June
30,
2007
(unaudited)
The
consolidated
financial statements of Realty Income Corporation (“Realty Income”, the
“Company”, “we” or “our”) were prepared from our books and records without audit
and include all adjustments (consisting of only normal recurring accruals)
necessary to present a fair statement of results for the interim periods
presented. Certain of the 2006 balances have been reclassified to conform
to the
2007 presentation. Readers of this quarterly report should refer to
our audited financial statements for the year ended December 31, 2006,
which are
included in our 2006 Annual Report on Form 10-K, as certain disclosures
that
would substantially duplicate those contained in the audited financial
statements have not been included in this report.
At
June 30, 2007, we owned 1,998 properties, located in 48 states, containing
over
17.2 million leasable square feet, along with 29 properties owned by our
wholly-owned taxable REIT subsidiary, Crest Net Lease, Inc.
(“Crest”). Crest was created to buy and sell properties, primarily to
individual investors who are involved in tax-deferred exchanges under
Section
1031 of the Internal Revenue Code of 1986, as amended (the “Tax
Code”).
2.
|
Summary
of Significant Accounting Policies and
Procedures
|
A.
The accompanying consolidated financial statements include the accounts
of
Realty Income, Crest and other entities for which we make operating and
financial decisions (control), after elimination of all material intercompany
balances and transactions. All of Realty Income’s and Crest’s
subsidiaries are wholly-owned.
B.
We have elected to be taxed as a Real Estate Investment Trust (“REIT”) under the
Tax Code. We believe we have qualified and continue to qualify as a
REIT. Under the REIT operating structure, we are permitted to deduct
distributions paid to our stockholders and generally will not be required
to pay
federal corporate income taxes on such income. Accordingly, no provision
has
been made for federal income taxes in the accompanying consolidated financial
statements, except for federal income taxes of Crest, which are included
in
discontinued operations.
C. We
recognize an allowance for doubtful accounts relating to accounts receivable
for
amounts deemed uncollectible. We consider tenant specific issues such
as financial stability and ability to pay rent when determining collectibility
of accounts receivable and appropriate allowances to record. The
allowance for doubtful accounts at June 30, 2007 was $617,000 and at
December
31, 2006 was $705,000.
D. In
June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No.
109. Interpretation No. 48 applies to all tax positions
accounted for under Statement No. 109 and clarifies the accounting for
uncertainty in income taxes by defining criteria that a tax position
on an
individual matter must meet before that position is recognized in the
financial
statements. Interpretation No. 48 became effective for us at the
beginning of 2007 and did not have an impact on our financial position
or
results of operations.
E. We
collect and remit sales taxes assessed by different governmental authorities
that are both imposed on and concurrent with a revenue-producing transaction
between us and our tenants. We report the collection of these taxes on
a net
basis (excluded from revenues). The amounts of these taxes are not significant
to our financial position or results of operations.
F. Other
assets consist of the following at:
|
|
June
30,
|
|
|
December
31,
|
|
(dollars
in
thousands)
|
|
2007
|
|
|
2006
|
|
Value
of
in-place and above-market leases
|
|
$ |
10,945
|
|
|
$ |
10,430
|
|
Deferred
bond
financing costs
|
|
|
10,167
|
|
|
|
10,868
|
|
Prepaid
expenses
|
|
|
3,033
|
|
|
|
3,271
|
|
Settlements
on treasury lock agreements
|
|
|
1,194
|
|
|
|
1,629
|
|
Unamortized
credit line fees
|
|
|
694
|
|
|
|
954
|
|
Corporate
assets, net of accumulated depreciation and amortization
|
|
|
916
|
|
|
|
463
|
|
Other
items
|
|
|
5,307
|
|
|
|
80
|
|
|
|
$ |
32,256
|
|
|
$ |
27,695
|
|
3.
|
Retail
Properties Acquired
|
We
acquire land, buildings and improvements that are used by retail
operators.
A. During
the first six months of 2007, Realty Income invested $98.3 million in 46
new retail properties and properties under development with an initial
weighted
average contractual lease rate of 8.6%. These 46 properties are
located in 12 states, will contain over 554,000 leasable square feet,
and are
100% leased with an average lease term of 19.1 years. The initial
weighted average contractual lease rate is computed by dividing the estimated
aggregate base rent for the first year of each lease by the estimated
total cost
of the properties.
Of
the $98.3 million invested in the first six months of 2007, $7.1 million
was
used to acquire one property with an existing lease already in-place
with a
retail tenant. In accordance with FASB Statement No. 141,
Business Combinations, Realty Income recorded $1.0 million as the
intangible value of the in-place lease and $689,000 as the intangible
value of
the below-market rents. These amounts are recorded in “other assets”
and “other liabilities,” respectively, on our consolidated balance sheet at June
30, 2007 and are amortized over the life of the lease.
In
comparison, during the first six months of 2006, Realty Income and Crest
invested $154.9 million, in aggregate, in 51 new retail properties and
properties under development. These 51 properties are located in 14
states, contain over 1.2 million leasable square feet, and are 100% leased
with
an average lease term of 18.0 years. Of the $154.9 million invested
in the first six months of 2006, Realty Income invested $146.2 million
in 48 new
retail properties and properties under development with an initial weighted
average contractual lease rate of 8.8%. These 48 properties are
located in 14 states, contain over 1.1 million leasable square feet,
and are
100% leased with an average lease term of 18.0 years. During the
first six months of 2006, Crest invested $8.7 million in three new retail
properties.
B. Crest’s
property inventory at June 30, 2007 consisted of 29 properties with a
total
investment of $74.5 million and at December 31, 2006 consisted of 60
properties with a total investment of $137.5 million. These
amounts are included on our consolidated balance sheets in “real estate held for
sale, net.”
We
have a $300 million acquisition credit facility that expires in October
2008,
unless extended as provided for in the credit facility agreement. In
April 2007, Moody’s Investors Service upgraded our credit
ratings. Effective May 1, 2007, our current investment grade credit
ratings provided for financing under the credit facility at LIBOR (London
Interbank Offered Rate) plus 60 basis points with a facility fee of 15
basis
points, for all-in drawn pricing of 75 basis points over LIBOR. Prior
to the credit rating upgrade by Moody’s Investors Service, financing under the
credit facility was five basis points higher.
The
average
borrowing rate on our credit facility during the first six months of
2007 was
6.0%, compared to 5.3% in the first six months of 2006. The increase
in the
average borrowing rate is due to an increase in LIBOR during the past
year. Our
current credit facility is subject to various leverage and interest coverage
ratio limitations. We are and have been in compliance with these
covenants.
Our
credit facility
is unsecured and accordingly, we have not pledged any assets as collateral
for
this obligation.
Our
senior
unsecured note obligations consist of the following as of June 30, 2007
and
December 31, 2006, sorted by maturity date (dollars in millions):
|
|
|
|
8
1/4%
notes, issued in October 1998 and due in November 2008
|
|
$ |
100.0
|
|
8%
notes, issued in January 1999 and due in January 2009
|
|
|
20.0
|
|
5
3/8%
notes, issued in March 2003 and due in March 2013
|
|
|
100.0
|
|
5
1/2%
notes, issued in November 2003 and due in November 2015
|
|
|
150.0
|
|
5.95%
notes, issued in September 2006 and due in September 2016
|
|
|
275.0
|
|
5
3/8%
notes, issued in September 2005 and due in September 2017
|
|
|
175.0
|
|
5
7/8%
bonds, issued in March 2005 and due in March 2035
|
|
|
100.0
|
|
|
|
$ |
920.0
|
|
6.
|
Gain
on Sales of Real Estate Acquired for Resale by
Crest
|
During
the second
quarter of 2007, Crest sold 26 properties for $56.2 million, which resulted
in a gain of $5.3 million. As part of one sale during the second
quarter of 2007, Crest provided the buyer financing in the form of a
$619,000
mortgage promissory note. In comparison, during the second quarter of
2006, Crest sold one property for $3.8 million, which resulted in a gain of
$520,000. Crest’s gains on sales are reported before income taxes and
are included in discontinued operations.
During
the first
six months of 2007, Crest sold 31 properties for $69.5 million, which
resulted in a gain of $6.6 million. As part of two sales during the
first six months of 2007, Crest provided the buyers financing for a total
of
$3.8 million in mortgage promissory notes. In comparison, during the
first six
months of 2006, Crest sold five properties for $10.2 million, which
resulted in a gain of $1.4 million.
7.
|
Gain
on Sales of Investment Properties and Land by Realty
Income
|
During
the second
quarter of 2007, we sold two investment properties for a total of $1.0
million,
which resulted in a gain of $585,000. In comparison, during the
second quarter of 2006, we sold five investment properties for a total
of $4.6
million, which resulted in a gain of $1.4 million. As part of one sale
during
the second quarter of 2006, we provided the buyer financing in the form
of a
$1.3 million promissory note, which was paid in full in September
2006. These gains are included in discontinued
operations.
During
the first
six months of 2007, we sold three investment properties for a total of
$1.5
million, which resulted in a gain of $585,000. This gain is included
in discontinued operations. In addition, we sold excess land from
three properties for a total of $3.8 million, which resulted in a gain
of $1.8
million. The gain from the land sales is reported in “other revenue”
on our consolidated statements of income because this excess land was
associated
with properties that continue to be owned as part of our core
operations. In comparison, during the first six months of 2006, we
sold ten investment properties for a total of $6.7 million, which resulted
in a gain of $2.2 million. This gain is included in discontinued
operations.
8.
|
Discontinued
Operations
|
In
accordance with Financial Accounting Standards Board Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS
144”), Realty Income’s operations from one investment property classified as
held for sale at June 30, 2007, plus properties sold in 2007 and 2006,
are
reported as discontinued operations. Their respective results of
operations have been reclassified to “income from discontinued operations, real
estate held for investment” on our consolidated statements of
income. We do not depreciate properties that are classified as held
for sale.
Crest
acquires
properties with the intention of reselling them rather than holding them
for
investment and operating the properties. Consequently, we classify
properties acquired by Crest as held for sale at the date of acquisition
and do
not depreciate them. In accordance with SFAS 144, the operations of
Crest’s properties are classified as “income from discontinued operations, real
estate acquired for resale by Crest” on our consolidated statements of
income.
No
debt was assumed by buyers of our investment properties or repaid as
a result of
our investment property sales and we do not allocate interest expense to
discontinued operations related to real estate held for investment.
We
allocate interest expense related to borrowings specifically attributable
to
Crest’s properties. The interest expense amounts allocated to the
Crest properties are included in “income from discontinued operations, real
estate acquired for resale by Crest.”
The
following is a
summary of Crest’s “income from discontinued operations, real estate acquired
for resale” (dollars in thousands):
Crest’s
income from discontinued operations,
real
estate acquired for resale
|
|
Three
months
ended
6/30/07
|
|
|
Three
months
ended
6/30/06
|
|
|
Six
months
ended
6/30/07
|
|
|
Six
months
ended
6/30/06
|
|
Gain
on sales
of real estate acquired for resale
|
|
$ |
5,326
|
|
|
$ |
520
|
|
|
$ |
6,566
|
|
|
$ |
1,426
|
|
Rental
revenue
|
|
|
2,365
|
|
|
|
990
|
|
|
|
5,249
|
|
|
|
2,094
|
|
Interest
expense
|
|
|
(1,758 |
) |
|
|
(737 |
) |
|
|
(3,877 |
) |
|
|
(1,463 |
) |
General
and
administrative expense
|
|
|
(179 |
) |
|
|
(75 |
) |
|
|
(282 |
) |
|
|
(154 |
) |
Property
expenses
|
|
|
(9 |
) |
|
|
4
|
|
|
|
(14 |
) |
|
|
(33 |
) |
Income
taxes
|
|
|
(1,463 |
) |
|
|
(165 |
) |
|
|
(1,612 |
) |
|
|
(454 |
) |
Income
from
discontinued operations,
real
estate
acquired for resale by Crest
|
|
$ |
4,282
|
|
|
$ |
537
|
|
|
$ |
6,030
|
|
|
$ |
1,416
|
|
The
following is a
summary of Realty Income’s “income from discontinued operations, real estate
held for investment” (dollars in thousands):
Realty
Income’s income from discontinued operations, real estate held for
investment
|
|
Three
months
ended
6/30/07
|
|
|
Three
months
ended
6/30/06
|
|
|
Six
months
ended
6/30/07
|
|
|
Six
months
ended
6/30/06
|
|
Gain
on sales
of investment properties
|
|
$ |
585
|
|
|
$ |
1,441
|
|
|
$ |
585
|
|
|
$ |
2,193
|
|
Rental
revenue
|
|
|
79
|
|
|
|
213
|
|
|
|
119
|
|
|
|
491
|
|
Depreciation
and amortization
|
|
|
--
|
|
|
|
(39 |
) |
|
|
(9 |
) |
|
|
(96 |
) |
Property
expenses
|
|
|
(1 |
) |
|
|
1
|
|
|
|
9
|
|
|
|
(43 |
) |
Income
from
discontinued operations,
real
estate
held for investment
|
|
$ |
663
|
|
|
$ |
1,616
|
|
|
$ |
704
|
|
|
$ |
2,545
|
|
The
following is a
summary of our total discontinued operations (dollars in thousands, except
per
share data):
|
|
Three
months
ended
6/30/07
|
|
|
Three
months
ended
6/30/06
|
|
|
Six
months
ended
6/30/07
|
|
|
Six
months
ended
6/30/06
|
|
Real
estate
acquired for resale by Crest
|
|
$ |
4,282
|
|
|
$ |
537
|
|
|
$ |
6,030
|
|
|
$ |
1,416
|
|
Real
estate
held for investment
|
|
|
663
|
|
|
|
1,616
|
|
|
|
704
|
|
|
|
2,545
|
|
Income
from
discontinued operations
|
|
$ |
4,945
|
|
|
$ |
2,153
|
|
|
$ |
6,734
|
|
|
$ |
3,961
|
|
Per
common
share, basic and diluted
|
|
$ |
0.05
|
|
|
$ |
0.02
|
|
|
$ |
0.07
|
|
|
$ |
0.05
|
|
The
per share
amounts for “income from discontinued operations” above and the “income from
continuing operations” and “net income” reported on the consolidated statement
of income have each been calculated independently.
9. Distributions
Paid and Payable
A. Common
Stock. We pay monthly distributions to our common
stockholders. The following is a summary of the monthly distributions
paid per common share for the first six months of 2007 and 2006:
Month
|
|
2007
|
|
|
2006
|
|
January
|
|
$ |
0.126500
|
|
|
$ |
0.116250
|
|
February
|
|
|
0.126500
|
|
|
|
0.116250
|
|
March
|
|
|
0.126500
|
|
|
|
0.116250
|
|
April
|
|
|
0.127125
|
|
|
|
0.116875
|
|
May
|
|
|
0.127125
|
|
|
|
0.116875
|
|
June
|
|
|
0.127125
|
|
|
|
0.116875
|
|
Total
|
|
$ |
0.760875
|
|
|
$ |
0.699375
|
|
At
June 30, 2007, a distribution of $0.12775 per common share was payable
and was
paid on July 16, 2007.
B. Preferred
Stock. In December 2006, we issued 8.8 million shares of 6
3/4% Monthly Income Class E cumulative redeemable
preferred stock. Beginning December 7, 2011, the Class E preferred
shares are redeemable, at our option, for $25 per share. During the
first six months of 2007, we paid six monthly dividends to holders of
our Class
E preferred stock totaling $0.88125 per share, or $7.8 million, and at
June 30,
2007 a monthly dividend of $0.140625 per share was payable and was paid
on July
16, 2007. In January 2007, we paid the first Class E preferred
dividend of $0.178125, which was for a period of 38 days.
In
May 2004, we issued 4.0 million shares of 7 3/8% Monthly
Income Class D cumulative redeemable preferred stock. In October
2004, we issued an additional 1.1 million shares of Class D preferred
stock. Beginning May 27, 2009, the Class D preferred shares are
redeemable, at our option, for $25 per share. During the first six
months of 2007 and 2006, we paid six monthly dividends to holders of
our Class D
preferred stock totaling $0.9218754 per share, or $4.7 million, and at June
30, 2007 a monthly dividend of $0.1536459 per share was payable and was
paid on
July 16, 2007.
10.
|
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 net income available to common stockholders for the period by
the
weighted average number of common shares that would have been outstanding
assuming the issuance of common shares for all potentially dilutive common
shares outstanding during the reporting period.
The
following is a
reconciliation of the denominator of basic net income per common share
computation to the denominator of diluted net income per common share
computation:
|
|
Three
months
ended
6/30/07
|
|
|
Three
months
ended
6/30/06
|
|
|
Six
months
ended
6/30/07
|
|
|
Six
months
ended
6/30/06
|
|
Weighted
average shares used for the basic net income per share
computation
|
|
|
100,133,094
|
|
|
|
88,305,175
|
|
|
|
100,111,734
|
|
|
|
85,791,994
|
|
Incremental
shares from share-based compensation
|
|
|
113,018
|
|
|
|
160,849
|
|
|
|
192,883
|
|
|
|
196,212
|
|
Adjusted
weighted average shares used for diluted net income per share
computation
|
|
|
100,246,112
|
|
|
|
88,466,024
|
|
|
|
100,304,617
|
|
|
|
85,988,206
|
|
No
stock options were anti-dilutive for the six months ended June 30, 2007
and
2006. We had 267,231 nonvested shares from share-based compensation that
were
anti-dilutive for the quarter ended June 30, 2007 and 251,800 shares for
the quarter ended June 30, 2006. We had 600 nonvested shares from
share-based compensation that were anti-dilutive for the six months ended
June 30, 2007 and 251,800 shares for the six months ended June 30,
2006.
11.
|
Supplemental
Disclosures of Cash Flow
Information
|
Interest
paid
during the first six months of 2007 was $28.4 million and for the first
six
months of 2006 was $26.1 million.
Interest
capitalized to properties under development in the first six months of
2007 was
$471,000 and in the first six months of 2006 was $1.1 million.
Income
taxes paid
by Realty Income and Crest in the first six months of 2007 totaled $2.7
million
and in the first six months of 2006 totaled $569,000.
The
following
non-cash investing and financing activities are included in the accompanying
consolidated financial statements:
A. Share-based
compensation for the first six months of 2007 was $2.2 million and for the
first six months of 2006 was $1.6 million.
B. In
2007, Crest sold two properties for $5.5 million and received mortgage
promissory notes totaling $3.8 million from the buyers, which are included
in “other assets” on our June 30, 2007 consolidated balance sheet.
C. On
one property sale during the second quarter of 2006, we provided the
buyer
financing in the form of a $1.3 million promissory note, which was paid in
full in September 2006.
D. In
2004, we recorded a loss of $716,000 on one property to reduce its carrying
value to zero. This impairment was the result of a dispute with the
original owner and tenant in their bankruptcy proceeding.
Our
title insurance
company failed to timely record the deed on this property upon our original
acquisition, which resulted in a claim by the bankruptcy trustee that
Realty
Income did not have legal title to the property. In the second
quarter of 2006, this issue was resolved and we obtained title to the
property. At that time we reinstated the original carrying value
(adjusted for depreciation) on our balance sheet and recorded other revenue
of
$716,000. We also reversed accrued liabilities and property expenses
of $133,000 associated with this property. As part of the settlement,
these costs became the responsibility of the title insurance
company.
E. Distributions
payable on our balance sheets is comprised of the following declared
distributions (dollars in thousands):
|
|
6/30/07
|
|
|
12/31/06
|
|
Common
stock
distributions
|
|
$ |
12,912
|
|
|
$ |
12,745
|
|
Preferred
stock dividends
|
|
|
2,021
|
|
|
|
2,351
|
|
F.
In connection with the acquisition of seven properties during the first
six
months of 2007, we acquired restricted escrow funds totaling $2.6 million.
During the first six months of 2007, $1.1 million of these funds were
invested
in improvements to these properties and at June 30, 2007, $1.5 million
is being
held in a temporary escrow and is anticipated to be used to pay for improvements
to these properties. We have only limited rights regarding the use of
these funds and have recorded the funds as a restricted asset, which
is included
as part of "other assets" on our consolidated balance sheet at June 30,
2007.
We
evaluate performance and make resource allocation decisions on an industry
by
industry basis. For financial reporting purposes, we have grouped our
tenants
into 30 industry and activity segments (including properties owned by
Crest that
are grouped together). All of the properties are incorporated into one
of the
applicable segments. Because almost all of our leases require the tenant
to pay
operating expenses, revenue is the only component of segment profit and
loss we
measure.
The
following
tables set forth certain information regarding the properties owned by
us,
classified according to the business of the respective tenants as of
June 30,
2007 (dollars in thousands):
Revenue
|
|
Three
months
ended
6/30/07
|
|
|
Three
months
ended
6/30/06
|
|
|
Six
months
ended
6/30/07
|
|
|
Six
months
ended
6/30/06
|
|
Segment
rental revenue(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
service
|
|
$ |
3,709
|
|
|
$ |
3,740
|
|
|
$ |
7,409
|
|
|
$ |
7,474
|
|
Automotive
tire services
|
|
|
5,283
|
|
|
|
3,424
|
|
|
|
10,565
|
|
|
|
6,848
|
|
Child
care
|
|
|
6,119
|
|
|
|
6,169
|
|
|
|
12,224
|
|
|
|
12,320
|
|
Convenience
stores
|
|
|
9,854
|
|
|
|
9,570
|
|
|
|
19,486
|
|
|
|
19,100
|
|
Drug
stores
|
|
|
1,941
|
|
|
|
1,628
|
|
|
|
3,882
|
|
|
|
3,257
|
|
Health
and
fitness
|
|
|
3,871
|
|
|
|
2,402
|
|
|
|
6,886
|
|
|
|
4,804
|
|
Home
furnishings
|
|
|
1,995
|
|
|
|
1,886
|
|
|
|
3,902
|
|
|
|
3,743
|
|
Home
improvement
|
|
|
1,750
|
|
|
|
1,741
|
|
|
|
3,515
|
|
|
|
3,418
|
|
Motor
vehicle
dealerships
|
|
|
2,440
|
|
|
|
2,012
|
|
|
|
4,885
|
|
|
|
3,758
|
|
Restaurants
|
|
|
13,525
|
|
|
|
5,272
|
|
|
|
26,919
|
|
|
|
10,348
|
|
Sporting
goods
|
|
|
1,865
|
|
|
|
1,687
|
|
|
|
3,704
|
|
|
|
3,374
|
|
Theaters
|
|
|
6,514
|
|
|
|
5,462
|
|
|
|
13,028
|
|
|
|
10,923
|
|
17
non-reportable segments
|
|
|
11,614
|
|
|
|
10,711
|
|
|
|
23,224
|
|
|
|
21,368
|
|
Total
rental
|
|
|
70,480
|
|
|
|
55,704
|
|
|
|
139,629
|
|
|
|
110,735
|
|
Other
revenue
|
|
|
213
|
|
|
|
765
|
|
|
|
2,365
|
|
|
|
851
|
|
Total
revenue
|
|
$ |
70,693
|
|
|
$ |
56,469
|
|
|
$ |
141,994
|
|
|
$ |
111,586
|
|
(1) Crest’s
revenue appears in
“income from discontinued operations, real estate acquired for resale
by Crest”
and is not included in this table, which covers revenue but does not
include
revenue classified as part of income from discontinued operations.
|
|
June
30,
|
|
|
December
31,
|
|
Assets,
as of:
|
|
2007
|
|
|
2006
|
|
Segment
net
real estate:
|
|
|
|
|
|
|
Automotive
service
|
|
$ |
102,655
|
|
|
$ |
104,089
|
|
Automotive
tire services
|
|
|
208,846
|
|
|
|
211,760
|
|
Child
care
|
|
|
93,658
|
|
|
|
96,263
|
|
Convenience
stores
|
|
|
355,138
|
|
|
|
334,839
|
|
Drug
stores
|
|
|
77,114
|
|
|
|
78,347
|
|
Health
and fitness
|
|
|
151,206
|
|
|
|
102,718
|
|
Home
furnishings
|
|
|
55,083
|
|
|
|
56,023
|
|
Home
improvement
|
|
|
70,431
|
|
|
|
71,474
|
|
Motor
vehicle dealerships
|
|
|
101,687
|
|
|
|
104,122
|
|
Restaurants
|
|
|
535,142
|
|
|
|
540,093
|
|
Sporting
goods
|
|
|
57,977
|
|
|
|
56,291
|
|
Theaters
|
|
|
269,121
|
|
|
|
272,135
|
|
Crest
|
|
|
74,529
|
|
|
|
137,506
|
|
17
other non-reportable segments
|
|
|
327,910
|
|
|
|
319,421
|
|
Total
segment
net real estate
|
|
|
2,480,497
|
|
|
|
2,485,081
|
|
Other
intangible assets – Drug stores
|
|
|
7,309
|
|
|
|
7,629
|
|
Other
intangible assets – Grocery stores
|
|
|
987
|
|
|
|
--
|
|
Other
intangible assets – Theaters
|
|
|
2,725
|
|
|
|
2,801
|
|
Other
corporate assets
|
|
|
53,374
|
|
|
|
50,997
|
|
Total
assets
|
|
$ |
2,544,892
|
|
|
$ |
2,546,508
|
|
13.
|
Common
Stock Incentive Plan
|
In
2003, our Board of Directors adopted, and stockholders approved, the
2003
Incentive Award Plan of Realty Income Corporation (the “Stock Plan”) to
enable us to attract and retain the services of directors, employees
and consultants considered essential to our long-term success, by
offering them an opportunity to own stock in Realty Income and/or
rights that will reflect our growth, development and financial
success.
Effective
January
1, 2006, we adopted FASB Statement No. 123R, Share-Based
Payments. Statement No. 123R requires companies to recognize in
the income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees. Effective January 1,
2002, we adopted the fair value recognition provisions of FASB Statement
No.
123, Accounting for Stock-Based Compensation, and starting January 1,
2002 expensed costs for all stock option awards granted, modified, or
settled.
The
amount of
share-based compensation costs charged against income during the second
quarter
of 2007 were $1.4 million, during the second quarter of 2006 were $1.0
million, during the first six months of 2007 were $2.2 million and during
the
first six months of 2006 were $1.6 million.
The
following table
summarizes our common stock grant activity under our Stock Plan. Our
common stock grants vest over periods ranging from immediately to 10
years.
|
|
For
the six
months
ended
June
30, 2007
|
|
|
For
the year ended
December
31, 2006
|
|
|
|
Number
of
shares
|
|
|
Weighted
average price (1)
|
|
|
Number
of
shares
|
|
|
Weighted
average price (1)
|
|
Outstanding
nonvested
|
|
|
|
|
|
|
|
|
|
|
|
|
shares,
beginning of year
|
|
|
868,726
|
|
|
$ |
17.96
|
|
|
|
788,722
|
|
|
$ |
17.83
|
|
Shares
granted
|
|
|
271,231
|
|
|
|
27.64
|
|
|
|
210,332
|
|
|
|
21.72
|
|
Shares
vested
|
|
|
(147,752 |
) |
|
|
20.90
|
|
|
|
(125,879 |
) |
|
|
20.39
|
|
Shares
forfeited
|
|
|
(726 |
) |
|
|
23.75
|
|
|
|
(4,449 |
) |
|
|
21.35
|
|
Outstanding
nonvested
shares,
end
of each period
|
|
|
991,479
|
|
|
$ |
21.06
|
|
|
|
868,726
|
|
|
$ |
17.96
|
|
(1) Grant
date fair
value.
During
the first
six months of 2007, we issued 271,231 shares of common stock under our
Stock
Plan. These shares vest over the following service periods: 20,000 vested
upon
issuance, 4,000 vest over a service period of one year, 8,000 vest over
a
service period of three years, 19,000 vest over a service period of five
years
and 220,231 vest over a service period of 10 years.
Our
Stock Plan was
amended on May 15, 2007. For grants made on or after May 15, 2007 the
vesting
schedule for shares granted to non-employee directors was amended to
the
following schedule:
·
|
Shares
vest
in 33 1/3% increments on each of the first three
anniversaries of the date the shares of stock are granted to
directors
with less than five years of service at the date of
grant;
|
·
|
Shares
vest
in 50% increments on each of the first two anniversaries of
the date the
shares of stock are granted to directors with six years of
service at the
date of grant;
|
·
|
Shares
are
100% vested on the first anniversary of the date the shares
of stock are
granted to directors with seven years of service at the date
of grant;
and
|
·
|
There
is
immediate vesting as of the date the shares of stock are granted
to
directors with eight or more years of service at the date of
grant.
|
On
May 15, 2007, our Board of Directors also approved a new vesting schedule
for
shares granted to employees on or after May 15, 2007, which is as
follows:
·
|
For
employees
age 49 and below at the grant date, shares vest in 10% increments
on each
of the first ten anniversaries of the grant
date;
|
·
|
For
employees
age 50 through 55 at the grant date, shares vest in 20% increments
on each
of the first five anniversaries of the grant
date;
|
·
|
For
employees
age 56 at the grant date, shares vest in 25% increments on
each of the
first four anniversaries of the grant
date;
|
·
|
For
employees
age 57 at the grant date, shares vest in 33 1/3%
increments on each of the first three anniversaries of the
grant
date;
|
·
|
For
employees
age 58 at the grant date, shares vest in 50% increments on
each of the
first two anniversaries of the grant
date;
|
·
|
For
employees
age 59 at the grant date, shares are 100% vested on the first
anniversary
of the grant date; and
|
·
|
For
employees
age 60 and above at the grant date, shares vest immediately
on the grant
date.
|
As
of June 30, 2007, the remaining unamortized share-based compensation
expense
totaled $20.9 million, which is being amortized on a straight-line basis
over the service period of each applicable award.
The
effect of
pre-vesting forfeitures on our recorded expense has historically been
negligible. Any future pre-vesting forfeitures are also expected to
be negligible and we will record the benefit related to such forfeitures
as they
occur. Under the terms of our Stock Plan, we pay non-refundable
dividends to the holders of our nonvested shares. Under Statement No.
123R, the dividends paid to holders of these nonvested shares should
be charged
as compensation expense to the extent that they relate to nonvested shares
that
do not or are not expected to vest. Given the negligible historical
and prospective forfeiture rate determined by us, we did not record any
amount
to compensation expense related to dividends paid in 2007 or 2006, nor
do we
expect to record any amounts in future periods.
No
stock options were granted after January 1, 2002. Prior to that time,
stock options were granted with an exercise price equal to the underlying
stock’s fair market value at the date of grant. Stock options expire
ten years from the date they were granted and vested over service periods
of
one, three, four or five years. As of June 30, 2007, there are 52,447
vested stock options outstanding and exercisable with a weighted average
exercise price of $12.96. There were 53,921 stock options exercised
in the first six months of 2007, with a weighted average exercise price
of
$13.16.
14.
|
Commitments
and Contingencies
|
In
the ordinary course of business, we are party to various legal actions
which we
believe are routine in nature and incidental to the operation of our
business.
We believe that the outcome of the proceedings will not have a material
adverse
effect upon our consolidated financial position or results of
operations.
At
June 30, 2007, we have committed to pay estimated unfunded development
costs of
$37.7 million on properties under development. In addition, we
also have contingent payments for tenant improvements and leasing costs
of
$397,000 as well as a $3 million commitment to fund the construction
costs of
one building, which is not currently under construction, and for which
funding
is dependent upon the tenant’s commitment to construct the building prior to
September 30, 2007.
Item
2.
|
Management’s
Discussion and Analysis of Financial
Condition
|
|
and
Results of Operations
(MD&A)
|
This
quarterly
report on Form 10-Q, including documents incorporated by reference, 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”, “expect”, “believe”, “intend” 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 and the timing of these
acquisitions;
|
·
|
Our
intention
to sell properties and the timing of these property
sales;
|
·
|
Our
intention
to re-lease vacant properties;
|
·
|
Anticipated
trends in our business, including trends in the market for
long-term
net-leases of freestanding, single-tenant retail
properties;
|
·
|
Future
expenditures for development projects;
and
|
·
|
Profitability
of our subsidiary, Crest Net Lease, Inc.
(“Crest”).
|
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;
|
·
|
Fluctuating
interest rates;
|
·
|
Access
to
debt and equity capital markets;
|
·
|
Other
risks
inherent in the real estate business including tenant defaults,
potential
liability relating to environmental matters, illiquidity of
real estate
investments, and potential damages from natural
disasters;
|
·
|
Impairments
in the value of our real estate
assets;
|
·
|
Changes
in
the tax laws of the United States of
America;
|
·
|
The
outcome
of any legal proceedings to which we are a party;
and
|
·
|
Acts
of
terrorism and war.
|
Additional
factors
that may cause risks and uncertainties include those discussed in the
sections
entitled “Business”, “Risk Factors” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2006.
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, or SEC. 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.
Realty
Income
Corporation, The Monthly Dividend Company®,
is a Maryland
corporation organized to operate as an equity real estate investment
trust, or
REIT. Our primary business objective is to generate dependable
monthly cash distributions from a consistent and predictable level of
funds from
operations, or FFO per share. The monthly distributions are supported
by the cash flow from our portfolio of retail properties leased to regional
and
national retail chains. We have in-house acquisition, leasing, legal,
retail research, real estate research, portfolio management and capital
markets
expertise. Over the past 38 years, Realty Income and its predecessors
have been
acquiring and owning freestanding retail properties that generate rental
revenue
under long-term lease agreements (primarily 15 to 20 years).
In
addition, we 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;
|
·
|
Rent
increases at the termination of existing leases when market
conditions
permit; and
|
·
|
The
active
management of our property portfolio, including re-leasing
vacant
properties and selectively selling
properties.
|
In
acquiring additional properties, we adhere to a focused strategy of primarily
acquiring properties that are:
·
|
Freestanding,
single-tenant, retail locations;
|
·
|
Leased
to
regional and national retail chains;
and
|
·
|
Leased
under
long-term, net-lease agreements.
|
At
June 30, 2007, we owned a diversified portfolio:
·
|
Of
1,998
retail properties;
|
·
|
With
an
occupancy rate of 98.6%, or 1,971 properties occupied of the
1,998
properties in the portfolio;
|
·
|
Leased
to 108
different retail chains doing business in 29 separate retail
industries;
|
·
|
With
over
17.2 million square feet of leasable space;
and
|
·
|
With
an
average leasable retail space per property of approximately
8,600 square
feet.
|
Of
the 1,998 properties in the portfolio, 1,990, or 99.6%, are single-tenant,
retail properties and the remaining eight are multi-tenant, distribution
and
office properties. At June 30, 2007, 1,964, or 98.7%, of the 1,990 single-tenant
properties were leased with a weighted average remaining lease term (excluding
extension options) of approximately 12.6 years.
In
addition, at June 30, 2007, our wholly-owned taxable REIT subsidiary,
Crest, had
invested $74.5 million in 29 properties, which are classified as held
for
sale. Crest was created to buy and sell properties, primarily to
individual investors who are involved in tax-deferred exchanges under
Section
1031 of the Internal Revenue Code of 1986, as amended (the “Tax
Code”).
We
typically acquire retail store properties under long-term leases with
retail
chain store operators. These transactions generally provide capital to
owners of
retail real estate and retail chains for expansion or other corporate
purposes.
Our acquisition and investment activities are concentrated in well-defined
target markets and generally focus on retail chains providing goods and
services
that satisfy basic consumer needs.
Our
net-lease
agreements generally:
·
|
Are
for
initial terms of 15 to 20 years;
|
·
|
Require
the
tenant to pay minimum monthly rent and property operating expenses
(taxes,
insurance and maintenance); and
|
·
|
Provide
for
future rent increases based on increases in the consumer price
index,
fixed increases, or to a lesser degree, additional rent calculated
as a
percentage of the tenants’ gross sales above a specified
level.
|
Investment
Philosophy
We
believe that owning an actively managed, diversified portfolio of retail
properties under long-term, net leases produces consistent and predictable
income. Net leases typically require the tenant to be responsible for
minimum monthly rent and property operating expenses including property
taxes,
insurance and maintenance. In addition, tenants are typically
responsible for future rent increases based on increases in the consumer
price
index, fixed increases or, to a lesser degree, additional rent calculated
as a
percentage of the tenants’ gross sales above a specified level. We believe that
a portfolio of properties under long-term leases, coupled with the tenant’s
responsibility for property expenses, generally produces a more predictable
income stream than many other types of real estate portfolios, while
continuing
to offer the potential for growth in rental income.
Credit
Strategy
We
generally provide sale-leaseback financing to less than investment grade
retail
chains. We typically acquire and lease back properties to regional
and national retail chains and believe that within this market we can
achieve an
attractive risk-adjusted return on the financing we provide to
retailers. Since 1970, our overall weighted average occupancy rate at
the end of each year has been 98.6%, and the occupancy rate at the end
of each
year has never been below 97.5%.
Acquisition
Strategy
We
seek to invest in industries in which several, well-organized, regional
and
national retail chains are capturing market share through service, quality
control, economies of scale, advertising and the selection of prime retail
locations. We execute our acquisition strategy by acting as a source
of capital
to regional and national retail chain store owners and operators, doing
business
in a variety of industries, by acquiring and leasing back retail store
locations. We undertake thorough research and analysis to identify appropriate
industries, tenants and property locations for investment. Our research
expertise is instrumental to uncovering net-lease opportunities in markets
where
our real estate financing program adds value. In selecting real estate
for
potential investment, we generally seek to acquire properties that have
the
following characteristics:
·
|
Freestanding,
commercially-zoned property with a single
tenant;
|
·
|
Properties
that are important retail locations for regional and national
retail
chains;
|
·
|
Properties
that are located within attractive demographic areas relative
to the
business of their tenants, with high visibility and easy access
to major
thoroughfares; and
|
·
|
Properties
that can be purchased with the simultaneous execution or assumption
of
long-term, net-lease agreements, offering both current income
and the
potential for rent increases.
|
Acquisitions
During the Second Quarter of 2007
During
the second
quarter of 2007, Realty Income invested $37.5 million in 35 new retail
properties and properties under development with a weighted average contractual
lease rate of 8.8%. These 35 properties are located in four states, will
contain
over 208,000 leasable square feet, and are 100% leased with an average
lease
term of 19.4 years. The 35 new properties acquired by Realty Income
are net-leased to three different retail chains in the following three
industries: convenience store, health and fitness, and restaurant.
Acquisitions
During the First Six Months of 2007
During
the first
six months of 2007, Realty Income invested $98.3 million in 46 new retail
properties and properties under development with a weighted average contractual
lease rate of 8.6%. The 46 new properties are located in 12 states, will
contain
over 554,000 leasable square feet, and are 100% leased with an average
lease
term of 19.1 years. The 46 new properties acquired by Realty Income
are net-leased to six different retail chains in the following five industries:
convenience store, grocery, health and fitness, restaurant and sporting
goods.
At
June 30, 2007, Realty Income had invested $25.0 million in four properties
that were leased and being developed by the tenant (with development
costs
funded by Realty Income). Rent on these properties is scheduled to
begin at various times during the next twelve months. At June 30,
2007, we had outstanding commitments to pay estimated unfunded development
costs
totaling approximately $37.7 million.
The
initial
weighted average contractual lease rate is computed as estimated contractual
net
operating income (in a net-leased property that is equal to the base
rent or, in
the case of the properties under development, the estimated base rent
under the
lease) for the first year of each lease, divided by the estimated total
costs. Since it is possible that a tenant could default on the
payment of contractual rent, we cannot assure you that the actual return
on the
funds invested will remain at the percentages listed above.
Credit
Ratings Upgrade
In
April 2007, Moody’s Investors Service upgraded our senior unsecured debt rating
to Baa1 from Baa2 and our preferred stock rating to Baa2 from Baa3, with
a
stable outlook.
Investments
in Existing Properties
In
the second quarter of 2007, we capitalized costs of $327,000 on existing
properties in our portfolio, consisting of $111,000 for re-leasing costs
and
$216,000 for building improvements.
In
the first six months of 2007, we capitalized costs of $1.0 million on
existing
properties in our portfolio, consisting of $238,000 for re-leasing costs
and
$794,000 for building improvements.
Net
Income
Available to Common Stockholders
Net
income
available to common stockholders was $30.9 million in the second quarter
of 2007
versus $24.3 million in the same quarter of 2006, an increase of $6.6
million. On a diluted per common share basis, net income was $0.31 per
share in
the second quarter of 2007 compared to $0.27 in the second quarter of
2006.
Net
income
available to common stockholders was $61.1 million in the first six months
of
2007 versus $46.8 million in the same period of 2006, an increase of $14.3
million. On a diluted per common share basis, net income was $0.61 per
share in
the first six months of 2007 compared to $0.54 in the first six months
of
2006.
The
calculation to
determine net income available to common stockholders includes the gain
from the
sales of properties. The amount of gains varies from period to period
and can
significantly impact net income available to common stockholders.
The
gain recognized
from the sales of investment properties during the second quarter of
2007 was
$585,000, as compared to $1.4 million for the second quarter of
2006. The gain recognized from the sales of investment properties
during the first six months of 2007 was $2.4 million, as compared to
$2.2 million for the first six months of 2006.
Funds
from
Operations (FFO)
In
the second quarter of 2007, our FFO increased by $11.2 million, or 29.8%,
to
$48.8 million versus $37.6 million in the second quarter of
2006. On a diluted per common share basis, FFO was $0.49 in the
second quarter of 2007 compared to $0.43 for the second quarter of 2006,
an
increase of $0.06, or 14.0%.
In
the first six months of 2007, our FFO increased by $22.4 million, or
30.7%, to
$95.3 million versus $72.9 million in the first six months of
2006. On a diluted per common share basis, FFO was $0.95 in the first
six months of 2007 compared to $0.85 for the first six months of 2006,
an
increase of $0.10, or 11.8%.
See
our discussion
of FFO later in this MD&A for a reconciliation of net income available to
common stockholders to FFO.
Crest
Property Sales
During
the second
quarter of 2007, Crest sold 26 properties from its inventory for an aggregate
of
$56.2 million, which resulted in a gain of $5.3 million. During
the first six months of 2007, Crest sold 31 properties from its inventory
for an
aggregate of $69.5 million, which resulted in a gain of $6.6
million. Crest’s gains are included in “income from discontinued
operations, real estate acquired for resale by Crest” on our consolidated
statements of income.
Crest’s
Property Inventory
Crest’s
property
inventory at June 30, 2007 totaled $74.5 million and at December 31,
2006
totaled $137.5 million, and is included in “real estate held for sale, net”
on our consolidated balance sheets.
Increases
in Monthly Distributions to Common Stockholders
We
continue our 38-year policy of paying distributions monthly. Monthly
distributions per share were increased in April 2007 by $0.000625 to
$0.127125
and in July 2007 by $0.000625 to $0.12775. The increase in July 2007
was our 39th consecutive quarterly increase and the 44th increase in
the amount
of our dividend since our listing on the New York Stock Exchange, or
NYSE, in
1994. In the first six months of 2007, we paid three monthly cash distributions
per share in the amount of $0.1265 and three in the amount of $0.127125,
totaling $0.760875. In June 2007 and July 2007, we declared distributions
of
$0.12775 per share, which were paid on July 16, 2007 and will be paid on
August 15, 2007, respectively.
The
monthly
distribution of $0.12775 per share represents a current annualized distribution
of $1.533 per share, and an annualized distribution yield of approximately
6.5% based on the last reported sale price of our common stock on the
NYSE of
$23.59 on July 30, 2007. Although we expect to continue our policy of
paying
monthly distributions, we cannot guarantee that we will maintain our
current
level of distributions, that we will continue our pattern of increasing
distributions per share, or what our actual distribution yield will be
in any
future period.
Cash
Reserves
We
are organized to operate as an equity REIT that acquires and leases properties
and distributes to stockholders, in the form of monthly cash distributions,
a
substantial portion of our net cash flow generated from leases on our
retail
properties. We intend to retain an appropriate amount of cash as working
capital. At June 30, 2007, we had cash and cash equivalents totaling
$8.9
million.
We
believe that our cash and cash equivalents on hand, cash provided from
operating
activities and borrowing capacity is 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
facility.
$300
Million Acquisition Credit Facility
We
have a $300 million revolving, unsecured credit facility that expires
in October
2008. In April 2007, Moody’s Investors Service upgraded our credit
ratings. Effective May 1, 2007, our current investment grade credit
ratings provided for financing under the credit facility at the London
Interbank
Offered Rate, commonly referred to as LIBOR, plus 60 basis points with
a
facility fee of 15 basis points, for all-in drawn pricing of 75 basis
points over LIBOR. Prior to the credit rating upgrade by Moody’s
Investors Service, financing under the credit facility was five basis
points
higher. At July 30, 2007, we had a borrowing capacity of
$300.0 million available on our credit facility and no outstanding
balance.
We
expect to use the credit facility to acquire additional retail properties
and
for other corporate purposes. Any additional borrowings will increase
our exposure to interest rate risk. We have the right to request an
increase in the borrowing capacity of the credit facility by up to $100
million,
to a total borrowing capacity of $400 million. Any increase in the
borrowing capacity is subject to approval by the lending banks on our
credit
facility.
Mortgage
Debt
We
have no mortgage debt on any of our properties.
Universal
Shelf Registration
In
April 2006, we filed a shelf registration statement with the SEC, which
will be
effective for a term of three years. In accordance with SEC rules, the
amount of
the securities to be issued pursuant to this shelf registration statement
was
not specified when it was filed. The securities covered by this
registration statement include common stock, preferred stock, debt securities,
or any combination of such securities. We may periodically offer one
or more of these securities in amounts, prices and on terms to be announced
when
and if the securities are offered. The specifics of any future offerings,
along
with the use of proceeds of any securities offered, will be described
in detail
in a prospectus supplement, or other offering materials, at the time
of any
offering. There is no specific limit to the dollar amount of new
securities that can be issued under this new shelf registration before
it
expires in April 2009, and our common stock, preferred stock and notes
issued
after April 2006 were all issued pursuant to this universal shelf registration
statement.
Conservative
Capital Structure
We
believe that our stockholders are best served by a conservative capital
structure. Therefore, we seek to maintain a conservative debt level on
our
balance sheet and solid interest and fixed charge coverage ratios. At
July 30,
2007, our total outstanding credit facility borrowings and outstanding
notes
were $920.0 million or approximately 25.2% of our total market
capitalization of $3.65 billion. We define our total market capitalization
at July 30, 2007 as the sum of:
·
|
Shares
of our
common stock outstanding of 101,071,994 multiplied by the last
reported
sales price of our common stock on the NYSE of $23.59 per share,
or
$2.38 billion;
|
·
|
Aggregate
liquidation value of the Class D preferred stock of $127.5
million;
|
·
|
Aggregate
liquidation value of the Class E preferred stock of $220 million;
and
|
·
|
Outstanding
notes of $920 million.
|
Historically,
we
have met our long-term capital needs through the issuance of common stock,
preferred stock and long-term unsecured notes and bonds. Over the long
term, we
believe that the majority of our future securities issuances should be
in the
form of common stock, however, we may issue additional preferred stock
or debt
securities from time to time. We may issue common stock when we believe
that our
share price is at a level that allows for the proceeds of any offering
to be
accretively invested into additional properties. In addition, we may
issue
common stock to permanently finance properties that were financed by
our credit
facility or debt securities. However, we cannot assure you that we will
have
access to the capital markets at terms that are acceptable to us.
Credit
Agency Ratings
We
are currently assigned investment grade corporate credit ratings on our
senior
unsecured notes from Fitch Ratings, Moody’s Investors Service and Standard &
Poor’s Ratings Group. Currently, Fitch Ratings has assigned a rating of BBB+,
Moody’s has assigned a rating of Baa1 and Standard & Poor’s has assigned a
rating of BBB to our senior notes. Standard & Poor’s rating has a “positive”
outlook and Fitch and Moody’s have “stable” outlooks.
We
have also been assigned investment grade credit ratings from the same
rating
agencies on our preferred stock. Fitch Ratings has assigned a rating
of BBB,
Moody’s has assigned a rating of Baa2 and Standard & Poor’s has assigned a
rating of BBB- to our preferred stock. Standard & Poor’s rating
has a “positive” outlook and Fitch and Moody’s have “stable”
outlooks.
The
credit ratings
assigned to us could change based upon, among other things, our results
of
operations and financial condition. These ratings are subject to
ongoing evaluation by credit rating agencies and we cannot assure you
that any
such rating will not be changed or withdrawn by a rating agency in the
future
if, in its judgment, circumstances warrant. Moreover, a rating is not
a recommendation to buy, sell or hold our debt securities, preferred
stock or
common stock.
Notes
Outstanding
Our
senior
unsecured note obligations consist of the following as of June 30, 2007,
sorted
by maturity date (dollars in millions):
|
|
|
|
8
1/4%
notes, issued in October 1998 and due in November 2008
|
|
$ |
100.0
|
|
8%
notes, issued in January 1999 and due in January 2009
|
|
|
20.0
|
|
5
3/8%
notes, issued in March 2003 and due in March 2013
|
|
|
100.0
|
|
5
1/2%
notes, issued in November 2003 and due in November 2015
|
|
|
150.0
|
|
5.95%
notes, issued in September 2006 and due in September 2016
|
|
|
275.0
|
|
5
3/8%
notes, issued in September 2005 and due in September 2017
|
|
|
175.0
|
|
5
7/8%
bonds, issued in March 2005 and due in March 2035
|
|
|
100.0
|
|
|
|
$ |
920.0
|
|
Interest
on all of
our senior note obligations is paid semiannually, with the exception
of the
interest on the 8 1/4% senior notes issued in October
1998, which is paid monthly. All of these notes contain various
covenants, including: (i) a limitation on incurrence of any debt which
would
cause our debt to total adjusted assets ratio to exceed 60%; (ii) a limitation
on incurrence of any secured debt which would cause our secured debt
to total
adjusted assets ratio to exceed 40%; (iii) a limitation on incurrence
of any
debt which would cause our debt service coverage ratio to be less than
1.5
times; and (iv) the maintenance at all times of total unencumbered assets
not
less than 150% of our outstanding unsecured debt. We have been in compliance
with these covenants since each of the notes were issued.
The
following is a
summary of the key financial covenants of our senior unsecured notes,
as defined
and calculated per the terms of our notes. These calculations, which
are not based on GAAP measurements, are presented to investors to show
our
ability to incur additional debt under the terms of our notes only and
are not
measures of our liquidity or performance. The actual amounts as of
June 30, 2007 are:
Note
Covenants
|
Required
|
|
Actual
|
|
Limitation
on
incurrence of total debt
|
≤
60%
|
|
|
31.6 |
% |
Limitation
on
incurrence of secured debt
|
≤
40%
|
|
|
0.0 |
% |
Debt
service
coverage
|
≥
1.5
x
|
|
|
4.5
|
x |
Maintenance
of total unencumbered assets
|
≥
150%
of
unsecured debt
|
|
|
316 |
% |
All
of our
outstanding notes and bonds have fixed interest rates. Our credit
facility interest rate is variable.
The
following table
summarizes the maturity of each of our obligations as of June 30, 2007
(dollars
in millions):
Table
of
Obligations
Year
of
Maturity
|
|
Credit
Facility (1)
|
|
|
Notes
|
|
|
Interest
(2)
|
|
|
Other
(3)
|
|
|
Totals
|
|
2007
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
27.9
|
|
|
$ |
38.1
|
|
|
$ |
66.0
|
|
2008
|
|
|
10.0
|
|
|
|
100.0
|
|
|
|
54.6
|
|
|
|
--
|
|
|
|
164.6
|
|
2009
|
|
|
--
|
|
|
|
20.0
|
|
|
|
45.3
|
|
|
|
--
|
|
|
|
65.3
|
|
2010
|
|
|
--
|
|
|
|
--
|
|
|
|
45.3
|
|
|
|
--
|
|
|
|
45.3
|
|
2011
|
|
|
--
|
|
|
|
--
|
|
|
|
45.3
|
|
|
|
--
|
|
|
|
45.3
|
|
Thereafter
|
|
|
--
|
|
|
|
800.0
|
|
|
|
305.5
|
|
|
|
--
|
|
|
|
1,105.5
|
|
Totals
|
|
$ |
10.0
|
|
|
$ |
920.0
|
|
|
$ |
523.9
|
|
|
$ |
38.1
|
|
|
$ |
1,492.0
|
|
|
(1)
There was no outstanding
credit facility balance on July 30,
2007.
|
|
(2) Interest
on credit
facility and notes has been calculated based on outstanding
balances as of
June 30, 2007 through their respective maturity
dates.
|
|
(3)
“Other”
consists
of $37.7
million of estimated unfunded costs on properties under development
and
$397,000 of contingent payments for tenant improvements and
leasing
costs.
|
Our
credit facility
and note obligations are unsecured. Accordingly, we have not pledged
any assets as collateral for these obligations.
Preferred
Stock Outstanding
In
May and October 2004, we issued an aggregate of 5.1 million shares of
7
3/8% Class D cumulative redeemable preferred
stock. Beginning May 27, 2009, shares of Class D preferred stock are
redeemable at our option for $25 per share, plus any accrued and unpaid
dividends. Dividends on shares of Class D preferred are paid
monthly in arrears.
In
December 2006, we issued 8.8 million shares of 6 3/4%
Class E cumulative redeemable preferred stock. Beginning December 7,
2011, shares of Class E preferred stock are redeemable at our option
for $25 per
share, plus any accrued and unpaid dividends. Dividends on shares of
Class E preferred stock are paid monthly in arrears.
No
Off-Balance Sheet Arrangements or Unconsolidated
Investments
We
have no unconsolidated or off-balance sheet investments in “variable interest
entities” or off-balance sheet financing, nor do we engage in trading activities
involving energy or commodity contracts or other derivative
instruments.
As
we have no joint ventures, off-balance sheet entities, or mandatory redeemable
preferred stock, our financial position or results of operations are
currently
not affected by Financial Accounting Standard Board Interpretation No.
46R,
Consolidation of Variable Interest Entities and Statement of Financial
Accounting Standard No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity.
Distribution
Policy
Distributions
are
paid monthly to our common, Class D preferred and Class E preferred stockholders
if, and when, declared by our Board of Directors.
In
order to maintain our tax status as a REIT for federal income tax purposes,
we
generally are required to distribute dividends to our stockholders aggregating
annually at least 90% of our REIT taxable income (determined without
regard to
the dividends paid deduction and by excluding net capital gains), and
we are
subject to income tax to the extent we distribute less than 100% of our
REIT
taxable income (including net capital gains). In 2006, our cash distributions
totaled $139.1 million, or approximately 114.2% of our estimated REIT
taxable income of $121.8 million. Our estimated REIT taxable income
reflects non-cash deductions for depreciation and amortization.
We
intend to continue to make distributions to our stockholders that are
sufficient
to meet this distribution requirement and that will reduce our exposure
to
income taxes. Our cash distributions for the first six months of 2007
totaled
$76.9 million, representing 80.7% of our funds from operations available
to
common stockholders of $95.3 million. In comparison, our 2006 cash
distributions to common stockholders totaled $129.7 million, representing
83.2% of our funds from operations available to common stockholders of
$155.8 million.
The
Class D
preferred stockholders receive cumulative distributions at a rate of
7.375% per
annum on the $25 per share liquidation preference (equivalent to $1.84375
per
annum per share). The Class E preferred stockholders receive
cumulative distributions at a rate of 6.75% per annum on the $25 per
share
liquidation preference (equivalent to $1.6875 per annum per share).
Future
distributions will be at the discretion of our Board of Directors and
will
depend on, among other things, our results of operations, FFO, cash flow
from
operations, financial condition and capital requirements, the annual
distribution requirements under the REIT provisions of the Tax Code,
our debt
service requirements and any other factors the Board of Directors may
deem
relevant. In addition, our credit facility contains financial covenants
that
could limit the amount of distributions payable by us in the event of
a
deterioration in our results of operations or financial condition, and
which
prohibit the payment of distributions on the common or preferred stock
in the
event that we fail to pay when due (subject to any applicable grace period)
any
principal or interest on borrowings under our credit facility.
Distributions
of
our current and accumulated earnings and profits for federal income tax
purposes
generally will be taxable to stockholders as ordinary income, except
to the
extent that we recognize capital gains and declare a capital gains dividend
or
that such amounts constitute "qualified dividend income" subject to a
reduced
rate of tax. The maximum tax rate of non-corporate taxpayers for “qualified
dividend
income”
has
generally been reduced to 15% (for taxable years beginning after December
31,
2002). In general, dividends payable by REITs are not eligible for the
reduced
tax rate on corporate dividends, except to the extent the REIT’s dividends are
attributable to dividends received from taxable corporations (such as
our
taxable REIT subsidiary, Crest), to income that was subject to tax at
the
corporate or REIT level (for example, if we distribute taxable income
that we
retained and paid tax on in the prior taxable year) or, as discussed
above,
dividends properly designated by us as “capital gain dividends.” Distributions
in excess of earnings and profits generally will be treated as a non-taxable
reduction in the stockholders’ basis in the stock. Distributions above that
basis, generally, will be taxable as a capital gain. Approximately 9.9%
of the
distributions to our common stockholders, made or deemed to have been
made in
2006, were classified as a return of capital for federal income tax purposes.
We
are unable to predict the portion of future distributions that may be
classified
as a return of capital.
Critical
Accounting Policies
Our
consolidated
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”). Our consolidated financial statements
are the basis for our discussion and analysis of financial condition
and results
of operations. Preparing our consolidated financial statements requires
us to
make a number of estimates and assumptions that affect the reported amounts
and
disclosures in the consolidated financial statements. We believe that
we have
made these estimates and assumptions in an appropriate manner in a way
that
accurately reflects our financial condition. We continually test and
evaluate
these estimates and assumptions using our historical knowledge of the
business,
as well as other factors, to ensure that they are reasonable for reporting
purposes. However, actual results may differ from these estimates and
assumptions.
In
order to prepare our consolidated financial statements according to the
rules
and guidelines set forth by GAAP, many subjective judgments must be made
with
regard to critical accounting polices. One of these judgments is our
estimate
for useful lives in determining depreciation expense for our properties.
Depreciation of buildings and improvements is computed using the straight–line
method over an estimated useful life of 25 years. If we use a shorter
or longer
estimated useful life it could have a material impact on our results
of
operations. We believe that 25 years is an appropriate estimate of useful
life.
No depreciation has been recorded on Crest’s properties because they are held
for sale.
Another
significant
judgment must be made as to if, and when, impairment losses should be
taken on
our properties when events or change in circumstances indicate that the
carrying
amount of the asset may not be recoverable. Generally, a provision is
made for
impairment loss if estimated future operating cash flows (undiscounted
and
without interest charges) plus estimated disposition proceeds (undiscounted)
are
less than the current book value. Impairment losses are measured as the
amount
by which the current book value of the asset exceeds the fair value of
the
asset. If a property is held for sale, it is carried at the lower of
carrying
cost or estimated fair value, less cost to sell. The carrying value of
our real
estate is the largest component of our consolidated balance sheet. If
events
should occur that require us to reduce the carrying value of our real
estate by
recording provisions for impairment losses, it could have a material
impact on
our results of operations.
The
following is a comparison of our results of operations for the three
and six
months ended June 30, 2007 to the three and six months ended June 30,
2006.
Rental
Revenue
Rental
revenue was
$70.5 million for the second quarter of 2007 versus $55.7 million for
the second
quarter of 2006, an increase of $14.8 million, or 26.6%. The increase
in rental revenue in the second quarter of 2007 compared to the second
quarter
of 2006 is attributable to:
·
|
The
46 retail
properties acquired by Realty Income in 2007, which generated
$1.2 million
of rent in the second quarter of
2007;
|
·
|
The
322
retail properties acquired by Realty Income in 2006, which
generated $13.2
million of rent in the second quarter of 2007 compared to $1.8
million in
the second quarter of 2006, an increase of
$11.4 million;
|
·
|
Same
store
rents generated on 1,560 properties during the entire second
quarter of
2007 increased by $860,000, or 1.7%, to $52.7 million from
$51.8 million
for the same quarter in 2006;
|
·
|
An
increase
of $1.2 million relating to the aggregate of (i) development
properties
acquired before 2006 that started paying rent in 2006, (ii)
properties
that were vacant during part of 2007 or 2006 and (iii) lease
termination
settlements. These items totaled $3.0 million in aggregate in
the second quarter of 2007 compared to $1.8 million in the
same quarter of
2006; and
|
·
|
An
increase
in straight-line rent and other non-cash adjustments to rent
of $102,000
in the second quarter of 2007 as compared to the second quarter
of
2006.
|
Rental
revenue was
$139.6 million for the first six months of 2007 versus $110.7 million
for the
first six months of 2006, an increase of $28.9 million, or 26.1%. The
increase in rental revenue in the first six months of 2007 compared to
the first
six months of 2006 is attributable to:
·
|
The
46 retail
properties acquired by Realty Income in 2007, which generated
$1.5 million
in the first six months of 2007;
|
·
|
The
322
retail properties acquired by Realty Income in 2006, which
generated $26.4
million in the first six months of 2007 compared to $3.1 million
in the
first six months of 2006, an increase of
$23.3 million;
|
·
|
Same
store
rents generated on 1,560 properties during the entire first
six months of
2007 increased by $1.7 million, or 1.6%, to $105.2 million
from $103.5
million for the same period in
2006;
|
·
|
An
increase
of $2.7 million relating to the aggregate of (i) development
properties
acquired before 2006 that started paying rent in 2006, (ii)
properties
that were vacant during part of 2007 or 2006 and (iii) lease
termination
settlements. These items totaled $6.0 million in aggregate in
the first six months of 2007 compared to $3.3 million in the
first six
months of 2006; and net of
|
·
|
A
decrease in
straight-line rent and other non-cash adjustments to rent of
$309,000 in
the first six months of 2007 as compared to the first six months
of
2006.
|
Of
the 1,998 properties in the portfolio at June 30, 2007, 1,990, or 99.6%,
are
single-tenant properties and the remaining eight are multi-tenant properties.
Of
the 1,990 single-tenant properties, 1,964, or 98.7%, were net leased
with a
weighted average remaining lease term (excluding rights to extend a lease
at the
option of the tenant) of approximately 12.6 years at June 30, 2007. Of our
1,964 leased single-tenant properties, 1,750, or 89.1%, were under leases
that
provide for increases in rents through:
·
|
Primarily
base rent increases tied to a consumer price
index;
|
·
|
To
a lesser
degree, overage rent based on a percentage of the tenants’ gross sales;
or
|
·
|
A
combination of two or
more of the above rent provisions.
|
Percentage
rent,
which is included in rental revenue, was $167,000 in the second quarter
of 2007
and $93,000 in the second quarter of 2006. Percentage rent was $329,000
in the
first six months of 2007 and $208,000 in the first six months of 2006.
Percentage rent in the second quarter and first six months of 2007 was
less than
1% of rental revenue and we anticipate percentage rent to be less than
1% of
rental revenue in 2007.
Our
portfolio of
retail real estate, leased primarily to regional and national chains
under net
leases, continues to perform well and provides dependable lease revenue
supporting the payment of monthly dividends to our stockholders. At
June 30, 2007, our portfolio of 1,998 retail properties was 98.6% leased
with 27
properties available for lease, one of which is a multi-tenant
property.
As
of July 26, 2007, transactions to lease or sell 12 of the 27 properties
available for lease at June 30, 2007 were underway or completed. We anticipate
these transactions will be completed during the next several months,
although we
cannot guarantee that all of these properties can be leased or sold within
this
period. It has been our experience that approximately 1% to 3% of our
property
portfolio will be unleased at any given time; however, we cannot assure
you that
the number of properties available for lease will not exceed these
levels.
Depreciation
and Amortization
For
the second
quarter of 2007, depreciation and amortization was $18.5 million as compared
to
$14.8 million in the second quarter of 2006. For the first six months of
2007, depreciation and amortization was $36.6 million as compared to
$28.3 million in the first six months of 2006. The increase in
depreciation and amortization in 2007 was due to the acquisition of properties
in 2007 and 2006, which was partially offset by property sales in these
years.
Interest
Expense
Interest
expense
was $1.1 million higher in the second quarter of 2007 than in the second
quarter of 2006. Interest expense was $322,000 higher in the
first six months of 2007 than in the first six months of 2006. Interest
expense
increased in 2007 primarily due to higher average outstanding balances,
which
were partially offset by lower interest rates related to our average
outstanding
borrowings and Crest’s larger investment in real estate, which contributed to
the increase in interest expense included in discontinued
operations. We issued $275 million of 10-year notes in September
2006, which contributed to the increase in average outstanding balances
and
slightly lower average interest rates on our debt.
The
following is a
summary of the components of our interest expense (dollars in
thousands):
|
|
Three
months
ended
6/30/07
|
|
|
Three
months
ended
6/30/06
|
|
|
Six
months
ended
6/30/07
|
|
|
Six
months
ended
6/30/06
|
|
Interest
on
our credit facility and notes
|
|
$ |
14,178
|
|
|
$ |
12,534
|
|
|
$ |
28,090
|
|
|
$ |
26,132
|
|
Interest
included in discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
real
estate acquired for resale by Crest
|
|
|
(1,758 |
) |
|
|
(737 |
) |
|
|
(3,877 |
) |
|
|
(1,463 |
) |
Amortization
of settlements on treasury lock agreement
|
|
|
218
|
|
|
|
189
|
|
|
|
435
|
|
|
|
378
|
|
Credit
facility commitment fees
|
|
|
114
|
|
|
|
114
|
|
|
|
228
|
|
|
|
228
|
|
Amortization
of credit facility origination costs and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deferred
bond financing costs |
|
|
522 |
|
|
|
471 |
|
|
|
1,043 |
|
|
|
941 |
|
Interest
capitalized
|
|
|
(245 |
) |
|
|
(641 |
) |
|
|
(470 |
) |
|
|
(1,089 |
) |
Interest
expense
|
|
$ |
13,029
|
|
|
$ |
11,930
|
|
|
$ |
25,449
|
|
|
$ |
25,127
|
|
Credit
facility and notes outstanding
|
|
Three
months
ended
6/30/07
|
|
|
Three
months
ended
6/30/06
|
|
|
Six
months
ended
6/30/07
|
|
|
Six
months
ended
6/30/06
|
|
Average
outstanding balances (in thousands)
|
|
$ |
946,889
|
|
|
$ |
805,253
|
|
|
$ |
937,979
|
|
|
$ |
849,271
|
|
Average
interest rates
|
|
|
5.99 |
% |
|
|
6.24 |
% |
|
|
5.99 |
% |
|
|
6.20 |
% |
At
July 30, 2007, the weighted average interest rate on our notes payable
of $920
million was 5.99% and the average interest rate on our credit line was
5.92%. There was no balance on our credit line at July 30,
2007.
Interest
Coverage Ratio
Our
interest
coverage ratio for the second quarter of 2007 was 4.8 times, and was
4.1 times
for the second quarter of 2006. Our interest coverage ratio for the first
six
months of 2007 was 4.7 times, and was 3.9 times for the first six months
of
2006. Interest coverage ratio is calculated as: the interest coverage
amount (as calculated in the following table) divided by interest expense,
including interest recorded to discontinued operations. We consider interest
coverage ratio to be an appropriate supplemental measure of a company’s ability
to meet its interest expense obligations. Our calculation of interest
coverage
ratio may be different from the calculation used by other companies and,
therefore, comparability may be limited. This information should not
be
considered as an alternative to any GAAP liquidity measures.
The
following is a
reconciliation of net cash provided by operating activities on our consolidated
statements of cash flow to our interest coverage amount (dollars in
thousands):
|
|
Three
months
ended
6/30/07
|
|
|
Three
months
ended
6/30/06
|
|
|
Six
months
ended
6/30/07
|
|
|
Six
months
ended
6/30/06
|
|
Net
cash
provided by operating activities
|
|
$ |
117,906
|
|
|
$ |
46,227
|
|
|
$ |
172,257
|
|
|
$ |
84,758
|
|
Interest
expense
|
|
|
13,029
|
|
|
|
11,930
|
|
|
|
25,449
|
|
|
|
25,127
|
|
Interest
expense included in discontinued operations(1)
|
|
|
1,758
|
|
|
|
737
|
|
|
|
3,877
|
|
|
|
1,463
|
|
Income
taxes
|
|
|
353
|
|
|
|
231
|
|
|
|
598
|
|
|
|
462
|
|
Income
taxes
included in discontinued operations(1)
|
|
|
1,463
|
|
|
|
165
|
|
|
|
1,612
|
|
|
|
454
|
|
Investment
in
real estate acquired for resale(1)
|
|
|
--
|
|
|
|
1,381
|
|
|
|
--
|
|
|
|
8,737
|
|
Proceeds
from
sales of real estate acquired for resale(1)
|
|
|
(55,557 |
) |
|
|
(3,819 |
) |
|
|
(65,778 |
) |
|
|
(10,195 |
) |
Collection
of
a mortgage note receivable by Crest(1)
|
|
|
(8 |
) |
|
|
--
|
|
|
|
(8 |
) |
|
|
(1,333 |
) |
Gain
on sales
of real estate acquired for resale(1)
|
|
|
5,326
|
|
|
|
520
|
|
|
|
6,566
|
|
|
|
1,426
|
|
Amortization
of share-based compensation
|
|
|
(1,374 |
) |
|
|
(1,005 |
) |
|
|
(2,196 |
) |
|
|
(1,643 |
) |
Changes
in
assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable and other assets
|
|
|
(961 |
) |
|
|
(1,423 |
) |
|
|
(990 |
) |
|
|
(4,528 |
) |
Accounts
payable, accrued expenses and other liabilities
|
|
|
(10,463 |
) |
|
|
(2,577 |
) |
|
|
(2,330 |
) |
|
|
(222 |
) |
Interest
coverage amount
|
|
$ |
71,472
|
|
|
$ |
52,367
|
|
|
$ |
139,057
|
|
|
$ |
104,506
|
|
Divided
by
interest expense (2)
|
|
$ |
14,787
|
|
|
$ |
12,667
|
|
|
$ |
29,326
|
|
|
$ |
26,590
|
|
Interest
coverage ratio
|
|
|
4.8
|
|
|
|
4.1
|
|
|
|
4.7
|
|
|
|
3.9
|
|
(2)
|
Includes
interest expense recorded to “income from discontinued operations, real
estate acquired for resale by Crest” on our consolidated statements of
income.
|
Fixed
Charge Coverage Ratio
Our
fixed charge
coverage ratio for the second quarter of 2007 was 3.4 times, and was
3.5 times
for the second quarter of 2006. For the six months ended June 30, 2007,
our
fixed charge coverage ratio was 3.4 times, and was 3.3 times for the
six months
ended June 30, 2006. Fixed charge coverage ratio is calculated in exactly
the
same manner as interest coverage ratio, except that preferred stock dividends
are also added to the denominator. We consider fixed charge coverage
ratio to be
an appropriate supplemental measure of a company’s ability to make its interest
and preferred stock dividend payments. Our calculation of the fixed charge
coverage ratio may be different from the calculation used by other companies
and, therefore, comparability may be limited. This information should
not be
considered as an alternative to any GAAP liquidity measures.
Interest
coverage
amount divided by interest expense plus preferred stock dividends (dollars
in
thousands):
|
|
Three
months
ended
6/30/07
|
|
|
Three
months
ended
6/30/06
|
|
|
Six
months
ended
6/30/07
|
|
|
Six
months
ended
6/30/06
|
|
Interest
coverage amount
|
|
$ |
71,472
|
|
|
$ |
52,367
|
|
|
$ |
139,057
|
|
|
$ |
104,506
|
|
Divided
by
interest expense plus
preferred
stock dividends(1)
|
|
$ |
20,850
|
|
|
$ |
15,018
|
|
|
$ |
41,453
|
|
|
$ |
31,292
|
|
Fixed
charge
coverage ratio
|
|
|
3.4
|
|
|
|
3.5
|
|
|
|
3.4
|
|
|
|
3.3
|
|
(1)
Includes interest
expense recorded to “income from discontinued operations, real estate acquired
for resale by Crest” on our consolidated statements of income.
General
and
Administrative Expenses
General
and
administrative expenses increased by $1.4 million to $5.8 million in
the second
quarter of 2007 as compared to $4.4 million in the second quarter of
2006. In the second quarter of 2007, as a percentage of total
revenue, general and administrative expenses increased to 8.3% as compared
to
7.7% in the second quarter of 2006.
General
and
administrative expenses increased by $2.3 million to $10.9 million in
the first
six months of 2007 as compared to $8.6 million in the first six months of
2006. As a percentage of total revenue, general and administrative
expenses remained at 7.7% for the first six months of 2007 and
2006. General and administrative expenses increased in 2007 primarily
due to increases in employee and director compensation costs.
As
our property portfolio has grown and continues to grow, we have increased,
and
anticipate that we will continue to gradually increase the level of our
staffing. We expect general and administrative expenses to continue to
increase
due to costs attributable to compensation costs.
In
July 2007, we had 75 permanent employees as compared to July 2006 when
we had 71
permanent employees.
Property
Expenses
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, bad
debt
expense, property inspections and title search fees. At June 30, 2007, 27
properties were available for lease as compared to 26 at December 31,
2006 and
22 at June 30, 2006.
Property
expenses
were $964,000 in the second quarter of 2007 and $685,000 in the second
quarter
of 2006. Property expenses were $1.8 million in the first six months
of 2007 and $1.5 million in the first six months of 2006. The
increase in property expenses in 2007 is primarily attributable to an
increase
in costs associated with bad debt expense and legal fees.
Income
Taxes
Income
taxes were
$353,000 in the second quarter of 2007 as compared to $231,000 in the
second
quarter of 2006. Income taxes were $598,000 for the first six months
of 2007 as compared to $462,000 for the first six months of 2006. These
amounts
are for city and state income taxes paid by Realty Income. The
increase in 2007 is due primarily to an increase in rental revenue resulting
in
higher city and state income tax expense.
In
addition, Crest incurred state and federal income taxes of $1.5 million
in the
second quarter of 2007 as compared to $165,000 in the second quarter
of
2006. Crest incurred state and federal income taxes of $1.6 million
in the first six months of 2007 as compared to $454,000 in the first
six months
of 2006. The increase in Crest’s income taxes is due to higher taxable income,
primarily attributable to higher rental revenue and higher gain on sales
of real
estate acquired for resale. These amounts are included in “income
from discontinued operations, real estate acquired for resale by Crest” on our
consolidated statements of income.
Discontinued
Operations
Crest
acquires
properties with the intention of reselling them rather than holding them
as
investments and operating the properties. Consequently, we classify
properties acquired by Crest as held for sale at the date of acquisition
and do
not depreciate them. The operation of Crest’s properties is
classified as “income from discontinued operations, real estate acquired for
resale by Crest.”
The
following is a
summary of Crest’s “income from discontinued operations, real estate acquired
for resale” on our consolidated statements of income (dollars in thousands,
except per share data):
Crest’s
income from discontinued operations, real estate acquired for
resale
|
|
Three
months
ended
6/30/07
|
|
|
Three
months
ended
6/30/06
|
|
|
Six
months
ended
6/30/07
|
|
|
Six
months
ended
6/30/06
|
|
Gain
on sales
of real estate acquired for resale
|
|
$ |
5,326
|
|
|
$ |
520
|
|
|
$ |
6,566
|
|
|
$ |
1,426
|
|
Rental
revenue
|
|
|
2,365
|
|
|
|
990
|
|
|
|
5,249
|
|
|
|
2,094
|
|
Interest
expense
|
|
|
(1,758 |
) |
|
|
(737 |
) |
|
|
(3,877 |
) |
|
|
(1,463 |
) |
General
and
administrative expense
|
|
|
(179 |
) |
|
|
(75 |
) |
|
|
(282 |
) |
|
|
(154 |
) |
Property
expenses
|
|
|
(9 |
) |
|
|
4
|
|
|
|
(14 |
) |
|
|
(33 |
) |
Income
taxes
|
|
|
(1,463 |
) |
|
|
(165 |
) |
|
|
(1,612 |
) |
|
|
(454 |
) |
Income
from
discontinued operations,
real
estate acquired for resale by Crest
|
|
$ |
4,282
|
|
|
$ |
537
|
|
|
$ |
6,030
|
|
|
$ |
1,416
|
|
Per
common
share, basic and diluted
|
|
$ |
0.04
|
|
|
$ |
0.01
|
|
|
$ |
0.06
|
|
|
$ |
0.02
|
|
Realty
Income’s
operations from one property listed as held for sale at June 30, 2007,
plus
properties sold in 2007 and 2006 have been classified as discontinued
operations. The following is a summary of Realty Income’s “income
from discontinued operations, real estate held for investment” on our
consolidated statements of income (dollars in thousands, except per share
data):
Realty
Income’s income from discontinued operations, real estate held for
investment
|
|
Three
months
ended
6/30/07
|
|
|
Three
months
ended
6/30/06
|
|
|
Six
months
ended
6/30/07
|
|
|
Six
months
ended
6/30/06
|
|
Gain
on sales
of investment properties
|
|
$ |
585
|
|
|
$ |
1,441
|
|
|
$ |
585
|
|
|
$ |
2,193
|
|
Rental
revenue
|
|
|
79
|
|
|
|
213
|
|
|
|
119
|
|
|
|
491
|
|
Depreciation
and amortization
|
|
|
--
|
|
|
|
(39 |
) |
|
|
(9 |
) |
|
|
(96 |
) |
Property
expenses
|
|
|
(1 |
) |
|
|
1
|
|
|
|
9
|
|
|
|
(43 |
) |
Income
from
discontinued operations,
real
estate held for investment
|
|
$ |
663
|
|
|
$ |
1,616
|
|
|
$ |
704
|
|
|
$ |
2,545
|
|
Per
common
share, basic and diluted
|
|
$ |
0.01
|
|
|
$ |
0.02
|
|
|
$ |
0.01
|
|
|
$ |
0.03
|
|
The
following is a
summary of our total discontinued operations (dollars in thousands, except
per
share data):
|
|
Three
months
ended
6/30/07
|
|
|
Three
months
ended
6/30/06
|
|
|
Six
months
ended
6/30/07
|
|
|
Six
months
ended
6/30/06
|
|
Real
estate
acquired for resale by Crest
|
|
$ |
4,282
|
|
|
$ |
537
|
|
|
$ |
6,030
|
|
|
$ |
1,416
|
|
Real
estate
held for investment
|
|
|
663
|
|
|
|
1,616
|
|
|
|
704
|
|
|
|
2,545
|
|
Income
from
discontinued operations
|
|
$ |
4,945
|
|
|
$ |
2,153
|
|
|
$ |
6,734
|
|
|
$ |
3,961
|
|
Per
common
share, basic and diluted
|
|
$ |
0.05
|
|
|
$ |
0.02
|
|
|
$ |
0.07
|
|
|
$ |
0.05
|
|
The
above per share
amounts have each been calculated independently.
Gain
on
Sales of Real Estate Acquired for Resale by Crest
During
the second
quarter of 2007, Crest sold 26 properties for $56.2 million, which resulted
in a gain of $5.3 million. As part of one sale during the second
quarter of 2007, Crest provided the buyer financing in the form of a
$619,000
mortgage promissory note. In comparison, during the second quarter of
2006, Crest sold one property for $3.8 million, which resulted in a gain of
$520,000. Crest’s gains on sales are reported before income taxes and
are included in discontinued operations.
During
the first
six months of 2007, Crest sold 31 properties for $69.5 million, which
resulted in a gain of $6.6 million. As part of two sales during the
first six months of 2007, Crest provided the buyers financing for a total
of
$3.8 million in mortgage promissory notes. In comparison, during the
first six months of 2006, Crest sold five properties for $10.2 million,
which resulted in a gain of $1.4 million.
At
June 30, 2007, Crest had $74.5 million invested in 29 properties, which
are held
for sale. Crest generally carries a real estate inventory in excess of
$20
million. Crest generates an earnings spread on the difference between
the lease payments it receives on the properties held in inventory and
the cost
of capital used to acquire properties. It is our belief that at this
level of inventory, rental revenue will exceed the ongoing operating
expenses of
Crest without any property sales.
Gain
on
Sales of Investment Properties and Land by Realty Income
During
the second
quarter of 2007, we sold two investment properties for $1.0 million,
which
resulted in a gain of $585,000. In comparison, during the second
quarter of 2006, we sold five investment properties for $4.6 million, which
resulted in a gain of $1.4 million. As part of one sale during the
second quarter of 2006, we provided the buyer financing in the form of
a $1.3
million promissory note, which was paid in full in September
2006. These gains are included in discontinued
operations.
During
the first
six months of 2007, we sold three investment properties for $1.5 million,
which
resulted in a gain of $585,000. This gain is included in discontinued
operations. In addition, we sold excess land from three properties
for $3.8 million, which resulted in a gain of $1.8 million. The gain
from the land sales is reported in “other revenue” on our consolidated
statements of income because this excess land was associated with properties
that continue to be owned as part of our core operations. In
comparison, during the first six months of 2006, we sold ten investment
properties for $6.7 million, which resulted in a gain of $2.2
million. This gain is included in discontinued
operations.
We
have an active portfolio management program that incorporates the sale
of assets
when we believe the reinvestment of the sale proceeds will generate higher
returns, enhance the credit quality of our real estate portfolio or extend
our
average remaining lease term. At June 30, 2007, we classified real estate
with a
carrying amount of $74.8 million as held for sale on our balance sheet,
which includes properties owned by Crest. Additionally, we anticipate
selling investment properties from our portfolio that have not yet been
specifically identified, from which we anticipate receiving between
$10 million and $35 million in proceeds during the next 12 months. We
intend to invest these proceeds into new property acquisitions. However,
we
cannot guarantee that we will sell properties during the next 12
months.
Preferred
Stock Dividends
Preferred
stock
cash dividends totaled $6.1 million in the second quarter of 2007 as
compared to
$2.4 million in the second quarter of 2006. Preferred stock cash
dividends totaled $12.1 million in the first six months of 2007 as compared
to
$4.7 million in the first six months of 2006.
Net
Income
Available to Common Stockholders
Net
income
available to common stockholders was $30.9 million in the second quarter
of
2007, an increase of $6.6 million as compared to $24.3 million in the
second quarter of 2006. Net income available to common stockholders
was $61.1 million in the first six months of 2007, an increase of
$14.3 million as compared to $46.8 million in the first six months of
2006.
The
calculation to
determine net income available to common stockholders includes gains
from the
sales of properties. The amount of gains varies from period to period
based on
the timing of property sales and can significantly impact net income
available
to common stockholders.
During
the second
quarter of 2007, the gain recognized from the sales of investment properties
was
$585,000 as compared to $1.4 million for the second quarter of
2006. During the first six months of 2007, the gain recognized from
the sales of investment properties was $2.4 million as compared to
$2.2 million for the first six months of 2006.
FFO
for the second
quarter of 2007 increased by $11.2 million, or 29.8%, to $48.8 million
as
compared to $37.6 million in the second quarter of 2006. FFO for
the first six months of 2007 increased by $22.4 million, or 30.7%, to $95.3
million as compared to $72.9 million in the first six months of
2006. The following is a reconciliation of net income available to
common stockholders (which we believe is the most comparable GAAP measure)
to
FFO. Also presented is information regarding distributions paid to
common stockholders and the weighted average number of common shares
used for
the basic and diluted computation per share (dollars in thousands, except
per
share amounts):
|
|
Three
months
ended
6/30/07
|
|
|
Three
months
ended
6/30/06
|
|
|
Six
months
ended
6/30/07
|
|
|
Six
months
ended
6/30/06
|
|
Net
income
available to common stockholders
|
|
$ |
30,873
|
|
|
$ |
24,289
|
|
|
$ |
61,133
|
|
|
$ |
46,826
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
18,518
|
|
|
|
14,782
|
|
|
|
36,643
|
|
|
|
28,285
|
|
Discontinued
operations
|
|
|
--
|
|
|
|
39
|
|
|
|
9
|
|
|
|
96
|
|
Depreciation
of furniture, fixtures and equipment
|
|
|
(46 |
) |
|
|
(47 |
) |
|
|
(95 |
) |
|
|
(92 |
) |
Gain
on sales
of land and investment properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
--
|
|
|
|
--
|
|
|
|
(1,806 |
) |
|
|
--
|
|
Discontinued
operations
|
|
|
(585 |
) |
|
|
(1,441 |
) |
|
|
(585 |
) |
|
|
(2,193 |
) |
FFO
available
to common stockholders
|
|
$ |
48,760
|
|
|
$ |
37,622
|
|
|
$ |
95,299
|
|
|
$ |
72,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
per
common share, basic and diluted
|
|
$ |
0.49
|
|
|
$ |
0.43
|
|
|
$ |
0.95
|
|
|
$ |
0.85
|
|
Distributions
paid to common stockholders
|
|
$ |
38,533
|
|
|
$ |
31,242
|
|
|
$ |
76,863
|
|
|
$ |
60,496
|
|
FFO
in excess
of distributions paid to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders
|
|
$ |
10,227
|
|
|
$ |
6,380
|
|
|
$ |
18,436
|
|
|
$ |
12,426
|
|
Weighted
average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used
for
computation per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
100,133,094
|
|
|
|
88,305,175
|
|
|
|
100,111,734
|
|
|
|
85,791,994
|
|
Diluted
|
|
|
100,246,112
|
|
|
|
88,466,024
|
|
|
|
100,304,617
|
|
|
|
85,988,206
|
|
We
define FFO, a non-GAAP measure, consistent with the National Association
of Real
Estate Investment Trust’s definition, as net income available to common
stockholders, plus depreciation and amortization of real estate assets,
reduced
by gains on sales of investment properties and extraordinary items.
We
consider FFO to be an appropriate supplemental measure of a REIT’s operating
performance as it is based on a net income analysis of property portfolio
performance that excludes non-cash items such as depreciation. The historical
accounting convention used for real estate assets requires straight-line
depreciation of buildings and improvements, which implies that the value
of real
estate assets diminishes predictably over time. Since real estate values
historically rise and fall with market conditions, presentations of operating
results for a REIT, using historical accounting for depreciation, could
be less
informative. The use of FFO is recommended by the REIT industry as a
supplemental performance measure. In addition, FFO is used as a measure
of our
compliance with the financial covenants of our credit facility.
Presentation
of
this information is intended to assist the reader in comparing the operating
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. Furthermore, FFO is not necessarily
indicative of cash flow available to fund cash needs and should not be
considered as an alternative to net income as an indication of our performance.
In addition, FFO should not be considered as an alternative to reviewing
our
cash flows from operating, investing and financing activities as a measure
of
liquidity, of our ability to make cash distributions or of our ability
to pay
interest payments.
Other
Non-Cash Items and Capitalized Expenditures
The
following
information includes non-cash items and capitalized expenditures on existing
properties in our portfolio. These items are not included in the adjustments
to
net income available to common stockholders to arrive at FFO. Analysts
and
investors often request this supplemental information.
(dollars
in
thousands)
|
|
Three
months
ended
6/30/07
|
|
|
Three
months
ended
6/30/06
|
|
|
Six
months
ended
6/30/07
|
|
|
Six
months
ended
6/30/06
|
|
Amortization
of settlements on treasury lock agreements(1)
|
|
$ |
217
|
|
|
$ |
189
|
|
|
$ |
435
|
|
|
$ |
378
|
|
Amortization
of deferred note financing costs(2)
|
|
|
336
|
|
|
|
290
|
|
|
|
673
|
|
|
|
579
|
|
Amortization
of share-based compensation
|
|
|
1,374
|
|
|
|
1,005
|
|
|
|
2,196
|
|
|
|
1,643
|
|
Capitalized
leasing costs and commissions
|
|
|
(111 |
) |
|
|
(12 |
) |
|
|
(238 |
) |
|
|
(134 |
) |
Capitalized
building improvements
|
|
|
(216 |
) |
|
|
(57 |
) |
|
|
(794 |
) |
|
|
(104 |
) |
Straight
line
rent(3)
|
|
|
(389 |
) |
|
|
(287 |
) |
|
|
(533 |
) |
|
|
(841 |
) |
Crest
gain on
sale, previously reported as impairment
|
|
|
--
|
|
|
|
--
|
|
|
|
(271 |
) |
|
|
--
|
|
Gain
on
reinstatement of property carrying value
|
|
|
--
|
|
|
|
(716 |
) |
|
|
--
|
|
|
|
(716 |
) |
|
(1)
The
settlements on the treasury lock agreements resulted from an
interest rate
risk prevention strategy that was used by us in 1997 and 1998,
which
correlated to pending issuances of senior note securities. We
have not employed this strategy since
1998.
|
|
(2)
Amortization of deferred note financing costs includes the
amortization of
costs incurred and capitalized when our notes were issued in
May 1997,
October 1998, January 1999, March 2003, November 2003, March
2005,
September 2005 and September 2006. These costs are being amortized
over
the lives of these notes. No costs associated with our credit
facility
agreements or annual fees paid to credit rating agencies have
been
included.
|
|
(3)
A negative
amount indicates that our straight-line rent was greater than
our actual
cash rent collected.
|
At
June 30, 2007, we owned a diversified portfolio:
·
|
Of
1,998
retail properties;
|
·
|
With
an
occupancy rate of 98.6%, or 1,971 properties occupied of the
1,998
properties in the portfolio;
|
·
|
Leased
to 108
different retail chains doing business in 29 separate retail
industries;
|
·
|
With
over
17.2 million square feet of leasable space;
and
|
·
|
With
an
average leasable retail space per property of approximately
8,600 square
feet.
|
In
addition to our real estate portfolio at June 30, 2007, our subsidiary,
Crest,
had invested $74.5 million in 29 retail properties located in 10 states.
These properties are classified as held for sale.
At
June 30, 2007, 1,964, or 98.3%, of our 1,998 retail properties were leased
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. In addition, tenants are typically
responsible
for future rent increases based on increases in the consumer price index,
fixed
increases or, to a lesser degree, additional rent calculated as a percentage
of
the tenants’ gross sales above a specified level.
Our
net-leased
retail properties primarily are leased to regional and national retail
chain
store operators. Most buildings are single-story structures with adequate
parking on site to accommodate peak retail traffic periods. The properties
tend
to be on major thoroughfares with relatively high traffic counts, adequate
access and proximity to a sufficient population base to constitute a
suitable
market or trade area for the retailer’s business.
Industry
Diversification
The
following table
sets forth certain information regarding Realty Income’s property portfolio
(excluding properties owned by Crest) classified according to the business
of
the respective tenants, expressed as a percentage of our total rental
revenue:
|
|
Percentage
of Rental Revenue(1)
|
|
|
|
For
the Quarter Ended
June
30,
2007
|
|
|
For
the Years Ended
|
|
Industries
|
|
Dec
31,
2006
|
|
|
Dec
31,
2005
|
|
|
Dec
31,
2004
|
|
|
Dec
31,
2003
|
|
|
Dec
31,
2002
|
|
|
Dec
31,
2001
|
|
|
|
|
Apparel
stores
|
|
|
1.3 |
% |
|
|
1.7 |
% |
|
|
1.6 |
% |
|
|
1.8 |
% |
|
|
2.1 |
% |
|
|
2.3 |
% |
|
|
2.4 |
% |
Automotive
collision services
|
|
|
1.2
|
|
|
|
1.3
|
|
|
|
1.3
|
|
|
|
1.0
|
|
|
|
0.3
|
|
|
|
--
|
|
|
|
--
|
|
Automotive
parts
|
|
|
2.3
|
|
|
|
2.8
|
|
|
|
3.4
|
|
|
|
3.8
|
|
|
|
4.5
|
|
|
|
4.9
|
|
|
|
5.7
|
|
Automotive
service
|
|
|
5.3
|
|
|
|
6.9
|
|
|
|
7.6
|
|
|
|
7.7
|
|
|
|
8.3
|
|
|
|
7.0
|
|
|
|
5.7
|
|
Automotive
tire services
|
|
|
7.5
|
|
|
|
6.1
|
|
|
|
7.2
|
|
|
|
7.8
|
|
|
|
3.1
|
|
|
|
2.7
|
|
|
|
2.6
|
|
Book
stores
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
0.4
|
|
Business
services
|
|
|
*
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Child
care
|
|
|
8.7
|
|
|
|
10.3
|
|
|
|
12.7
|
|
|
|
14.4
|
|
|
|
17.8
|
|
|
|
20.8
|
|
|
|
23.9
|
|
Consumer
electronics
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
1.3
|
|
|
|
2.1
|
|
|
|
3.0
|
|
|
|
3.3
|
|
|
|
4.0
|
|
Convenience
stores
|
|
|
14.0
|
|
|
|
16.1
|
|
|
|
18.7
|
|
|
|
19.2
|
|
|
|
13.3
|
|
|
|
9.1
|
|
|
|
8.4
|
|
Crafts
and
novelties
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
0.4
|
|
|
|
0.4
|
|
Drug
stores
|
|
|
2.8
|
|
|
|
2.9
|
|
|
|
2.8
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Entertainment
|
|
|
1.4
|
|
|
|
1.6
|
|
|
|
2.1
|
|
|
|
2.3
|
|
|
|
2.6
|
|
|
|
2.3
|
|
|
|
1.8
|
|
Equipment
rental services
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
--
|
|
|
|
--
|
|
Financial
services
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
General
merchandise
|
|
|
0.7
|
|
|
|
0.6
|
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.6
|
|
Grocery
stores
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
0.8
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
0.6
|
|
Health
and
fitness
|
|
|
5.5
|
|
|
|
4.3
|
|
|
|
3.7
|
|
|
|
4.0
|
|
|
|
3.8
|
|
|
|
3.8
|
|
|
|
3.6
|
|
Home
furnishings
|
|
|
2.7
|
|
|
|
3.1
|
|
|
|
3.7
|
|
|
|
4.1
|
|
|
|
4.9
|
|
|
|
5.4
|
|
|
|
6.0
|
|
Home
improvement
|
|
|
2.5
|
|
|
|
3.4
|
|
|
|
1.1
|
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
1.3
|
|
Motor
vehicle
dealerships
|
|
|
3.5
|
|
|
|
3.4
|
|
|
|
2.6
|
|
|
|
0.6
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Office
supplies
|
|
|
1.1
|
|
|
|
1.3
|
|
|
|
1.5
|
|
|
|
1.6
|
|
|
|
1.9
|
|
|
|
2.1
|
|
|
|
2.2
|
|
Pet
supplies
and services
|
|
|
0.9
|
|
|
|
1.1
|
|
|
|
1.3
|
|
|
|
1.4
|
|
|
|
1.7
|
|
|
|
1.7
|
|
|
|
1.6
|
|
Private
education
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
1.3
|
|
|
|
1.5
|
|
Restaurants
|
|
|
19.2
|
|
|
|
11.9
|
|
|
|
9.4
|
|
|
|
9.7
|
|
|
|
11.8
|
|
|
|
13.5
|
|
|
|
12.2
|
|
Shoe
stores
|
|
|
--
|
|
|
|
--
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.9
|
|
|
|
0.8
|
|
|
|
0.7
|
|
Sporting
goods
|
|
|
2.6
|
|
|
|
2.9
|
|
|
|
3.4
|
|
|
|
3.4
|
|
|
|
3.8
|
|
|
|
4.1
|
|
|
|
0.9
|
|
Theaters
|
|
|
9.2
|
|
|
|
9.6
|
|
|
|
5.2
|
|
|
|
3.5
|
|
|
|
4.1
|
|
|
|
3.9
|
|
|
|
4.3
|
|
Travel
plazas
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
--
|
|
|
|
--
|
|
Video
rental
|
|
|
1.8
|
|
|
|
2.1
|
|
|
|
2.5
|
|
|
|
2.8
|
|
|
|
3.3
|
|
|
|
3.3
|
|
|
|
3.7
|
|
Other
|
|
|
2.3
|
|
|
|
2.7
|
|
|
|
3.0
|
|
|
|
3.4
|
|
|
|
3.8
|
|
|
|
4.4
|
|
|
|
5.2
|
|
Totals
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
* Less
than 0.1%
(1)
|
Includes
rental revenue for all properties owned by Realty Income at
the end of
each period presented, including revenue from properties reclassified
to
discontinued operations.
|
Service
Category Diversification
The
following table
sets forth certain information regarding the properties owned by Realty
Income
(excluding properties owned by Crest) at June 30, 2007, classified according
to
the retail business types and the level of services they provide (dollars
in
thousands):
|
|
|
|
|
|
Rental
Revenue for the
|
Percentage
of
|
|
Number
of
|
Quarter
Ended
|
Rental
|
Industry
|
Properties
|
June
30, 2007(1)
|
Revenue
|
Tenants
Providing Services
|
|
|
|
Automotive
collision services
|
13
|
$
825
|
1.2%
|
Automotive
service
|
219
|
3,709
|
5.3
|
Child
care
|
268
|
6,119
|
8.7
|
Entertainment
|
8
|
967
|
1.4
|
Equipment
rental services
|
2
|
150
|
0.2
|
Financial
services
|
4
|
85
|
0.1
|
Health
and
fitness
|
26
|
3,871
|
5.5
|
Private
education
|
6
|
576
|
0.8
|
Theaters
|
31
|
6,514
|
9.2
|
Other
|
11
|
1,600
|
2.3
|
|
588
|
24,416
|
34.7
|
Tenants
Selling Goods and Services
|
|
|
Automotive
parts (with installation)
|
30
|
583
|
0.8
|
Automotive
tire services
|
149
|
5,283
|
7.5
|
Business
services
|
1
|
32
|
*
|
Convenience
stores
|
425
|
9,854
|
14.0
|
Home
improvement
|
1
|
57
|
0.1
|
Motor
vehicle
dealerships
|
22
|
2,495
|
3.5
|
Pet
supplies
and services
|
9
|
607
|
0.9
|
Restaurants
|
472
|
13,525
|
19.2
|
Travel
plazas
|
1
|
170
|
0.2
|
Video
rental
|
34
|
1,263
|
1.8
|
|
1,144
|
33,869
|
48.0
|
Tenants
Selling Goods
|
|
|
|
Apparel
stores
|
6
|
883
|
1.3
|
Automotive
parts
|
74
|
1,063
|
1.5
|
Book
stores
|
2
|
156
|
0.2
|
Consumer
electronics
|
17
|
679
|
1.0
|
Crafts
and
novelties
|
4
|
215
|
0.3
|
Drug
stores
|
34
|
1,941
|
2.8
|
General
merchandise
|
24
|
482
|
0.7
|
Grocery
stores
|
8
|
531
|
0.7
|
Home
furnishings
|
41
|
1,932
|
2.7
|
Home
improvement
|
31
|
1,693
|
2.4
|
Office
supplies
|
10
|
788
|
1.1
|
Pet
supplies
|
2
|
37
|
*
|
Sporting
goods
|
13
|
1,810
|
2.6
|
|
266
|
12,210
|
17.3
|
Totals
|
1,998
|
$
70,495
|
100.0%
|
*
Less
than
0.1%
(1)
|
Includes
rental revenue for all properties owned by Realty Income at
June 30, 2007,
including revenue from properties reclassified to discontinued
operations
of $15.
|
Lease
Expirations
The
following table
sets forth certain information regarding Realty Income’s property portfolio
(excluding properties owned by Crest) regarding the timing of the lease
term
expirations (excluding extension options) on our 1,964 net leased, single-tenant
retail properties as of June 30, 2007 (dollars in thousands):
|
|
Total
Portfolio
|
|
|
Initial
Expirations(3)
|
|
|
Subsequent
Expirations(4)
|
|
Year
|
|
Total
Number
of Leases Expiring(1)
|
|
|
Rental
Revenue for the Quarter Ended 6/30/07(2)
|
|
|
%
of
Total
Rental Revenue
|
|
|
Number
of
Leases Expiring
|
|
|
Rental
Revenue
for
the Quarter Ended 6/30/07
|
|
|
%
of
Total
Rental Revenue
|
|
|
Number
of Leases Expiring
|
|
|
Rental
Revenue
for
the Quarter Ended 6/30/07
|
|
|
%
of
Total
Rental Revenue
|
|
2007
|
|
|
87
|
|
|
$ |
1,566
|
|
|
|
2.3 |
% |
|
|
52
|
|
|
$ |
967
|
|
|
|
1.4 |
% |
|
|
35
|
|
|
$ |
599
|
|
|
|
0.9 |
% |
2008
|
|
|
120
|
|
|
|
2,581
|
|
|
|
3.7
|
|
|
|
64
|
|
|
|
1,520
|
|
|
|
2.2
|
|
|
|
56
|
|
|
|
1,061
|
|
|
|
1.5
|
|
2009
|
|
|
108
|
|
|
|
2,319
|
|
|
|
3.4
|
|
|
|
32
|
|
|
|
734
|
|
|
|
1.1
|
|
|
|
76
|
|
|
|
1,585
|
|
|
|
2.3
|
|
2010
|
|
|
74
|
|
|
|
1,564
|
|
|
|
2.3
|
|
|
|
34
|
|
|
|
833
|
|
|
|
1.2
|
|
|
|
40
|
|
|
|
731
|
|
|
|
1.1
|
|
2011
|
|
|
81
|
|
|
|
2,467
|
|
|
|
3.6
|
|
|
|
36
|
|
|
|
1,422
|
|
|
|
2.1
|
|
|
|
45
|
|
|
|
1,045
|
|
|
|
1.5
|
|
2012
|
|
|
89
|
|
|
|
2,262
|
|
|
|
3.3
|
|
|
|
75
|
|
|
|
1,968
|
|
|
|
2.9
|
|
|
|
14
|
|
|
|
294
|
|
|
|
0.4
|
|
2013
|
|
|
76
|
|
|
|
3,435
|
|
|
|
5.0
|
|
|
|
67
|
|
|
|
3,201
|
|
|
|
4.7
|
|
|
|
9
|
|
|
|
234
|
|
|
|
0.3
|
|
2014
|
|
|
48
|
|
|
|
2,000
|
|
|
|
2.9
|
|
|
|
35
|
|
|
|
1,739
|
|
|
|
2.5
|
|
|
|
13
|
|
|
|
261
|
|
|
|
0.4
|
|
2015
|
|
|
90
|
|
|
|
1,848
|
|
|
|
2.7
|
|
|
|
65
|
|
|
|
1,284
|
|
|
|
1.9
|
|
|
|
25
|
|
|
|
564
|
|
|
|
0.8
|
|
2016
|
|
|
112
|
|
|
|
1,902
|
|
|
|
2.7
|
|
|
|
111
|
|
|
|
1,877
|
|
|
|
2.7
|
|
|
|
1
|
|
|
|
25
|
|
|
|
*
|
|
2017
|
|
|
25
|
|
|
|
1,686
|
|
|
|
2.5
|
|
|
|
21
|
|
|
|
1,615
|
|
|
|
2.4
|
|
|
|
4
|
|
|
|
71
|
|
|
|
0.1
|
|
2018
|
|
|
24
|
|
|
|
1,018
|
|
|
|
1.5
|
|
|
|
24
|
|
|
|
1,018
|
|
|
|
1.5
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2019
|
|
|
94
|
|
|
|
4,652
|
|
|
|
6.8
|
|
|
|
93
|
|
|
|
4,456
|
|
|
|
6.5
|
|
|
|
1
|
|
|
|
196
|
|
|
|
0.3
|
|
2020
|
|
|
81
|
|
|
|
3,087
|
|
|
|
4.5
|
|
|
|
78
|
|
|
|
3,024
|
|
|
|
4.4
|
|
|
|
3
|
|
|
|
63
|
|
|
|
0.1
|
|
2021
|
|
|
148
|
|
|
|
5,597
|
|
|
|
8.2
|
|
|
|
147
|
|
|
|
5,543
|
|
|
|
8.1
|
|
|
|
1
|
|
|
|
54
|
|
|
|
0.1
|
|
2022
|
|
|
98
|
|
|
|
2,852
|
|
|
|
4.2
|
|
|
|
98
|
|
|
|
2,852
|
|
|
|
4.2
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2023
|
|
|
234
|
|
|
|
6,452
|
|
|
|
9.4
|
|
|
|
233
|
|
|
|
6,426
|
|
|
|
9.4
|
|
|
|
1
|
|
|
|
26
|
|
|
|
*
|
|
2024
|
|
|
60
|
|
|
|
1,882
|
|
|
|
2.7
|
|
|
|
60
|
|
|
|
1,882
|
|
|
|
2.7
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2025
|
|
|
67
|
|
|
|
6,308
|
|
|
|
9.2
|
|
|
|
63
|
|
|
|
6,243
|
|
|
|
9.1
|
|
|
|
4
|
|
|
|
65
|
|
|
|
0.1
|
|
2026
|
|
|
193
|
|
|
|
10,969
|
|
|
|
16.0
|
|
|
|
191
|
|
|
|
10,915
|
|
|
|
15.9
|
|
|
|
2
|
|
|
|
54
|
|
|
|
0.1
|
|
2027
|
|
|
27
|
|
|
|
782
|
|
|
|
1.1
|
|
|
|
27
|
|
|
|
782
|
|
|
|
1.1
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2028
|
|
|
5
|
|
|
|
148
|
|
|
|
0.2
|
|
|
|
5
|
|
|
|
148
|
|
|
|
0.2
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2029
|
|
|
13
|
|
|
|
127
|
|
|
|
0.2
|
|
|
|
13
|
|
|
|
127
|
|
|
|
0.2
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2030
|
|
|
2
|
|
|
|
240
|
|
|
|
0.3
|
|
|
|
2
|
|
|
|
240
|
|
|
|
0.3
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2033
|
|
|
3
|
|
|
|
357
|
|
|
|
0.5
|
|
|
|
3
|
|
|
|
357
|
|
|
|
0.5
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2034
|
|
|
2
|
|
|
|
230
|
|
|
|
0.3
|
|
|
|
2
|
|
|
|
230
|
|
|
|
0.3
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2037
|
|
|
2
|
|
|
|
322
|
|
|
|
0.5
|
|
|
|
2
|
|
|
|
322
|
|
|
|
0.5
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2043
|
|
|
1
|
|
|
|
13
|
|
|
|
*
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1
|
|
|
|
13
|
|
|
|
*
|
|
Totals
|
|
|
1,964
|
|
|
$ |
68,666
|
|
|
|
100.0 |
% |
|
|
1,633
|
|
|
$ |
61,725
|
|
|
|
90.0 |
% |
|
|
331
|
|
|
$ |
6,941
|
|
|
|
10.0 |
% |
*
Less
than
0.1%
(1)
|
Excludes
seven multi-tenant properties and 27 vacant unleased properties,
one of
which is a multi-tenant property. The lease expirations for
properties under construction are based on the estimated date
of
completion of those properties.
|
(2)
|
Includes
rental revenue of $15 from properties reclassified to discontinued
operations and excludes revenue of $1,829 from seven multi-tenant
properties and from 27 vacant and unleased properties at June
30,
2007.
|
(3)
|
Represents
leases to the initial tenant of the property that are expiring
for the
first time.
|
(4)
|
Represents
lease expirations on properties in the portfolio, which have
previously
been renewed, extended or
re-tenanted.
|
State
Diversification
The
following table
sets forth certain state-by-state information regarding Realty Income’s property
portfolio (excluding properties owned by Crest) as of June 30, 2007 (dollars
in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Rental
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
For
the Quarter
|
|
|
Percentage
of
|
|
|
|
Number
of
|
|
|
Percent
|
|
|
Leasable
|
|
|
Ended
June 30,
|
|
|
Rental
|
|
State
|
|
Properties
|
|
|
Leased
|
|
|
Square
Feet
|
|
|
2007(1)
|
|
|
Revenue
|
|
Alabama
|
|
|
61
|
|
|
|
98 |
% |
|
|
422,900
|
|
|
$ |
1,885
|
|
|
|
2.7 |
% |
Alaska
|
|
|
2
|
|
|
|
100
|
|
|
|
128,500
|
|
|
|
277
|
|
|
|
0.4
|
|
Arizona
|
|
|
72
|
|
|
|
97
|
|
|
|
372,800
|
|
|
|
2,075
|
|
|
|
2.9
|
|
Arkansas
|
|
|
15
|
|
|
|
100
|
|
|
|
94,500
|
|
|
|
411
|
|
|
|
0.6
|
|
California
|
|
|
61
|
|
|
|
98
|
|
|
|
1,103,800
|
|
|
|
3,924
|
|
|
|
5.6
|
|
Colorado
|
|
|
47
|
|
|
|
98
|
|
|
|
419,400
|
|
|
|
1,776
|
|
|
|
2.5
|
|
Connecticut
|
|
|
16
|
|
|
|
100
|
|
|
|
245,600
|
|
|
|
1,028
|
|
|
|
1.5
|
|
Delaware
|
|
|
15
|
|
|
|
100
|
|
|
|
27,700
|
|
|
|
316
|
|
|
|
0.4
|
|
Florida
|
|
|
152
|
|
|
|
99
|
|
|
|
1,421,400
|
|
|
|
6,203
|
|
|
|
8.8
|
|
Georgia
|
|
|
127
|
|
|
|
99
|
|
|
|
910,700
|
|
|
|
3,919
|
|
|
|
5.6
|
|
Idaho
|
|
|
14
|
|
|
|
100
|
|
|
|
91,900
|
|
|
|
393
|
|
|
|
0.6
|
|
Illinois
|
|
|
64
|
|
|
|
100
|
|
|
|
830,800
|
|
|
|
3,709
|
|
|
|
5.3
|
|
Indiana
|
|
|
78
|
|
|
|
96
|
|
|
|
677,100
|
|
|
|
2,517
|
|
|
|
3.6
|
|
Iowa
|
|
|
19
|
|
|
|
100
|
|
|
|
138,700
|
|
|
|
450
|
|
|
|
0.6
|
|
Kansas
|
|
|
29
|
|
|
|
90
|
|
|
|
562,200
|
|
|
|
1,001
|
|
|
|
1.4
|
|
Kentucky
|
|
|
22
|
|
|
|
95
|
|
|
|
111,500
|
|
|
|
678
|
|
|
|
1.0
|
|
Louisiana
|
|
|
33
|
|
|
|
100
|
|
|
|
190,400
|
|
|
|
946
|
|
|
|
1.3
|
|
Maryland
|
|
|
26
|
|
|
|
98
|
|
|
|
251,400
|
|
|
|
1,394
|
|
|
|
2.0
|
|
Massachusetts
|
|
|
37
|
|
|
|
100
|
|
|
|
203,100
|
|
|
|
1,032
|
|
|
|
1.5
|
|
Michigan
|
|
|
20
|
|
|
|
100
|
|
|
|
158,300
|
|
|
|
680
|
|
|
|
1.0
|
|
Minnesota
|
|
|
21
|
|
|
|
100
|
|
|
|
392,100
|
|
|
|
1,267
|
|
|
|
1.8
|
|
Mississippi
|
|
|
70
|
|
|
|
97
|
|
|
|
353,800
|
|
|
|
1,445
|
|
|
|
2.0
|
|
Missouri
|
|
|
61
|
|
|
|
98
|
|
|
|
634,800
|
|
|
|
2,079
|
|
|
|
2.9
|
|
Montana
|
|
|
2
|
|
|
|
100
|
|
|
|
30,000
|
|
|
|
74
|
|
|
|
0.1
|
|
Nebraska
|
|
|
17
|
|
|
|
100
|
|
|
|
190,200
|
|
|
|
603
|
|
|
|
0.9
|
|
Nevada
|
|
|
15
|
|
|
|
100
|
|
|
|
191,000
|
|
|
|
838
|
|
|
|
1.2
|
|
New
Hampshire
|
|
|
10
|
|
|
|
100
|
|
|
|
95,400
|
|
|
|
394
|
|
|
|
0.6
|
|
New
Jersey
|
|
|
26
|
|
|
|
100
|
|
|
|
235,600
|
|
|
|
1,642
|
|
|
|
2.3
|
|
New
Mexico
|
|
|
7
|
|
|
|
100
|
|
|
|
53,300
|
|
|
|
142
|
|
|
|
0.2
|
|
New
York
|
|
|
29
|
|
|
|
97
|
|
|
|
427,400
|
|
|
|
2,147
|
|
|
|
3.0
|
|
North
Carolina
|
|
|
60
|
|
|
|
100
|
|
|
|
438,100
|
|
|
|
2,014
|
|
|
|
2.9
|
|
North
Dakota
|
|
|
5
|
|
|
|
100
|
|
|
|
31,900
|
|
|
|
54
|
|
|
|
0.1
|
|
Ohio
|
|
|
111
|
|
|
|
100
|
|
|
|
751,800
|
|
|
|
2,864
|
|
|
|
4.1
|
|
Oklahoma
|
|
|
24
|
|
|
|
100
|
|
|
|
134,300
|
|
|
|
597
|
|
|
|
0.8
|
|
Oregon
|
|
|
19
|
|
|
|
100
|
|
|
|
294,800
|
|
|
|
816
|
|
|
|
1.2
|
|
Pennsylvania
|
|
|
85
|
|
|
|
100
|
|
|
|
558,700
|
|
|
|
2,635
|
|
|
|
3.7
|
|
Rhode
Island
|
|
|
1
|
|
|
|
100
|
|
|
|
3,500
|
|
|
|
32
|
|
|
|
*
|
|
South
Carolina
|
|
|
59
|
|
|
|
100
|
|
|
|
250,700
|
|
|
|
1,533
|
|
|
|
2.2
|
|
South
Dakota
|
|
|
8
|
|
|
|
100
|
|
|
|
21,000
|
|
|
|
96
|
|
|
|
0.1
|
|
Tennessee
|
|
|
126
|
|
|
|
100
|
|
|
|
607,800
|
|
|
|
3,020
|
|
|
|
4.3
|
|
Texas
|
|
|
202
|
|
|
|
97
|
|
|
|
2,242,100
|
|
|
|
7,719
|
|
|
|
10.9
|
|
Utah
|
|
|
6
|
|
|
|
83
|
|
|
|
35,100
|
|
|
|
96
|
|
|
|
0.1
|
|
Vermont
|
|
|
1
|
|
|
|
100
|
|
|
|
2,500
|
|
|
|
24
|
|
|
|
*
|
|
Virginia
|
|
|
67
|
|
|
|
100
|
|
|
|
485,900
|
|
|
|
2,589
|
|
|
|
3.7
|
|
Washington
|
|
|
36
|
|
|
|
100
|
|
|
|
237,800
|
|
|
|
706
|
|
|
|
0.9
|
|
West
Virginia
|
|
|
2
|
|
|
|
50
|
|
|
|
23,200
|
|
|
|
44
|
|
|
|
0.1
|
|
Wisconsin
|
|
|
17
|
|
|
|
94
|
|
|
|
157,400
|
|
|
|
393
|
|
|
|
0.6
|
|
Wyoming
|
|
|
1
|
|
|
|
100
|
|
|
|
4,200
|
|
|
|
18
|
|
|
|
*
|
|
Totals/Average
|
|
|
1,998
|
|
|
|
99 |
% |
|
|
17,247,100
|
|
|
$ |
70,495
|
|
|
|
100.0 |
% |
* Less
than 0.1%
(1)
|
Includes
rental revenue for all properties owned by Realty Income at
June 30, 2007,
including revenue from properties reclassified to discontinued
operations
of $15.
|
Tenant
leases
generally provide for limited increases in rent as a result of increases
in the
tenants’ sales volumes, increases in the consumer price index, and/or fixed
increases. We expect that inflation will cause these lease provisions
to result
in rent increases over time. 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
98.3%, or 1,964, of the 1,998 properties in the portfolio are leased
to tenants
under net leases where the tenant is responsible for property expenses.
Net
leases tend to reduce our exposure to rising property expenses due to
inflation.
Inflation and increased costs may have an adverse impact on our tenants
if
increases in their operating expenses exceed increases in revenue.
In
September 2006, the FASB issued Statement No. 157, Fair Value
Measurements. Statement No. 157 sets out a framework for
measuring fair value, and requires additional disclosures about fair-value
measurements. Statement No. 157 becomes effective for us at the
beginning of 2008. The impact of adopting Statement No. 157 is not
expected to have a material effect on our financial position or results
of
operations.
In
June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No.
109. Interpretation No. 48 applies to all tax positions
accounted for under Statement No. 109, including tax positions acquired
in a
business combination. Interpretation No. 48 became effective for
us at the beginning of 2007 and did not have an impact on our financial
position
or results of operations.
Our
common stock is
listed on the NYSE under the ticker symbol “O.” Our central index key number is
726728 and our cusip number is 756109-104.
Our
Class D
cumulative redeemable preferred stock is listed on the NYSE under the
ticker
symbol “OprD” and its cusip number is 756109-609.
Our
Class E
cumulative redeemable preferred stock is listed on the NYSE under the
ticker
symbol “OprE” and its cusip number is 756109-708.
Our
8
1/4% Monthly Income Senior Notes due 2008 are listed
on
the NYSE under the ticker symbol “OUI”. The cusip number of these
notes is 756109-203.
We
maintain an Internet website at www.realtyincome.com. On our website
we make
available, free of charge, copies of our annual report on Form 10-K,
quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to
those
reports, as soon as reasonably practicable after we electronically file
these
reports with the SEC. None of the information on our website is
deemed to be a part of this report.
Item
3. Quantitative
and Qualitative Disclosures about Market Risk
We
are exposed to interest rate changes primarily as a result of our credit
facility and long-term notes 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
flow and to lower our overall borrowing costs. To achieve these objectives
we
issue long-term notes, 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 were not a party to any derivative financial
instruments at June 30, 2007. We do not enter into any derivative transactions
for speculative or trading purposes.
Our
interest rate
risk is monitored using a variety of techniques. The following table
presents by
year of expected maturity, the principal amounts, average interest rates,
fair
values as of June 30, 2007. This information is presented to evaluate
the expected cash flows and sensitivity to interest rate changes (dollars
in
millions):
Expected
Maturity Data
Year
of maturity
|
|
Fixed
rate
debt
|
|
|
Average
interest rate
on
fixed rate debt
|
|
|
Variable
rate
debt
|
|
|
Average
interest rate
on
variable rate debt
|
|
2007
|
|
$ |
--
|
|
|
|
--
|
|
|
$ |
--
|
|
|
|
--
|
|
2008(1)(2)
|
|
|
100.0
|
|
|
|
8.25 |
% |
|
|
10.0
|
|
|
|
5.92 |
% |
2009(3)
|
|
|
20.0
|
|
|
|
8.00 |
% |
|
|
--
|
|
|
|
--
|
|
2010
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2011
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Thereafter(4)
|
|
|
800.0
|
|
|
|
5.66 |
% |
|
|
--
|
|
|
|
--
|
|
Totals
|
|
$ |
920.0
|
|
|
|
5.99 |
% |
|
$ |
10.0
|
|
|
|
5.92 |
% |
Fair
Value(5)
|
|
$ |
887.7
|
|
|
|
|
|
|
$ |
10.0
|
|
|
|
|
|
(1)
|
$100
million
matures in November 2008.
|
(2)
|
The
credit
facility expires in October 2008. The credit facility balance
as of June 30, 2007 was $10.0 million and as of July 30, 2007
was
zero.
|
(3)
|
$20
million
matures in January 2009.
|
(4)
|
$100
million
matures in March 2013, $150 million matures in November 2015,
$275 million
matures in September 2016, $175 million matures in September
2017 and
$100 million matures in March
2035.
|
(5)
|
We
base the
fair value of the fixed rate debt at June 30, 2007 on the closing
market
price or indicative price per each
note.
|
The
table
incorporates only those exposures that exist as of June 30, 2007. 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.
All
of our
outstanding notes and bonds have fixed interest rates. Our credit
facility interest rate is variable. Based on our credit facility
balance at June 30, 2007, a 1% change in interest rates would change
our
interest costs by $100,000 per year.
Evaluation
of Disclosure Controls and Procedure
We
maintain disclosure controls and procedures (as defined in Securities
Exchange
Act 1934 Rules 13a-14(c) and 15d-14(c)) that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified
in the
Securities and Exchange Commission’s rules and forms, and that such information
is accumulated and communicated to our management, including our Chief
Executive
Officer and Chief Financial Officer, as appropriate, to allow timely
decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and
procedures,
no matter how well designed and operated, can provide only reasonable
assurance
of achieving the desired control objectives, and management necessarily
was
required to apply its judgment in evaluating the cost-benefit relationship
of
possible controls and procedures.
As
required of and for the quarter ended June 30, 2007, we carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, under the supervision and with the participation
of
management, including our Chief Executive Officer and Chief Financial
Officer.
Based on the foregoing, our Chief Executive Officer and Chief Financial
Officer
concluded that our disclosure controls and procedures were effective
and were
operating at a reasonable assurance level.
Changes
in
Internal Controls
There
have not been
any significant changes in our internal controls or in other factors
that could
significantly affect these controls subsequent to the date of their evaluation.
There were no material weaknesses in our internal controls, and therefore
no
corrective actions were taken.
Limitations
on the Effectiveness of Controls
Internal
control
over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence
and
compliance and is subject to lapses in judgment and breakdowns resulting
from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of
such
limitations, there is a risk that material misstatements may not be prevented
or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
PART
II. OTHER
INFORMATION
There
have been no
material changes in our risk factors from those disclosed in our 2006
Annual
Report on Form 10-K.
Item
4. Submission
of Matters to a Vote of Security Holders
Our
annual meeting
of stockholders was held on May 15, 2007. As of March 15, 2007, the record
date
for the annual meeting, there were 101,007,276 common shares issued and
outstanding and entitled to vote at the annual meeting. Proxies for the
meeting
were solicited pursuant to Section 14(a) of the Securities Exchange Act
of
1934.
The
only proposal
considered at the annual meeting was the election of eight directors
to serve
until the 2008 annual meeting of stockholders and until their respective
successors are duly elected and qualify.
All
of management’s
nominees for directors as listed in the proxy statement were elected
with the
following vote:
|
|
Shares
Voted
For
|
|
|
Votes
Withheld
|
|
Kathleen
R.
Allen
|
|
|
83,740,735
|
|
|
|
819,760
|
|
Donald
R.
Cameron
|
|
|
83,862,417
|
|
|
|
698,078
|
|
William
E.
Clark
|
|
|
83,811,566
|
|
|
|
748,929
|
|
Roger
P.
Kuppinger
|
|
|
82,981,720
|
|
|
|
1,578,775
|
|
Thomas
A.
Lewis
|
|
|
83,871,596
|
|
|
|
688,899
|
|
Michael
D.
McKee
|
|
|
83,881,948
|
|
|
|
678,547
|
|
Ronald
L.
Merriman
|
|
|
82,943,201
|
|
|
|
1,617,294
|
|
Willard
H.
Smith Jr.
|
|
|
83,677,193
|
|
|
|
883,302
|
|
Exhibit
No. Description
Articles
of Incorporation and By-Laws
3.1
|
Articles
of
Incorporation of the Company, as amended by amendment No. 1 dated
May 10, 2005 and amendment No. 2 dated May 10, 2005 (filed as
exhibit 3.1 to the Company’s Form 10-Q dated June 30, 2005, and
incorporated herein by reference).
|
3.2
|
Bylaws
of the
Company, as amended by amendment No. 1 dated March 20, 2000 and
amendment No. 2 dated June 15, 2005 (filed as exhibit 3.2 to the
Company’s Form 10-Q dated June 30, 2005, and incorporated herein by
reference).
|
3.3
|
Articles
Supplementary to the Articles of Incorporation of the Company
classifying
and designating the 7 3/8% Monthly Income Class D
Cumulative Redeemable Preferred Stock (filed as exhibit 3.8
to the
Company’s Form 8-A filed on May 25, 2004 and incorporated herein by
reference).
|
3.4
|
Articles
Supplementary to the Articles of Incorporation of the Company
classifying
and designating additional shares of the 7 3/8%
Monthly Income Class D Cumulative Redeemable Preferred Stock
(filed as
exhibit 3.2 to the Company’s Form 8-K filed on October 19, 2004 and
incorporated herein by reference).
|
3.5
|
Articles
Supplementary to the Articles of Incorporation of the Company
classifying
and designating the 6 3/4% Class E Cumulative
Redeemable Preferred Stock (filed as exhibit 3.5 to the Company’s Form 8-A
filed on December 5, 2006 and incorporated herein by
reference).
|
Instruments
defining the rights of security holders, including
indentures
4.1
|
Pricing
Committee Resolutions (filed as exhibit 4.2 the Company’s Form 8-K, dated
October 27, 1998 and incorporated herein by
reference).
|
4.2
|
Form
of 8
1/4% Notes due 2008 (filed as exhibit
4.3 to
Company’s Form 8-K, dated October 27, 1998 and incorporated herein by
reference).
|
4.3
|
Indenture
dated as of October 28, 1998 between the Company and The Bank
of New York
(filed as exhibit 4.1 to the Company’s Form 8-K, dated October 27, 1998
and incorporated herein by reference).
|
4.4
|
Pricing
Committee Resolutions and Form of 8% Notes due 2009 (filed
as exhibit 4.2
to the Company’s Form 8-K, dated January 21, 1999 and incorporated herein
by reference).
|
4.5
|
Form
of 5
3/8% Senior Notes due 2013 (filed as exhibit
4.2 to
the Company’s Form 8-K, dated March 5, 2003 and incorporated herein by
reference).
|
4.6
|
Officer’s
Certificate pursuant to sections 201, 301 and 303 of the Indenture
dated
October 28, 1998 between the Company and The Bank of New York, as
Trustee, establishing a series of securities entitled 5
3/8% Senior Notes due 2013 (filed as exhibit
4.3 to
the Company’s Form 8-K, dated March 5, 2003 and incorporated
herein by reference).
|
4.7
|
Form
of 5
1/2% Senior Notes due 2015 (filed as exhibit
4.2 to
the Company’s Form 8-K, dated November 19, 2003 and incorporated herein
by
reference).
|
4.8
|
Officer’s
Certificate pursuant to sections 201, 301 and 303 of the Indenture
dated
October 28, 1998 between the Company and The Bank of New York, as
Trustee, establishing a series of securities entitled 5
1/2% Senior Notes due 2015 (filed as exhibit
4.3 to
the Company’s Form 8-K, dated November 19, 2003 and incorporated
herein by reference).
|
4.9
|
Form
of 5
7/8% Senior Notes due 2035 (filed as exhibit
4.2 to
the Company’s Form 8-K, dated March 8, 2005 and incorporated herein
by reference).
|
4.10
|
Officer’s
Certificate pursuant to section 301 of the Indenture dated
October 28, 1998 between the Company and The Bank of New York, as
Trustee, establishing a series of securities entitled 5
7/8% Senior Debentures due 2035 (filed
as exhibit
4.3 to the Company’s Form 8-K, dated March 8, 2005 and
incorporated herein by reference).
|
4.11
|
Form
of 5
3/8% Senior Notes due 2017 (filed as exhibit
4.2 to
the Company’s Form 8-K, dated September 8, 2005 and incorporated
herein by reference).
|
4.12
|
Officer’s
Certificate pursuant to section 301 of the Indenture dated
October 28, 1998 between the Company and The Bank of New York, as
Trustee, establishing a series of securities entitled 5
3/8% Senior Notes due 2017 (filed as exhibit
4.3 to
the Company’s Form 8-K, dated September 8, 2005 and incorporated
herein by reference).
|
4.13
|
Form
of 5.95%
Senior Notes due 2016 (filed as exhibit 4.2 to the Company’s Form 8-K,
dated September 6, 2006 and incorporated herein by
reference).
|
4.14
|
Officer’s
Certificate pursuant to section 301 of the Indenture dated
October 28,
1998 between the Company and The Bank of New York, as Trustee,
establishing a series of securities entitled 5.95% Senior
Notes due 2016
(filed as exhibit 4.3 to the Company’s Form 8-K, dated September 6, 2006
and incorporated herein by
reference).
|
Material
Contracts
* 10.1
|
Amendment
dated May 15, 2007 to our Amended and Restated 2003 Stock
Incentive Award
Plan of Realty Income Corporation
|
*
10.2
|
Form
of
Restricted Stock Agreement
|
Certifications
*
31.1
|
Section
302
Certifications as filed by the Chief Executive Officer
pursuant to SEC
release No. 33-8212 and 34-47551.
|
*
31.2
|
Section
302
Certifications as filed by the Chief Financial Officer
pursuant to SEC
release No. 33-8212 and 34-47551.
|
*
32
|
Section
906
Certifications as furnished by the Chief Executive Officer
and the Chief
Financial Officer pursuant to SEC release No. 33-8212 and
34-47551.
|
|
*
Filed
herewith
|
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
Date:
August 1,
2007 /s/
GREGORY J.
FAHEY
Vice
President,
Controller
(Principal
Accounting Officer)