ricq307_10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
x
Quarterly report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the quarterly period ended September 30, 2007, or
o
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 Incorporation or Organization)
|
|
(IRS
Employer Identification Number)
|
600
La Terraza Boulevard, 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
o
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 o Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
There
were 101,072,960 shares of common stock outstanding as of October 25,
2007.
REALTY
INCOME CORPORATION
Form
10-Q
September
30, 2007
PART
I. FINANCIAL
INFORMATION
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Page
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Item
1:
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3
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4
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5
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7
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Item
2:
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18
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19
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21
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24
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28
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37
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39
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44
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44
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44
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Item
3:
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45
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Item
4:
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46
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PART
II. OTHER
INFORMATION
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Item
1A:
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47
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Item
6:
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47
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50
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Item
1.
|
Financial
Statements
|
REALTY
INCOME CORPORATION AND SUBSIDIARIES
September
30, 2007 and December 31, 2006
(dollars
in thousands, except per share data)
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
(unaudited)
|
|
|
|
|
Real
estate, at cost:
|
|
|
|
|
|
|
Land
|
|
$ |
1,075,103
|
|
|
$ |
958,770
|
|
Buildings
and improvements
|
|
|
2,042,767
|
|
|
|
1,785,203
|
|
|
|
|
3,117,870
|
|
|
|
2,743,973
|
|
Less
accumulated depreciation and amortization
|
|
|
(450,222 |
) |
|
|
(396,854 |
) |
Net
real estate held for investment
|
|
|
2,667,648
|
|
|
|
2,347,119
|
|
Real
estate held for sale, net
|
|
|
78,552
|
|
|
|
137,962
|
|
Net
real estate
|
|
|
2,746,200
|
|
|
|
2,485,081
|
|
Cash
and cash equivalents
|
|
|
266,644
|
|
|
|
10,573
|
|
Accounts
receivable
|
|
|
6,098
|
|
|
|
5,953
|
|
Goodwill
|
|
|
17,206
|
|
|
|
17,206
|
|
Other
assets, net
|
|
|
40,114
|
|
|
|
27,695
|
|
Total
assets
|
|
$ |
3,076,262
|
|
|
$ |
2,546,508
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Distributions
payable
|
|
$ |
15,780
|
|
|
$ |
15,096
|
|
Accounts
payable and accrued expenses
|
|
|
29,242
|
|
|
|
27,004
|
|
Other
liabilities
|
|
|
9,840
|
|
|
|
8,416
|
|
Line
of credit payable
|
|
|
--
|
|
|
|
--
|
|
Notes
payable
|
|
|
1,470,000
|
|
|
|
920,000
|
|
Total
liabilities
|
|
|
1,524,862
|
|
|
|
970,516
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock and paid in capital, par value $1.00 per share,
|
|
|
|
|
|
|
|
|
20,000,000
shares authorized, 13,900,000 shares issued
|
|
|
|
|
|
|
|
|
and
outstanding in 2007 and 2006
|
|
|
337,790
|
|
|
|
337,781
|
|
Common
stock and paid in capital, par value $1.00 per share,
|
|
|
|
|
|
|
|
|
200,000,000
shares authorized, 101,072,360 and 100,746,226
|
|
|
|
|
|
|
|
|
shares
issued and outstanding in 2007 and 2006, respectively
|
|
|
1,544,117
|
|
|
|
1,540,365
|
|
Distributions
in excess of net income
|
|
|
(330,507 |
) |
|
|
(302,154 |
) |
Total
stockholders’ equity
|
|
|
1,551,400
|
|
|
|
1,575,992
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
3,076,262
|
|
|
$ |
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 nine months ended September 30, 2007 and 2006
(dollars
in thousands, except per share data)
(unaudited)
|
|
Three
Months
Ended
9/30/07
|
|
|
Three
Months
Ended
9/30/06
|
|
|
Nine
Months
Ended
9/30/07
|
|
|
Nine
Months
Ended
9/30/06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$ |
72,794
|
|
|
$ |
58,919
|
|
|
$ |
212,237
|
|
|
$ |
169,468
|
|
Other
|
|
|
1,295
|
|
|
|
245
|
|
|
|
3,660
|
|
|
|
1,096
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|
|
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|
74,089
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|
|
|
59,164
|
|
|
|
215,897
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|
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|
170,564
|
|
|
|
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|
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EXPENSES
|
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|
|
|
|
|
|
|
|
|
|
|
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|
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Depreciation
and amortization
|
|
|
19,564
|
|
|
|
14,586
|
|
|
|
56,132
|
|
|
|
42,796
|
|
Interest
|
|
|
16,163
|
|
|
|
12,530
|
|
|
|
41,612
|
|
|
|
37,657
|
|
General
and administrative
|
|
|
6,290
|
|
|
|
4,083
|
|
|
|
17,219
|
|
|
|
12,683
|
|
Property
|
|
|
819
|
|
|
|
787
|
|
|
|
2,652
|
|
|
|
2,331
|
|
Income
taxes
|
|
|
350
|
|
|
|
96
|
|
|
|
948
|
|
|
|
558
|
|
Loss
on extinguishment of debt
|
|
|
--
|
|
|
|
1,555
|
|
|
|
--
|
|
|
|
1,555
|
|
|
|
|
43,186
|
|
|
|
33,637
|
|
|
|
118,563
|
|
|
|
97,580
|
|
Income
from continuing operations
|
|
|
30,903
|
|
|
|
25,527
|
|
|
|
97,334
|
|
|
|
72,984
|
|
Income
from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate acquired for resale by Crest
|
|
|
1,937
|
|
|
|
99
|
|
|
|
7,967
|
|
|
|
1,515
|
|
Real
estate held for investment
|
|
|
1,133
|
|
|
|
932
|
|
|
|
1,932
|
|
|
|
3,586
|
|
|
|
|
3,070
|
|
|
|
1,031
|
|
|
|
9,899
|
|
|
|
5,101
|
|
Net
income
|
|
|
33,973
|
|
|
|
26,558
|
|
|
|
107,233
|
|
|
|
78,085
|
|
Preferred
stock cash dividends
|
|
|
(6,063 |
) |
|
|
(2,351 |
) |
|
|
(18,190 |
) |
|
|
(7,052 |
) |
Net
income available to common stockholders
|
|
$ |
27,910
|
|
|
$ |
24,207
|
|
|
$ |
89,043
|
|
|
$ |
71,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
available to common stockholders per common share, basic and
diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.25
|
|
|
$ |
0.26
|
|
|
$ |
0.79
|
|
|
$ |
0.76
|
|
Net
income
|
|
$ |
0.28
|
|
|
$ |
0.27
|
|
|
$ |
0.89
|
|
|
$ |
0.82
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
100,187,901
|
|
|
|
89,166,429
|
|
|
|
100,148,993
|
|
|
|
86,936,161
|
|
Diluted
|
|
|
100,252,953
|
|
|
|
89,267,138
|
|
|
|
100,326,859
|
|
|
|
87,084,545
|
|
The
accompanying notes to consolidated financial statements are an integral part
of
these statements.
REALTY
INCOME CORPORATION AND SUBSIDIARIES
For
the
nine months ended September 30, 2007 and 2006
(dollars
in thousands)(unaudited)
|
|
2007
|
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
income
|
|
$ |
107,233
|
|
|
$ |
78,085
|
|
Adjustments
to net income:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
56,132
|
|
|
|
42,796
|
|
Income
from discontinued operations:
|
|
|
|
|
|
|
|
|
Real
estate acquired for resale
|
|
|
(7,967 |
) |
|
|
(1,515 |
) |
Real
estate held for investment
|
|
|
(1,932 |
) |
|
|
(3,586 |
) |
Gain
on sales of land and improvements
|
|
|
(1,835 |
) |
|
|
--
|
|
Gain
on reinstatement of property carrying value
|
|
|
--
|
|
|
|
(716 |
) |
Amortization
of share-based compensation
|
|
|
3,025
|
|
|
|
2,297
|
|
Cash
provided by (used in) discontinued operations:
|
|
|
|
|
|
|
|
|
Real
estate acquired for resale
|
|
|
(819 |
) |
|
|
84
|
|
Real
estate held for investment
|
|
|
824
|
|
|
|
797
|
|
Investment in real estate acquired for resale
|
|
|
(29,892 |
) |
|
|
(9,937 |
) |
Proceeds from sales of real estate acquired for resale
|
|
|
94,106
|
|
|
|
16,807
|
|
Collection of mortgage note receivable by Crest
|
|
|
25
|
|
|
|
1,333
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable and other assets
|
|
|
728
|
|
|
|
5,033
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
(773 |
) |
|
|
(3,636 |
) |
Net
cash provided by operating activities
|
|
|
218,855
|
|
|
|
127,842
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from sales of investment properties:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
4,370
|
|
|
|
--
|
|
Discontinued operations
|
|
|
3,114
|
|
|
|
9,804
|
|
Acquisition
of and improvements to investment properties
|
|
|
(377,564 |
) |
|
|
(244,586 |
) |
Restricted
escrow funds acquired in connection with
|
|
|
|
|
|
|
|
|
acquisitions
of investment properties
|
|
|
(2,648 |
) |
|
|
--
|
|
Intangibles
acquired in connection with acquisitions of
|
|
|
|
|
|
|
|
|
investment
properties
|
|
|
(319 |
) |
|
|
(937 |
) |
Net
cash used in investing activities
|
|
|
(373,047 |
) |
|
|
(235,719 |
) |
REALTY
INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(CONTINUED)
|
For
the
nine months ended September 30, 2007 and 2006
(dollars
in thousands)(unaudited)
|
|
2007
|
|
|
2006
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
Borrowings
from lines of credit
|
|
|
407,800
|
|
|
|
279,900
|
|
Payments
under lines of credit
|
|
|
(407,800 |
) |
|
|
(416,600 |
) |
Proceeds
from stock offerings, net of offering costs of $11,931 in
2006
|
|
|
--
|
|
|
|
229,566
|
|
Proceeds
from notes issued, net of offering costs of $5,563 in 2007
|
|
|
|
|
|
|
|
|
and
$3,003 in 2006
|
|
|
544,437
|
|
|
|
271,997
|
|
Principal
payment on notes
|
|
|
--
|
|
|
|
(110,000 |
) |
Cash
distributions to common stockholders
|
|
|
(116,382 |
) |
|
|
(92,605 |
) |
Cash
dividends to preferred stockholders
|
|
|
(18,520 |
) |
|
|
(7,052 |
) |
Proceeds
from other stock issuances
|
|
|
728
|
|
|
|
341
|
|
Net
cash provided by financing activities
|
|
|
410,263
|
|
|
|
155,547
|
|
Net
increase in cash and cash equivalents
|
|
|
256,071
|
|
|
|
47,670
|
|
Cash
and cash equivalents, beginning of period
|
|
|
10,573
|
|
|
|
65,704
|
|
Cash
and cash equivalents, end of period
|
|
$ |
266,644
|
|
|
$ |
113,374
|
|
For
supplemental disclosures, see note 13.
The
accompanying notes to consolidated financial statements are an integral part
of
these statements.
REALTY
INCOME CORPORATION AND SUBSIDIARIES
September
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
September 30, 2007, we owned 2,181 properties, located in 49 states, containing
over 18.1 million leasable square feet, along with 47 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 September 30, 2007 was $738,000 and at
December 31, 2006 was $705,000.
D. In
June 2006, the Financial Accounting Standards Board (“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. The adoption of Interpretation No. 48 in
January 2007 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:
|
|
September
30,
|
|
|
December
31,
|
|
(dollars
in thousands)
|
|
2007
|
|
|
2006
|
|
Deferred
bond financing costs, net
|
|
$ |
15,320
|
|
|
$ |
10,868
|
|
Value
of in-place and above-market leases, net
|
|
|
10,695
|
|
|
|
10,430
|
|
Prepaid
expenses
|
|
|
3,395
|
|
|
|
3,271
|
|
Corporate
assets, net of accumulated depreciation and amortization
|
|
|
1,376
|
|
|
|
463
|
|
Settlements
on treasury lock agreements
|
|
|
977
|
|
|
|
1,629
|
|
Unamortized
credit line fees, net
|
|
|
564
|
|
|
|
954
|
|
Other
items
|
|
|
7,787
|
|
|
|
80
|
|
|
|
$ |
40,114
|
|
|
$ |
27,695
|
|
3.
|
Retail
Properties Acquired
|
We
acquire land, buildings and improvements that are used by retail
operators.
A. During
the first nine months of 2007, Realty Income and Crest invested
$412.9 million, in aggregate, in 264 new retail properties and properties
under development. These 264 properties are located in 33 states,
will contain over 1.6 million leasable square feet, and are 100% leased with
an
average lease term of 19.2 years.
Of
the
$412.9 million invested in the first nine 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 (“SFAS 141”), 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
September 30, 2007 and are amortized over the life of the lease.
In
comparison, during the first nine months of 2006, Realty Income and Crest
invested $259.1 million, in aggregate, in 138 new retail properties and
properties under development. These 138 properties are located in 24
states, contain over 1.7 million leasable square feet, and are 100% leased
with
an average lease term of 13.7 years. Of the $259.1 million invested
in the first nine months of 2006, $6.0 million was used to acquire one property
with an existing lease already in place with a retail tenant. In
accordance with SFAS 141, Realty Income recorded $1.6 million as the intangible
value of the in-place lease and $628,000 as the intangible value of the
below-market rents. These amounts are recorded to “other assets” and
“other liabilities,” respectively, on our consolidated balance sheets and are
amortized over the life of the lease.
B. During
the first nine months of 2007, Realty Income invested $383.0 million in 232
new
retail properties and properties under development with initial weighted average
contractual lease rate of 8.6%. These 232 properties are located in
33 states, will contain over 1.5 million 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.
In
comparison, during the first nine months of 2006, Realty Income invested $249.2
million in 133 new retail properties and properties under development with
an
initial weighted average contractual lease rate of 8.7%. These 133
properties are located in 24 states, contain over 1.6 million leasable square
feet, and are 100% leased with an average lease term of 13.6 years.
C. During
the first nine months of 2007, Crest invested $29.9 million in 32 new retail
properties.
In
comparison, during the first nine months of 2006, Crest invested $9.9 million
in
five new retail properties.
D. Crest’s
property inventory at September 30, 2007 consisted of 47 properties with a
total
investment of $78.3 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. 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.
The
average borrowing rate on our credit facility during the first nine months
of
2007 was 6.0%, compared to 5.5% in the first nine 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. We regularly review our credit
facility and may seek to extend, renew or replace our credit facility, to the
extent we deem appropriate.
In
September 2007, we issued $550 million in aggregate principal amount of
63/4% senior unsecured notes due 2019 (the “2019
Notes”). The price to the investor for the 2019 Notes was 99.827% of
the principal amount for an effective yield of 6.772%. The net
proceeds of approximately $544.4 million from this offering were used to fund
certain property acquisitions, repay borrowings under our acquisition credit
facility and for general corporate purposes. The remaining net
proceeds, which are included in “cash and cash equivalents” on our consolidated
balance sheet, will be used for general corporate purposes, which include
additional property acquisitions. Interest on the 2019 Notes is paid
semiannually.
In
September 2006, we redeemed all of our outstanding $110 million,
73/4% unsecured notes due May 2007 (the “2007 Notes”). The
2007 Notes were redeemed at a redemption price equal to 100% of the principal
amount of the 2007 Notes, plus accrued and unpaid interest of $3.2 million,
as
well as a make-whole payment of $1.6 million. We recorded a loss on
extinguishment of debt totaling $1.6 million related to the make-whole payment
associated with the 2007 Notes.
Our
senior unsecured note obligations consist of the following, sorted by maturity
date at (dollars in millions):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
81/4%
notes, issued in October 1998 and due in November 2008
|
|
$ |
100.0
|
|
|
$ |
100.0
|
|
8%
notes, issued in January 1999 and due in January 2009
|
|
|
20.0
|
|
|
|
20.0
|
|
53/8%
notes,
issued in March 2003 and due in March 2013
|
|
|
100.0
|
|
|
|
100.0
|
|
51/2%
notes,
issued in November 2003 and due in November 2015
|
|
|
150.0
|
|
|
|
150.0
|
|
5.95%
notes, issued in September 2006 and due in September 2016
|
|
|
275.0
|
|
|
|
275.0
|
|
53/8%
notes,
issued in September 2005 and due in September 2017
|
|
|
175.0
|
|
|
|
175.0
|
|
63/4%
notes,
issued in September 2007 and due in August 2019
|
|
|
550.0
|
|
|
|
--
|
|
57/8%
bonds,
issued in March 2005 and due in March 2035
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
$ |
1,470.0
|
|
|
$ |
920.0
|
|
The
estimated fair value of the notes payable at September 30, 2007 is $1,425.3
million and at December 31, 2006 is $921.9 million, based upon the closing
market price per note, or indicative price per each note, at September 30,
2007
and December 31, 2006, respectively.
8.
|
Gain
on Sales of Real Estate Acquired for Resale by
Crest
|
During
the third quarter of 2007, Crest sold 14 properties for $28.3 million,
which resulted in a gain of $2.2 million. In comparison, during
the third quarter of 2006, Crest sold four properties for $6.6 million,
which resulted in a gain of $313,000. Crest’s gains on sales are
reported before income taxes and are included in income from discontinued
operations.
During
the first nine months of 2007, Crest sold 45 properties for $97.9 million,
which resulted in a gain of $8.8 million. As part of two sales during
the first nine months of 2007, Crest provided the buyers’ financing for a total
of $3.8 million in mortgage promissory notes. In comparison, during the first
nine months of 2006, Crest sold nine properties for $16.8 million, which
resulted in a gain of $1.7 million.
9.
|
Gain
on Sales of Investment Properties, Improvements and Land by Realty
Income
|
During
the third quarter of 2007, we sold three investment properties for an aggregate
of $4.4 million, which resulted in a gain of $770,000. This gain is
included in discontinued operations. As part of one sale during
the third quarter of 2007, we received a lease termination fee of $427,000,
which is reported in “income from discontinued operations, real estate held for
investment” on our consolidated statements of income. In addition, we
sold excess land and improvements from two properties for an aggregate of
$529,000, which resulted in a gain of $29,000. The gain from the land
and improvements sales is reported in “other revenue” on our consolidated
statements of income because these improvements and excess land were associated
with properties that continue to be owned as part of our core
operations. In comparison, during the third quarter of 2006, we sold
or exchanged three investment properties for a total of $4.0 million, which
resulted in a gain of $843,000. These gains are included in discontinued
operations.
During
the first nine months of 2007, we sold six investment properties for an
aggregate of $5.9 million, which resulted in a gain of $1.4
million. This gain is included in discontinued
operations. In addition, we sold excess land and improvements from
five properties for an aggregate of $4.4 million, which resulted in a gain
of
$1.8 million. The gain from the land and improvements sales is
reported in “other revenue” on our consolidated statements of income because
these improvements and excess land were associated with properties that continue
to be owned as part of our core operations. In comparison, during the
first nine months of 2006, we sold or exchanged 13 investment properties for
a
total of $10.7 million, which resulted in a gain of $3.0 million. This
gain is included in discontinued operations. As part of one sale
during the first nine months 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.
10.
|
Discontinued
Operations
|
In
accordance with FASB 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 September 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
9/30/07
|
|
|
Three
months
ended
9/30/06
|
|
|
Nine
months
ended
9/30/07
|
|
|
Nine
months
ended
9/30/06
|
|
Gain
on sales of real estate acquired for resale
|
|
$ |
2,219
|
|
|
$ |
313
|
|
|
$ |
8,786
|
|
|
$ |
1,739
|
|
Rental
revenue
|
|
|
1,547
|
|
|
|
913
|
|
|
|
6,736
|
|
|
|
2,996
|
|
Other
revenue
|
|
|
68
|
|
|
|
--
|
|
|
|
128
|
|
|
|
11
|
|
Interest
expense
|
|
|
(1,239 |
) |
|
|
(711 |
) |
|
|
(5,115 |
) |
|
|
(2,175 |
) |
General
and administrative expense
|
|
|
(224 |
) |
|
|
(73 |
) |
|
|
(507 |
) |
|
|
(227 |
) |
Property
expenses
|
|
|
(14 |
) |
|
|
(17 |
) |
|
|
(29 |
) |
|
|
(50 |
) |
Provisions
for impairment
|
|
|
--
|
|
|
|
(308 |
) |
|
|
--
|
|
|
|
(308 |
) |
Income
taxes
|
|
|
(420 |
) |
|
|
(18 |
) |
|
|
(2,032 |
) |
|
|
(471 |
) |
Income
from discontinued operations,
real
estate acquired for resale by Crest
|
|
$ |
1,937
|
|
|
$ |
99
|
|
|
$ |
7,967
|
|
|
$ |
1,515
|
|
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
9/30/07
|
|
|
Three
months
ended
9/30/06
|
|
|
Nine
months
ended
9/30/07
|
|
|
Nine
months
ended
9/30/06
|
|
Gain
on sales of investment properties
|
|
$ |
770
|
|
|
$ |
843
|
|
|
$ |
1,355
|
|
|
$ |
3,036
|
|
Rental
revenue
|
|
|
529
|
|
|
|
236
|
|
|
|
834
|
|
|
|
914
|
|
Depreciation
and amortization
|
|
|
(29 |
) |
|
|
(75 |
) |
|
|
(113 |
) |
|
|
(247 |
) |
Property
expenses
|
|
|
(3 |
) |
|
|
(72 |
) |
|
|
(10 |
) |
|
|
(117 |
) |
Provision
for impairment
|
|
|
(134 |
) |
|
|
--
|
|
|
|
(134 |
) |
|
|
--
|
|
Income
from discontinued operations,
real
estate held for investment
|
|
$ |
1,133
|
|
|
$ |
932
|
|
|
$ |
1,932
|
|
|
$ |
3,586
|
|
The
following is a summary of our total discontinued operations (dollars in
thousands, except per share data):
|
|
Three
months
ended
9/30/07
|
|
|
Three
months
ended
9/30/06
|
|
|
Nine
months
ended
9/30/07
|
|
|
Nine
months
ended
9/30/06
|
|
Real
estate acquired for resale by Crest
|
|
$ |
1,937
|
|
|
$ |
99
|
|
|
$ |
7,967
|
|
|
$ |
1,515
|
|
Real
estate held for investment
|
|
|
1,133
|
|
|
|
932
|
|
|
|
1,932
|
|
|
|
3,586
|
|
Income
from discontinued operations
|
|
$ |
3,070
|
|
|
$ |
1,031
|
|
|
$ |
9,899
|
|
|
$ |
5,101
|
|
Per
common share, basic and diluted
|
|
$ |
0.03
|
|
|
$ |
0.01
|
|
|
$ |
0.10
|
|
|
$ |
0.06
|
|
11. 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 nine 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
|
|
July
|
|
|
0.127750
|
|
|
|
0.117500
|
|
August
|
|
|
0.127750
|
|
|
|
0.117500
|
|
September
|
|
|
0.135500
|
|
|
|
0.125250
|
|
Total
|
|
$ |
1.151875
|
|
|
$ |
1.059625
|
|
At
September 30, 2007, a distribution of $0.136125 per common share was payable
and
was paid in October 2007.
B. Preferred
Stock. In December 2006, we issued 8.8 million shares of
63/4% 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 nine
months of 2007, we paid nine monthly dividends to holders of our Class E
preferred stock totaling $1.303125 per share, or $11.5 million, and at September
30, 2007 a monthly dividend of $0.140625 per share was payable and was paid
in
October 2007. In January 2007, we paid the first Class E preferred
dividend of $0.178125, which was for a period of 38 days.
In
2004, we issued 5.1 million shares of 73/8% Monthly Income Class D
cumulative redeemable preferred stock. Beginning May 27, 2009, the
Class D preferred shares are redeemable, at our option, for $25 per
share. During the first nine months of 2007 and 2006, we paid nine
monthly dividends to holders of our Class D preferred stock totaling $1.3828131
per share, or $7.1 million, and at September 30, 2007 a monthly dividend of
$0.1536459 per share was payable and was paid in October 2007.
12.
|
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
9/30/07
|
|
|
Three
months
ended
9/30/06
|
|
|
Nine
months
ended
9/30/07
|
|
|
Nine
months
ended
9/30/06
|
|
Weighted
average shares used for the basic net income per share
computation
|
|
|
100,187,901
|
|
|
|
89,166,429
|
|
|
|
100,148,993
|
|
|
|
86,936,161
|
|
Incremental
shares from share-based compensation
|
|
|
65,052
|
|
|
|
100,709
|
|
|
|
177,866
|
|
|
|
148,384
|
|
Adjusted
weighted average shares used for diluted net income per share
computation
|
|
|
100,252,953
|
|
|
|
89,267,138
|
|
|
|
100,326,859
|
|
|
|
87,084,545
|
|
Nonvested
shares from share-based compensation that were
anti-dilutive
|
|
|
267,631
|
|
|
|
243,325
|
|
|
|
267,231
|
|
|
|
243,725
|
|
No
stock options were anti-dilutive for the nine months ended September 30, 2007
and 2006.
13.
|
Supplemental
Disclosures of Cash Flow
Information
|
Interest
paid during the first nine months of 2007 was $50.3 million and for the first
nine months of 2006 was $45.3 million.
Interest
capitalized to properties under development in the first nine months of 2007
was
$767,000 and in the first nine months of 2006 was $1.9 million.
Income
taxes paid by Realty Income and Crest in the first nine months of 2007 totaled
$3.9 million and in the first nine months of 2006 totaled $606,000.
The
following non-cash investing and financing activities are included in the
accompanying consolidated financial statements:
A. Share-based
compensation expense for the first nine months of 2007 was $3.0 million and
for the first nine months of 2006 was $2.3 million.
B. In
2007, Crest sold two properties for an aggregate of $5.5 million and received
mortgage promissory notes totaling $3.8 million from the buyers, which are
included in “other assets” on our September 30, 2007 consolidated balance
sheet.
C. In
2007, we sold one property for $2.8 million, the proceeds of which are held
in a
Section 1031 tax-deferred exchange escrow account and included in “other assets”
on our September 30, 2007 consolidated balance sheet.
D. In
2007, we recorded a provision for impairment of $138,000 on one property for
the
nine months ended September 30, 2007. This provision for impairment
is included in property expenses on our consolidated income
statement.
E. In
connection with the acquisition of seven properties during the first nine months
of 2007, we acquired restricted escrow funds totaling $2.6
million. During the first nine months of 2007, $1.4 million of these
funds were invested in improvements to these properties and at September 30,
2007, $1.2 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 September 30, 2007.
F. Accrued
costs on properties under development resulted in an increase in buildings
and
improvements and accounts payable of $3.9 million at September 30, 2007 and
$3.3
million at September 30, 2006.
G. Distributions
payable on our balance sheets is comprised of the following declared
distributions (dollars in thousands):
|
|
9/30/07
|
|
|
12/31/06
|
|
Common
stock distributions
|
|
$ |
13,759
|
|
|
$ |
12,745
|
|
Preferred
stock dividends
|
|
|
2,021
|
|
|
|
2,351
|
|
H. 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.
We
evaluate performance and make resource allocation decisions on an industry
by
industry basis. For financial reporting purposes, we have grouped our tenants
into 31 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
September 30, 2007 (dollars in thousands):
Revenue
|
|
Three
months
ended
9/30/07
|
|
|
Three
months
ended
9/30/06
|
|
|
Nine
months
ended
9/30/07
|
|
|
Nine
months
ended
9/30/06
|
|
Segment
rental revenue(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
service
|
|
$ |
3,721
|
|
|
$ |
5,331
|
|
|
$ |
11,130
|
|
|
$ |
12,805
|
|
Automotive
tire services
|
|
|
5,283
|
|
|
|
3,424
|
|
|
|
15,848
|
|
|
|
10,272
|
|
Child
care
|
|
|
6,107
|
|
|
|
6,267
|
|
|
|
18,330
|
|
|
|
18,587
|
|
Convenience
stores
|
|
|
10,229
|
|
|
|
9,572
|
|
|
|
29,715
|
|
|
|
28,672
|
|
Drug
stores
|
|
|
1,941
|
|
|
|
1,787
|
|
|
|
5,824
|
|
|
|
5,043
|
|
Health
and fitness
|
|
|
3,882
|
|
|
|
2,648
|
|
|
|
10,768
|
|
|
|
7,452
|
|
Home
furnishings
|
|
|
1,931
|
|
|
|
1,929
|
|
|
|
5,864
|
|
|
|
5,702
|
|
Home
improvement
|
|
|
1,534
|
|
|
|
1,515
|
|
|
|
4,590
|
|
|
|
4,492
|
|
Motor
vehicle dealerships
|
|
|
2,375
|
|
|
|
2,030
|
|
|
|
7,096
|
|
|
|
5,624
|
|
Restaurants
|
|
|
15,298
|
|
|
|
5,720
|
|
|
|
42,216
|
|
|
|
16,068
|
|
Sporting
goods
|
|
|
1,865
|
|
|
|
1,687
|
|
|
|
5,569
|
|
|
|
5,060
|
|
Theaters
|
|
|
6,514
|
|
|
|
5,574
|
|
|
|
19,543
|
|
|
|
16,497
|
|
18
non-reportable segments
|
|
|
12,114
|
|
|
|
11,435
|
|
|
|
35,744
|
|
|
|
33,194
|
|
Total
rental
|
|
|
72,794
|
|
|
|
58,919
|
|
|
|
212,237
|
|
|
|
169,468
|
|
Other
revenue
|
|
|
1,295
|
|
|
|
245
|
|
|
|
3,660
|
|
|
|
1,096
|
|
Total
revenue
|
|
$ |
74,089
|
|
|
$ |
59,164
|
|
|
$ |
215,897
|
|
|
$ |
170,564
|
|
(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.
|
|
September
30,
|
|
|
December
31,
|
|
Assets,
as of:
|
|
2007
|
|
|
2006
|
|
Segment
net real estate:
|
|
|
|
|
|
|
Automotive
service
|
|
$ |
101,950
|
|
|
$ |
104,089
|
|
Automotive
tire services
|
|
|
207,343
|
|
|
|
211,760
|
|
Child
care
|
|
|
92,400
|
|
|
|
96,263
|
|
Convenience
stores
|
|
|
353,253
|
|
|
|
334,839
|
|
Drug
stores
|
|
|
76,497
|
|
|
|
78,347
|
|
Health
and fitness
|
|
|
160,674
|
|
|
|
102,718
|
|
Home
furnishings
|
|
|
54,948
|
|
|
|
56,286
|
|
Home
improvement
|
|
|
59,838
|
|
|
|
61,197
|
|
Motor
vehicle dealerships
|
|
|
100,767
|
|
|
|
104,122
|
|
Restaurants
|
|
|
761,299
|
|
|
|
540,093
|
|
Sporting
goods
|
|
|
57,557
|
|
|
|
56,291
|
|
Theaters
|
|
|
269,434
|
|
|
|
272,135
|
|
Crest
|
|
|
78,307
|
|
|
|
137,506
|
|
18
other non-reportable segments
|
|
|
371,933
|
|
|
|
329,435
|
|
Total
segment net real estate
|
|
|
2,746,200
|
|
|
|
2,485,081
|
|
Other
intangible assets – Drug stores
|
|
|
7,148
|
|
|
|
7,629
|
|
Other
intangible assets – Theaters
|
|
|
2,572
|
|
|
|
2,801
|
|
Other
corporate assets
|
|
|
320,342
|
|
|
|
50,997
|
|
Total
assets
|
|
$ |
3,076,262
|
|
|
$ |
2,546,508
|
|
15.
|
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
third
quarter of 2007 were $828,000, during the third quarter of 2006 were $654,000,
during the first nine months of 2007 were $3.0 million and during the first
nine
months of 2006 were $2.3 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 nine
months
ended
September
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
|
|
|
271,831
|
|
|
|
27.63
|
|
|
|
210,332
|
|
|
|
21.72
|
|
Shares
vested
|
|
|
(148,955 |
) |
|
|
20.93
|
|
|
|
(125,879 |
) |
|
|
20.39
|
|
Shares
forfeited
|
|
|
(960 |
) |
|
|
23.85
|
|
|
|
(4,449 |
) |
|
|
21.35
|
|
Outstanding
nonvested
shares,
end of each period
|
|
|
990,642
|
|
|
$ |
20.26
|
|
|
|
868,726
|
|
|
$ |
17.96
|
|
(1) Grant
date fair
value.
During
the first nine months of 2007, we issued 271,831 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, 21,000 vest over a service period of
five
years and 218,831 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 331/3% 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 331/3% 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
September 30, 2007, the remaining unamortized share-based compensation expense
totaled $20.1 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 September 30, 2007, there were
51,105 vested stock options outstanding and exercisable with a weighted average
exercise price of $12.91. There were 55,263 stock options exercised
in the first nine months of 2007, with a weighted average exercise price of
$13.20.
16.
|
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
September 30, 2007, we have committed to pay estimated unfunded development
costs of $18.6 million on properties under development. In
addition, we also have contingent payments for tenant improvements and leasing
costs of $776,000.
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;
|
·
|
Continued
uncertainty in the credit 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
September 30, 2007, we owned a diversified portfolio:
·
|
Of
2,181 retail properties;
|
·
|
With
an occupancy rate of 98.3%, or 2,144 properties occupied of the 2,181
properties in the portfolio;
|
·
|
Leased
to 110 different retail chains doing business in 30 separate retail
industries;
|
·
|
With
over 18.1 million square feet of leasable space;
and
|
·
|
With
an average leasable retail space per property of approximately 8,300
square feet.
|
Of
the
2,181 properties in the portfolio, 2,170, or 99.5%, are single-tenant, retail
properties and the remaining 11 are multi-tenant, distribution and office
properties. At September 30, 2007, 2,134, or 98.3%, of the 2,170 single-tenant
properties were leased with a weighted average remaining lease term (excluding
extension options) of approximately 13.0 years.
In
addition, at September 30, 2007, our wholly-owned taxable REIT subsidiary,
Crest, had invested $78.3 million in 47 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 Third Quarter of 2007
During
the third quarter of 2007, Realty Income and Crest invested $314.6 million,
in
aggregate, in 218 new retail properties and properties under development. These
218 properties are located in 31 states, will contain over 1.0 million leasable
square feet, and are 100% leased with an average lease term of 19.2
years.
Included
in the $314.6 million is $284.7 million invested by Realty Income in 186 new
properties and properties under development, with an initial weighted average
contractual lease rate of 8.6%. These 186 properties are located in
31 states, will contain over 954,000 leasable square feet and are 100% leased
with an average lease term of 19.1 years. The 186 new properties acquired by
Realty Income are net-leased to three different retail chains in the following
three industries: automotive service, distribution & office and
restaurant. Also included in the $314.6 million is $29.9 million
invested by Crest in 32 new restaurant properties.
Acquisitions
During the First Nine Months of 2007
During
the first nine months of 2007, Realty Income and Crest invested $412.9 million,
in aggregate, in 264 new retail properties and properties under development.
These 264 new properties are located in 33 states, will contain over 1.6 million
leasable square feet, and are 100% leased with an average lease term of 19.2
years.
Included
in the $412.9 million is $383.0 million invested by Realty Income in 232 new
properties and properties under development, with an initial weighted average
contractual lease rate of 8.6%. These 232 properties are located in
33 states, will contain over 1.5 million leasable square feet and are 100%
leased with an average lease term of 19.1 years. The 232 new properties acquired
by Realty Income are net-leased to nine different retail chains in the following
seven industries: automotive service, convenience store, distribution and
office, grocery, health and fitness, restaurant and sporting
goods. Also included in the $412.9 million is $29.9 million invested
by Crest in 32 new restaurant properties.
At
September 30, 2007, Realty Income had invested $21.8 million in three
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 September
30, 2007, we had outstanding commitments to pay estimated unfunded development
costs totaling approximately $18.6 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.
Issuance
of 12-Year Senior Unsecured Notes
In
September 2007, we issued $550 million in aggregate principal amount of
63/4% senior unsecured notes due 2019 (the “2019
Notes”). The price to the investor for the 2019 Notes was 99.827% of
the principal amount for an effective yield of 6.772%. The net
proceeds of approximately $544.4 million from this offering were used to fund
certain acquisitions, repay borrowings under our acquisition credit facility
and
for general corporate purposes. The remaining net proceeds,
which are included in “cash and cash equivalents” on our consolidated balance
sheet, will be used for general corporate purposes, which include additional
property acquisitions. Interest on the 2019 Notes is paid
semiannually.
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
third quarter of 2007, we capitalized costs of $356,000 on existing properties
in our portfolio, consisting of $155,000 for re-leasing costs and $201,000
for
building improvements.
In
the
first nine months of 2007, we capitalized costs of $1.4 million on existing
properties in our portfolio, consisting of $393,000 for re-leasing costs and
$995,000 for building improvements.
Net
Income Available to Common Stockholders
Net
income available to common stockholders was $27.9 million in the third quarter
of 2007 versus $24.2 million in the same quarter of 2006, an increase of
$3.7 million. On a diluted per common share basis, net income was $0.28 per
share in the third quarter of 2007 compared to $0.27 in the third quarter of
2006.
Net
income available to common stockholders was $89.0 million in the first nine
months of 2007 versus $71.0 million in the same period of 2006, an increase
of $18.0 million. On a diluted per common share basis, net income was $0.89
per
share in the first nine months of 2007 compared to $0.82 in the first nine
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 third quarter
of 2007 was $799,000, as compared to $843,000 for the third quarter of
2006. The gain recognized from the sales of investment properties
during the first nine months of 2007 was $3.2 million, as compared to
$3.0 million for the first nine months of 2006.
Funds
from Operations (FFO)
In
the
third quarter of 2007, our FFO increased by $8.6 million, or 22.6%, to
$46.6 million versus $38.0 million in the third quarter of
2006. On a diluted per common share basis, FFO was $0.47 in the third
quarter of 2007 compared to $0.43 for the third quarter of 2006, an increase
of
$0.04, or 9.3%.
In
the
first nine months of 2007, our FFO increased by $31.0 million, or 28.0%, to
$141.9 million versus $110.9 million in the first nine months of
2006. On a diluted per common share basis, FFO was $1.41 in the first
nine months of 2007 compared to $1.27 for the first nine months of 2006, an
increase of $0.14, or 11.0%.
See
our
discussion of FFO later in this MD&A for a reconciliation of net income
available to common stockholders to FFO.
Crest’s
Property Sales
During
the third quarter of 2007, Crest sold 14 properties from its inventory for
an
aggregate of $28.3 million, which resulted in a gain of $2.2
million. During the first nine months of 2007, Crest sold 45
properties from its inventory for an aggregate of $97.9 million, which
resulted in a gain of $8.8 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 September 30, 2007 totaled $78.3 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,
in July 2007 by $0.000625 to $0.12775, in September 2007 by $0.00775 to $0.1355
and in October by $0.000625 to $0.136125. The increase in October
2007 was our 40th consecutive quarterly increase and the 46th increase in the
amount of our dividend since our listing on the New York Stock Exchange, or
NYSE, in 1994. In the first nine months of 2007, we paid three monthly cash
distributions per share in the amount of $0.1265, three in the amount of
$0.127125, two in the amount of $0.12775 and one in the amount of $0.1355,
totaling $1.151875. In September 2007 and October 2007, we declared
distributions of $0.136125 per share, which were paid in October 2007 and will
be paid in November 2007, respectively.
The
monthly distribution of $0.136125 per share represents a current annualized
distribution of $1.6335 per share, and an annualized distribution yield of
approximately 5.7% based on the last reported sale price of our common stock
on
the NYSE of $28.73 on October 25, 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 September 30, 2007, we had cash and cash equivalents totaling
$266.6 million, which represents a portion of the proceeds from the
September 2007 issuance of senior unsecured notes.
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 future borrowings under
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 October 25, 2007, we had a borrowing capacity of
$300.0 million available on our credit facility and no outstanding
balance.
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 October
25, 2007, our total outstanding credit facility borrowings and outstanding
notes
were $1.47 billion or approximately 31.1% of our total market
capitalization of $4.72 billion. We define our total market capitalization
at October 25, 2007 as the sum of:
·
|
Shares
of our common stock outstanding of 101,072,960 multiplied by the
last
reported sales price of our common stock on the NYSE of $28.73 per
share,
or $2.90 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 $1.47 billion.
|
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 capital structure may 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. The rating by Standard & Poor’s has a
“positive” outlook and the ratings by 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. The rating by Standard & Poor’s has
a “positive” outlook and the ratings by 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 September
30,
2007, sorted by maturity date (dollars in millions):
81/4%
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
|
|
53/8%
notes,
issued in March 2003 and due in March 2013
|
|
|
100.0
|
|
51/2%
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
|
|
53/8%
notes,
issued in September 2005 and due in September 2017
|
|
|
175.0
|
|
63/4%
notes,
issued in September 2007 and due in August 2019
|
|
|
550.0
|
|
57/8%
bonds,
issued in March 2005 and due in March 2035
|
|
|
100.0
|
|
|
|
$ |
1,470.0
|
|
Interest
on all of
our senior note obligations is paid semiannually, with the exception of the
interest on the 81/4% 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 September 30, 2007 are:
Note
Covenants
|
Required
|
|
Actual
|
|
Limitation
on incurrence of total debt
|
≤
60%
|
|
|
42.1 |
% |
Limitation
on incurrence of secured debt
|
≤
40%
|
|
|
0.0 |
% |
Debt
service coverage
|
≥
1.5 x
|
|
|
4.6
|
x |
Maintenance
of total unencumbered assets
|
≥
150% of unsecured debt
|
|
|
238 |
% |
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
September 30, 2007 (dollars in millions):
Table
of Obligations
Year
of Maturity
|
|
Credit
Facility (1)
|
|
|
Notes
|
|
|
Interest
(2)
|
|
|
Other
(3)
|
|
|
Totals
|
|
2007
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
23.1
|
|
|
$ |
19.4
|
|
|
$ |
42.5
|
|
2008
|
|
|
--
|
|
|
|
100.0
|
|
|
|
91.2
|
|
|
|
--
|
|
|
|
191.2
|
|
2009
|
|
|
--
|
|
|
|
20.0
|
|
|
|
82.5
|
|
|
|
--
|
|
|
|
102.5
|
|
2010
|
|
|
--
|
|
|
|
--
|
|
|
|
82.4
|
|
|
|
--
|
|
|
|
82.4
|
|
2011
|
|
|
--
|
|
|
|
--
|
|
|
|
82.4
|
|
|
|
--
|
|
|
|
82.4
|
|
Thereafter
|
|
|
--
|
|
|
|
1,350.0
|
|
|
|
588.5
|
|
|
|
--
|
|
|
|
1,938.5
|
|
Totals
|
|
$ |
--
|
|
|
$ |
1,470.0
|
|
|
$ |
950.1
|
|
|
$ |
19.4
|
|
|
$ |
2,439.5
|
|
|
(1) There
was no
outstanding credit facility balance on October 25,
2007.
|
|
(2) Interest
on the
credit facility and notes has been calculated based on outstanding
balances as of September 30, 2007 through their respective maturity
dates.
|
|
(3)
“Other”
consists
of $18.6
million of estimated unfunded costs on properties under development
and
$776,000 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
2004, we issued 5.1 million shares of 73/8% 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 63/4% 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 113.3% of our estimated REIT
taxable income of $122.8 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 to common stockholders for the first nine
months of 2007 totaled $116.4 million, representing 82.0% of our funds from
operations available to common stockholders of $141.9 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% (until it "sunsets" or
reverts to the provisions of prior law, which under current law will occur
with
respect to taxable years beginning after December 31, 2010). 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 their stock. Distributions above that basis, generally,
will be taxable as a capital gain to stockholders who hold their shares as
a
capital asset. 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 a provision for impairment, 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 nine
months ended September 30, 2007 to the three and nine months ended September
30,
2006.
Rental
Revenue
Rental
revenue was $72.8 million for the third quarter of 2007 versus $58.9 million
for
the third quarter of 2006, an increase of $13.9 million, or
23.6%. The increase in rental revenue in the third quarter of 2007
compared to the third quarter of 2006 is attributable to:
·
|
The
232 retail properties acquired by Realty Income in 2007, which generated
$3.7 million of rent in the third quarter of
2007;
|
·
|
The
322 retail properties acquired by Realty Income in 2006, which generated
$13.4 million of rent in the third quarter of 2007 compared to $2.9
million in the third quarter of 2006, an increase of
$10.5 million;
|
·
|
Same
store rents generated on 1,536 properties during the entire third
quarter
of 2007 increased by $738,000, or 1.4%, to $52.28 million from $51.54
million for the same quarter in 2006; net
of
|
·
|
A
decrease of $806,000 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 $2.4 million in
aggregate in the third quarter of 2007 compared to $3.2 million in
the
same quarter of 2006; and
|
·
|
A
decrease in straight-line rent and other non-cash adjustments to
rent of
$162,000 in the third quarter of 2007 as compared to the third quarter
of
2006.
|
Rental
revenue was $212.2 million for the first nine months of 2007 versus $169.5
million for the first nine months of 2006, an increase of $42.7 million, or
25.2%. The increase in rental revenue in the first nine months of
2007 compared to the first nine months of 2006 is attributable to:
·
|
The
232 retail properties acquired by Realty Income in 2007, which generated
$5.2 million in the first nine months of
2007;
|
·
|
The
322 retail properties acquired by Realty Income in 2006, which generated
$39.8 million in the first nine months of 2007 compared to $6.0
million in the first nine months of 2006, an increase of
$33.8 million;
|
·
|
Same
store rents generated on 1,536 properties during the entire first
nine
months of 2007 increased by $2.4 million, or 1.6%, to $156.4 million
from
$154.0 million for the same period in
2006;
|
·
|
An
increase of $1.9 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 $7.6 million in
aggregate in the first nine months of 2007 compared to $5.7 million
in the
first nine months of 2006; and net
of
|
·
|
A
decrease in straight-line rent and other non-cash adjustments to
rent of
$470,000 in the first nine months of 2007 as compared to the first
nine
months of 2006.
|
Of
the
2,181 properties in the portfolio at September 30, 2007, 2,170, or 99.5%, are
single-tenant properties and the remaining 11 are multi-tenant properties.
Of
the 2,170 single-tenant properties, 2,134, or 98.3%, were net leased with a
weighted average remaining lease term (excluding rights to extend a lease at
the
option of the tenant) of approximately 13.0 years at September 30, 2007. Of
our 2,134 leased single-tenant properties, 1,923, or 90.1%, 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 $227,000 in the third quarter
of
2007 and $223,000 in the third quarter of 2006. Percentage rent was $556,000
in
the first nine months of 2007 and $431,000 in the first nine months of 2006.
Percentage rent in the third quarter and first nine months of 2007 was less
than
1% of rental revenue and we anticipate percentage rent to continue to be less
than 1% of rental revenue for 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 September 30, 2007, our portfolio of 2,181 retail
properties was 98.3% leased with 37 properties available for lease, one of
which
is a multi-tenant property.
As
of
October 25, 2007, transactions to lease or sell 12 of the 37 properties
available for lease at September 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
third quarter of 2007, depreciation and amortization was $19.6 million as
compared to $14.6 million in the third quarter of 2006. For the first nine
months of 2007, depreciation and amortization was $56.1 million as compared
to
$42.8 million in the first nine 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. As discussed in the section entitled “Funds from Operations
Available to Common Stockholders,” depreciation and amortization is a non-cash
item that is excluded from our calculation of FFO.
Interest
Expense
Interest
expense was $3.6 million higher in the third quarter of 2007 than in the
third quarter of 2006. Interest expense was $4.0 million higher
in the first nine months of 2007 than in the first nine 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 $550 million of 12-year notes in September 2007
and $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
9/30/07
|
|
|
Three
months
ended
9/30/06
|
|
|
Nine
months
ended
9/30/07
|
|
|
Nine
months
ended
9/30/06
|
|
Interest
on our credit facility and notes
|
|
$ |
16,812
|
|
|
$ |
13,235
|
|
|
$ |
44,902
|
|
|
$ |
39,367
|
|
Interest
included in discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
real estate acquired for resale by Crest
|
|
|
(1,239 |
) |
|
|
(711 |
) |
|
|
(5,115 |
) |
|
|
(2,175 |
) |
Amortization
of settlements on treasury lock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreement
|
|
|
218
|
|
|
|
121
|
|
|
|
653
|
|
|
|
499
|
|
Credit
facility commitment fees
|
|
|
114
|
|
|
|
114
|
|
|
|
342
|
|
|
|
342
|
|
Amortization
of credit facility origination costs and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deferred bond financing costs
|
|
|
554
|
|
|
|
552
|
|
|
|
1,597
|
|
|
|
1,494
|
|
Interest
capitalized
|
|
|
(296 |
) |
|
|
(781 |
) |
|
|
(767 |
) |
|
|
(1,870 |
) |
Interest
expense
|
|
$ |
16,163
|
|
|
$ |
12,530
|
|
|
$ |
41,612
|
|
|
$ |
37,657
|
|
Credit
facility and notes outstanding
|
|
Three
months
ended
9/30/07
|
|
|
Three
months
ended
9/30/06
|
|
|
Nine
months
ended
9/30/07
|
|
|
Nine
months
ended
9/30/06
|
|
Average
outstanding balances (in thousands)
|
|
$ |
1,101,810
|
|
|
$ |
847,580
|
|
|
$ |
992,605
|
|
|
$ |
848,377
|
|
Average
interest rates
|
|
|
6.10 |
% |
|
|
6.19 |
% |
|
|
6.03 |
% |
|
|
6.20 |
% |
At
October 25, 2007, the weighted average interest rate on our notes payable of
$1.47 billion was 6.28% and the average interest rate on our credit line was
5.55%. There was no outstanding balance on our credit line at October
25, 2007.
Interest
Coverage Ratio
Our
interest coverage ratio for the third quarter of 2007 and 2006 was 4.1
times. Our interest coverage ratio for the first nine months of 2007
was 4.5 times, and for the first nine months of 2006 was
4.0 times. 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
9/30/07
|
|
|
Three
months
ended
9/30/06
|
|
|
Nine
months
ended
9/30/07
|
|
|
Nine
months
ended
9/30/06
|
|
Net
cash provided by operating activities
|
|
$ |
46,598
|
|
|
$ |
43,085
|
|
|
$ |
218,855
|
|
|
$ |
127,842
|
|
Interest
expense
|
|
|
16,163
|
|
|
|
12,530
|
|
|
|
41,612
|
|
|
|
37,657
|
|
Interest
expense included in discontinued operations(1)
|
|
|
1,239
|
|
|
|
711
|
|
|
|
5,115
|
|
|
|
2,175
|
|
Income
taxes
|
|
|
350
|
|
|
|
96
|
|
|
|
948
|
|
|
|
558
|
|
Income
taxes included in discontinued operations(1)
|
|
|
420
|
|
|
|
18
|
|
|
|
2,032
|
|
|
|
471
|
|
Investment
in real estate acquired for resale(1)
|
|
|
29,892
|
|
|
|
1,200
|
|
|
|
29,892
|
|
|
|
9,937
|
|
Proceeds
from sales of real estate acquired for resale(1)
|
|
|
(28,328 |
) |
|
|
(6,612 |
) |
|
|
(94,106 |
) |
|
|
(16,807 |
) |
Collection
of a mortgage note receivable by Crest(1)
|
|
|
(17 |
) |
|
|
--
|
|
|
|
(25 |
) |
|
|
(1,333 |
) |
Provision
for impairment included in property expenses
|
|
|
--
|
|
|
|
--
|
|
|
|
138
|
|
|
|
--
|
|
Crest
provisions for impairment(1)
|
|
|
--
|
|
|
|
(308 |
) |
|
|
--
|
|
|
|
(308 |
) |
Gain
on sales of real estate acquired for resale(1)
|
|
|
2,219
|
|
|
|
313
|
|
|
|
8,786
|
|
|
|
1,739
|
|
Amortization
of share-based compensation
|
|
|
(828 |
) |
|
|
(654 |
) |
|
|
(3,025 |
) |
|
|
(2,297 |
) |
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable and other assets
|
|
|
262
|
|
|
|
(505 |
) |
|
|
(728 |
) |
|
|
(5,033 |
) |
Accounts
payable, accrued expenses and other liabilities
|
|
|
3,103
|
|
|
|
3,857
|
|
|
|
773
|
|
|
|
3,636
|
|
Interest
coverage amount
|
|
$ |
71,073
|
|
|
$ |
53,731
|
|
|
$ |
210,267
|
|
|
$ |
158,237
|
|
Divided
by interest expense (2)
|
|
$ |
17,402
|
|
|
$ |
13,241
|
|
|
$ |
46,727
|
|
|
$ |
39,832
|
|
Interest
coverage ratio
|
|
|
4.1
|
|
|
|
4.1
|
|
|
|
4.5
|
|
|
|
4.0
|
|
|
(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 third quarter of 2007 was 3.0 times, and
was
3.4 times for the third quarter of 2006. For the nine months ended September
30,
2007, our fixed charge coverage ratio was 3.2 times, and was 3.4 times for
the
nine months ended September 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
9/30/07
|
|
|
Three
months
ended
9/30/06
|
|
|
Nine
months
ended
9/30/07
|
|
|
Nine
months
ended
9/30/06
|
|
Interest
coverage amount
|
|
$ |
71,073
|
|
|
$ |
53,731
|
|
|
$ |
210,267
|
|
|
$ |
158,237
|
|
Divided
by interest expense plus
preferred
stock dividends(1)
|
|
$ |
23,465
|
|
|
$ |
15,592
|
|
|
$ |
64,917
|
|
|
$ |
46,884
|
|
Fixed
charge coverage ratio
|
|
|
3.0
|
|
|
|
3.4
|
|
|
|
3.2
|
|
|
|
3.4
|
|
(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 $2.2 million to $6.3 million in the
third quarter of 2007 as compared to $4.1 million in the third quarter of
2006. In the third quarter of 2007, as a percentage of total revenue,
general and administrative expenses increased to 8.5% as compared to 6.9% in
the
third quarter of 2006.
General
and administrative expenses increased by $4.5 million to $17.2 million in the
first nine months of 2007 as compared to $12.7 million in the first nine
months of 2006. As a percentage of total revenue, general and
administrative expenses increased to 8.0% for the first nine months of 2007
as
compared to 7.4% in the first nine months of 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
October 2007, we had 75 permanent employees as compared to October 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 September 30, 2007,
37 properties were available for sale or lease as compared to 26 at December
31,
2006 and 21 at September 30, 2006.
Property
expenses were $819,000 in the third quarter of 2007 and $787,000 in the third
quarter of 2006. Property expenses were $2.7 million in the first
nine months of 2007 and $2.3 million in the first nine months of
2006. Property expenses include a provision for impairment of
$138,000 recorded for one property in the first nine months of
2007. 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 $350,000 in the third quarter of 2007 as compared to $96,000 in
the
third quarter of 2006. Income taxes were $948,000 for the first nine
months of 2007 as compared to $558,000 for the first nine 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 $420,000 in the
third
quarter of 2007 as compared to $18,000 in the third quarter of
2006. Crest incurred state and federal income taxes of
$2.0 million in the first nine months of 2007 as compared to $471,000 in
the first nine 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.
Loss
on Extinguishment of Debt
In
September 2006, we redeemed all of our outstanding $110 million,
73/4% unsecured notes due May 2007 (the “2007 Notes”). The
2007 Notes were redeemed at a redemption price equal to 100% of the principal
amount of the 2007 Notes, plus accrued and unpaid interest of $3.2 million,
as
well as a make-whole payment of $1.6 million. We recorded a loss on
extinguishment of debt totaling $1.6 million related to the make-whole payment
associated with the 2007 Notes. The make-whole payment represented
approximately $0.017 per diluted share during the third quarter of
2006.
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
9/30/07
|
|
|
Three
months
ended
9/30/06
|
|
|
Nine
months
ended
9/30/07
|
|
|
Nine
months
ended
9/30/06
|
|
Gain
on sales of real estate acquired for resale
|
|
$ |
2,219
|
|
|
$ |
313
|
|
|
$ |
8,786
|
|
|
$ |
1,739
|
|
Rental
revenue
|
|
|
1,547
|
|
|
|
913
|
|
|
|
6,736
|
|
|
|
2,996
|
|
Other
revenue
|
|
|
68
|
|
|
|
--
|
|
|
|
128
|
|
|
|
11
|
|
Interest
expense
|
|
|
(1,239 |
) |
|
|
(711 |
) |
|
|
(5,115 |
) |
|
|
(2,175 |
) |
General
and administrative expense
|
|
|
(224 |
) |
|
|
(73 |
) |
|
|
(507 |
) |
|
|
(227 |
) |
Property
expenses
|
|
|
(14 |
) |
|
|
(17 |
) |
|
|
(29 |
) |
|
|
(50 |
) |
Provisions
for impairment
|
|
|
--
|
|
|
|
(308 |
) |
|
|
--
|
|
|
|
(308 |
) |
Income
taxes
|
|
|
(420 |
) |
|
|
(18 |
) |
|
|
(2,032 |
) |
|
|
(471 |
) |
Income
from discontinued operations,
real
estate acquired for resale by Crest
|
|
$ |
1,937
|
|
|
$ |
99
|
|
|
$ |
7,967
|
|
|
$ |
1,515
|
|
Per
common share, basic and diluted
|
|
$ |
0.02
|
|
|
$ |
0.00
|
|
|
$ |
0.08
|
|
|
$ |
0.02
|
|
Realty
Income’s operations from one property listed as held for sale at September 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
9/30/07
|
|
|
Three
months
ended
9/30/06
|
|
|
Nine
months
ended
9/30/07
|
|
|
Nine
months
ended
9/30/06
|
|
Gain
on sales of investment properties
|
|
$ |
770
|
|
|
$ |
843
|
|
|
$ |
1,355
|
|
|
$ |
3,036
|
|
Rental
revenue
|
|
|
529
|
|
|
|
236
|
|
|
|
834
|
|
|
|
914
|
|
Depreciation
and amortization
|
|
|
(29 |
) |
|
|
(75 |
) |
|
|
(113 |
) |
|
|
(247 |
) |
Property
expenses
|
|
|
(3 |
) |
|
|
(72 |
) |
|
|
(10 |
) |
|
|
(117 |
) |
Provision
for impairment
|
|
|
(134 |
) |
|
|
--
|
|
|
|
(134 |
) |
|
|
--
|
|
Income
from discontinued operations,
real
estate held for investment
|
|
$ |
1,133
|
|
|
$ |
932
|
|
|
$ |
1,932
|
|
|
$ |
3,586
|
|
Per
common share, basic and diluted
|
|
$ |
0.01
|
|
|
$ |
0.01
|
|
|
$ |
0.02
|
|
|
$ |
0.04
|
|
The
following is a summary of our total discontinued operations (dollars in
thousands, except per share data):
|
|
Three
months
ended
9/30/07
|
|
|
Three
months
ended
9/30/06
|
|
|
Nine
months
ended
9/30/07
|
|
|
Nine
months
ended
9/30/06
|
|
Real
estate acquired for resale by Crest
|
|
$ |
1,937
|
|
|
$ |
99
|
|
|
$ |
7,967
|
|
|
$ |
1,515
|
|
Real
estate held for investment
|
|
|
1,133
|
|
|
|
932
|
|
|
|
1,932
|
|
|
|
3,586
|
|
Income
from discontinued operations
|
|
$ |
3,070
|
|
|
$ |
1,031
|
|
|
$ |
9,899
|
|
|
$ |
5,101
|
|
Per
common share, basic and diluted
|
|
$ |
0.03
|
|
|
$ |
0.01
|
|
|
$ |
0.10
|
|
|
$ |
0.06
|
|
The
above per share amounts have each been calculated independently.
Gain
on Sales of Real Estate Acquired for Resale by Crest
During
the third quarter of 2007, Crest sold 14 properties for $28.3 million,
which resulted in a gain of $2.2 million. In comparison, during
the third quarter of 2006, Crest sold four properties for $6.6 million,
which resulted in a gain of $313,000. Crest’s gains on sales are
reported before income taxes and are included in discontinued
operations.
During
the first nine months of 2007, Crest sold 45 properties for $97.9 million,
which resulted in a gain of $8.8 million. As part of two sales during
the first nine months of 2007, Crest provided the buyers financing for a total
of $3.8 million in mortgage promissory notes. In comparison, during
the first nine months of 2006, Crest sold nine properties for
$16.8 million, which resulted in a gain of $1.7 million.
At
September 30, 2007, Crest had $78.3 million invested in 47 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, Improvements and Land by Realty
Income
During
the third quarter of 2007, we sold three investment properties for an aggregate
of $4.4 million, which resulted in a gain of $770,000. This gain is
included in discontinued operations. As part of one sale during the
third quarter of 2007, we received a lease termination fee of $427,000, which
is
reported in “income from discontinued operations, real estate held for
investment” on our consolidated statements of income. In addition, we
sold excess land and improvements from two properties for an aggregate of
$529,000, which resulted in a gain of $29,000. The gain from the land
and improvements sales is reported in “other revenue” on our consolidated
statements of income because these improvements and excess land were associated
with properties that continue to be owned as part of our core
operations. In comparison, during the third quarter of 2006, we sold
or exchanged three investment properties for $4.0 million, which resulted
in a gain of $843,000. These gains are included in discontinued
operations.
During
the first nine months of 2007, we sold six investment properties for $5.9
million, which resulted in a gain of $1.4 million. This gain is
included in discontinued operations. In addition, we sold excess land
and improvements from five properties for an aggregate of $4.4 million, which
resulted in gain of $1.8 million. The gain from the land and
improvements sales is reported in “other revenue” on our consolidated statements
of income because these improvements and excess land were associated with
properties that continue to be owned as part of our core
operations. In comparison, during the first nine months of 2006, we
sold or exchanged 13 investment properties for $10.7 million, which
resulted in a gain of $3.0 million. This gain is included in
discontinued operations. As part of one sale during the first nine
months 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.
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 September 30, 2007, we classified real estate with
a
carrying amount of $78.6 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.
Provisions
for Impairment on Real Estate Acquired for Resale by Crest
No
provision for impairment was recorded by Crest in the first nine months of
2007. Provisions for impairment of $308,000 were recorded by Crest on
two properties in the third quarter and first nine months of 2006.
Provisions
for Impairment on Realty Income Investment Properties
We
recorded a provision for impairment of $134,000 on one property in September
2007, which is included in “income from discontinued operations, real estate
held for investment” on our consolidated statement of income. We
recorded a provision for impairment of $138,000 on a property in June 2007,
which is included in property expense on our consolidated statement of
income. We recorded no provision for impairment in the first nine
months of 2006.
Preferred
Stock Dividends
Preferred
stock cash dividends totaled $6.1 million in the third quarter of 2007 as
compared to $2.4 million in the third quarter of 2006. Preferred
stock cash dividends totaled $18.2 million in the first nine months of 2007
as
compared to $7.1 million in the first nine months of 2006.
Net
Income Available to Common Stockholders
Net
income available to common stockholders was $27.9 million in the third quarter
of 2007, an increase of $3.7 million as compared to $24.2 million in
the third quarter of 2006. Net income available to common
stockholders was $89.0 million in the first nine months of 2007, an increase
of
$18.0 million as compared to $71.0 million in the first nine 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 third quarter of 2007, the gain recognized from the sales of investment
properties was $799,000 as compared to $843,000 for the third quarter of
2006. During the first nine months of 2007, the gain recognized from
the sales of investment properties was $3.2 million as compared to
$3.0 million for the first nine months of 2006.
FFO
for
the third quarter of 2007 increased by $8.6 million, or 22.6%, to $46.6 million
as compared to $38.0 million in the third quarter of 2006. FFO
for the first nine months of 2007 increased by $31.0 million, or 28.0%, to
$141.9 million as compared to $110.9 million in the first nine 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
9/30/07
|
|
|
Three
months
ended
9/30/06
|
|
|
Nine
months
ended
9/30/07
|
|
|
Nine
months
ended
9/30/06
|
|
Net
income available to common stockholders
|
|
$ |
27,910
|
|
|
$ |
24,207
|
|
|
$ |
89,043
|
|
|
$ |
71,033
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
19,564
|
|
|
|
14,586
|
|
|
|
56,132
|
|
|
|
42,796
|
|
Discontinued
operations
|
|
|
29
|
|
|
|
75
|
|
|
|
113
|
|
|
|
247
|
|
Depreciation
of furniture, fixtures and equipment
|
|
|
(79 |
) |
|
|
(49 |
) |
|
|
(174 |
) |
|
|
(142 |
) |
Gain
on sales of land and investment properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(29 |
) |
|
|
--
|
|
|
|
(1,835 |
) |
|
|
--
|
|
Discontinued
operations
|
|
|
(770 |
) |
|
|
(843 |
) |
|
|
(1,355 |
) |
|
|
(3,036 |
) |
FFO
available to common stockholders
|
|
$ |
46,625
|
|
|
$ |
37,976
|
|
|
$ |
141,924
|
|
|
$ |
110,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.47
|
|
|
$ |
0.43
|
|
|
$ |
1.42
|
|
|
$ |
1.28
|
|
Diluted
|
|
$ |
0.47
|
|
|
$ |
0.43
|
|
|
$ |
1.41
|
|
|
$ |
1.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
paid to common stockholders
|
|
$ |
39,519
|
|
|
$ |
32,109
|
|
|
$ |
116,382
|
|
|
$ |
92,605
|
|
FFO
in excess of distributions paid to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders
|
|
$ |
7,106
|
|
|
$ |
5,867
|
|
|
$ |
25,542
|
|
|
$ |
18,293
|
|
Weighted
average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used
for computation per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
100,187,901
|
|
|
|
89,166,429
|
|
|
|
100,148,993
|
|
|
|
86,936,161
|
|
Diluted
|
|
|
100,252,953
|
|
|
|
89,267,138
|
|
|
|
100,326,859
|
|
|
|
87,084,545
|
|
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
9/30/07
|
|
|
Three
months
ended
9/30/06
|
|
|
Nine
months
ended
9/30/07
|
|
|
Nine
months
ended
9/30/06
|
|
Amortization
of settlements on treasury lock agreements(1)
|
|
$ |
218
|
|
|
$ |
121
|
|
|
$ |
653
|
|
|
$ |
499
|
|
Amortization
of deferred note financing costs(2)
|
|
|
369
|
|
|
|
371
|
|
|
|
1,042
|
|
|
|
950
|
|
Amortization
of share-based compensation
|
|
|
828
|
|
|
|
654
|
|
|
|
3,025
|
|
|
|
2,297
|
|
Capitalized
leasing costs and commissions
|
|
|
(155 |
) |
|
|
(247 |
) |
|
|
(393 |
) |
|
|
(382 |
) |
Capitalized
building improvements
|
|
|
(201 |
) |
|
|
(76 |
) |
|
|
(995 |
) |
|
|
(179 |
) |
Straight
line rent(3)
|
|
|
(249 |
) |
|
|
(411 |
) |
|
|
(782 |
) |
|
|
(1,252 |
) |
Provisions
for impairment
|
|
|
134
|
|
|
|
--
|
|
|
|
272
|
|
|
|
--
|
|
Crest
provisions for impairment
|
|
|
--
|
|
|
|
308
|
|
|
|
--
|
|
|
|
308
|
|
Crest
gain on sale, previously reported as impairment
|
|
|
--
|
|
|
|
--
|
|
|
|
(271 |
) |
|
|
--
|
|
Gain
on reinstatement of property carrying value
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(716 |
) |
|
(1)
The settlements on the treasury lock agreements resulted from an
interest
rate risk prevention strategy that we used 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, September 2006 and September 2007. 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
September 30, 2007, we owned a diversified portfolio:
·
|
Of
2,181 retail properties;
|
·
|
With
an occupancy rate of 98.3%, or 2,144 properties occupied of the 2,181
properties in the portfolio;
|
·
|
Leased
to 110 different retail chains doing business in 30 separate retail
industries;
|
·
|
With
over 18.1 million square feet of leasable space;
and
|
·
|
With
an average leasable retail space per property of approximately 8,300
square feet.
|
In
addition to our real estate portfolio at September 30, 2007, our subsidiary,
Crest, had invested $78.3 million in 47 retail properties located in 20
states. These properties are classified as held for sale.
At
September 30, 2007, 2,134, or 97.8%, of our 2,181 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
|
|
|
For
the Years Ended
|
|
Industries
|
|
Ended
September
30,
2007
|
|
|
Dec
31,
2006
|
|
|
Dec
31,
2005
|
|
|
Dec
31,
2004
|
|
|
Dec
31,
2003
|
|
|
Dec
31,
2002
|
|
|
Dec
31,
2001
|
|
Apparel
stores
|
|
|
1.2 |
% |
|
|
1.7 |
% |
|
|
1.6 |
% |
|
|
1.8 |
% |
|
|
2.1 |
% |
|
|
2.3 |
% |
|
|
2.4 |
% |
Automotive
collision services
|
|
|
1.1
|
|
|
|
1.3
|
|
|
|
1.3
|
|
|
|
1.0
|
|
|
|
0.3
|
|
|
|
--
|
|
|
|
--
|
|
Automotive
parts
|
|
|
2.1
|
|
|
|
2.8
|
|
|
|
3.4
|
|
|
|
3.8
|
|
|
|
4.5
|
|
|
|
4.9
|
|
|
|
5.7
|
|
Automotive
service
|
|
|
5.2
|
|
|
|
6.9
|
|
|
|
7.6
|
|
|
|
7.7
|
|
|
|
8.3
|
|
|
|
7.0
|
|
|
|
5.7
|
|
Automotive
tire services
|
|
|
7.3
|
|
|
|
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
|
|
|
8.3
|
|
|
|
10.3
|
|
|
|
12.7
|
|
|
|
14.4
|
|
|
|
17.8
|
|
|
|
20.8
|
|
|
|
23.9
|
|
Consumer
electronics
|
|
|
0.9
|
|
|
|
1.1
|
|
|
|
1.3
|
|
|
|
2.1
|
|
|
|
3.0
|
|
|
|
3.3
|
|
|
|
4.0
|
|
Convenience
stores
|
|
|
14.1
|
|
|
|
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
|
|
Distribution
and office
|
|
|
0.6
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Drug
stores
|
|
|
2.7
|
|
|
|
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
|
|
|
0.2
|
|
|
|
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
|
|
|
5.3
|
|
|
|
4.3
|
|
|
|
3.7
|
|
|
|
4.0
|
|
|
|
3.8
|
|
|
|
3.8
|
|
|
|
3.6
|
|
Home
furnishings
|
|
|
2.6
|
|
|
|
3.1
|
|
|
|
3.7
|
|
|
|
4.1
|
|
|
|
4.9
|
|
|
|
5.4
|
|
|
|
6.0
|
|
Home
improvement
|
|
|
2.1
|
|
|
|
3.4
|
|
|
|
1.1
|
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
1.3
|
|
Motor
vehicle dealerships
|
|
|
3.3
|
|
|
|
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
|
|
|
21.0
|
|
|
|
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
|
|
|
8.9
|
|
|
|
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
|
|
|
1.7
|
|
|
|
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 |
% |
|
(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 September 30, 2007,
classified according to the retail business types and the level of services
they
provide (dollars in thousands):
Industry
|
|
Number
of
Properties
|
|
|
Rental
Revenue for
the
Quarter Ended
September
30, 2007(1)
|
|
|
Percentage
of
Rental
Revenue
|
|
Tenants
Providing Services
|
|
|
|
|
|
|
|
|
|
Automotive
collision services
|
|
|
13
|
|
|
$ |
825
|
|
|
|
1.1 |
% |
Automotive
service
|
|
|
237
|
|
|
|
3,782
|
|
|
|
5.2
|
|
Child
care
|
|
|
268
|
|
|
|
6,072
|
|
|
|
8.3
|
|
Entertainment
|
|
|
8
|
|
|
|
986
|
|
|
|
1.4
|
|
Equipment
rental services
|
|
|
2
|
|
|
|
150
|
|
|
|
0.2
|
|
Financial
services
|
|
|
5
|
|
|
|
113
|
|
|
|
0.2
|
|
Health
and fitness
|
|
|
26
|
|
|
|
3,882
|
|
|
|
5.3
|
|
Private
education
|
|
|
6
|
|
|
|
576
|
|
|
|
0.8
|
|
Theaters
|
|
|
31
|
|
|
|
6,514
|
|
|
|
8.9
|
|
Other
|
|
|
11
|
|
|
|
1,642
|
|
|
|
2.3
|
|
|
|
|
607
|
|
|
|
24,542
|
|
|
|
33.7
|
|
Tenants
Selling Goods and Services
|
|
|
|
|
|
|
|
|
|
Automotive
parts (with installation)
|
|
|
30
|
|
|
|
583
|
|
|
|
0.8
|
|
Automotive
tire services
|
|
|
149
|
|
|
|
5,283
|
|
|
|
7.3
|
|
Business
services
|
|
|
1
|
|
|
|
32
|
|
|
|
*
|
|
Convenience
stores
|
|
|
425
|
|
|
|
10,229
|
|
|
|
14.1
|
|
Distribution
and office
|
|
|
3
|
|
|
|
446
|
|
|
|
0.6
|
|
Home
improvement
|
|
|
1
|
|
|
|
57
|
|
|
|
0.1
|
|
Motor
vehicle dealerships
|
|
|
20
|
|
|
|
2,375
|
|
|
|
3.3
|
|
Pet
supplies and services
|
|
|
9
|
|
|
|
607
|
|
|
|
0.8
|
|
Restaurants
|
|
|
639
|
|
|
|
15,313
|
|
|
|
21.0
|
|
Travel
plazas
|
|
|
1
|
|
|
|
170
|
|
|
|
0.2
|
|
Video
rental
|
|
|
34
|
|
|
|
1,254
|
|
|
|
1.7
|
|
|
|
|
1,312
|
|
|
|
36,349
|
|
|
|
49.9
|
|
Tenants
Selling Goods
|
|
|
|
|
|
|
|
|
|
|
|
|
Apparel
stores
|
|
|
6
|
|
|
|
883
|
|
|
|
1.2
|
|
Automotive
parts
|
|
|
70
|
|
|
|
958
|
|
|
|
1.3
|
|
Book
stores
|
|
|
2
|
|
|
|
156
|
|
|
|
0.2
|
|
Consumer
electronics
|
|
|
16
|
|
|
|
683
|
|
|
|
0.9
|
|
Crafts
and novelties
|
|
|
4
|
|
|
|
215
|
|
|
|
0.3
|
|
Drug
stores
|
|
|
34
|
|
|
|
1,941
|
|
|
|
2.7
|
|
General
merchandise
|
|
|
24
|
|
|
|
481
|
|
|
|
0.7
|
|
Grocery
stores
|
|
|
8
|
|
|
|
536
|
|
|
|
0.7
|
|
Home
furnishings
|
|
|
42
|
|
|
|
1,895
|
|
|
|
2.6
|
|
Home
improvement
|
|
|
30
|
|
|
|
1,477
|
|
|
|
2.0
|
|
Office
supplies
|
|
|
10
|
|
|
|
791
|
|
|
|
1.1
|
|
Pet
supplies
|
|
|
2
|
|
|
|
37
|
|
|
|
0.1
|
|
Sporting
goods
|
|
|
14
|
|
|
|
1,865
|
|
|
|
2.6
|
|
|
|
|
262
|
|
|
|
11,918
|
|
|
|
16.4
|
|
Totals
|
|
|
2,181
|
|
|
$ |
72,809
|
|
|
|
100.0 |
% |
|
(1)
Includes rental revenue for all properties owned by Realty Income
at
September 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 2,134 net
leased, single-tenant retail properties as of September 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
9/30/07(2)
|
|
|
%
of
Total
Rental Revenue
|
|
|
Number
of
Leases Expiring
|
|
|
Rental
Revenue
for
the Quarter Ended 9/30/07
|
|
|
%
of
Total
Rental Revenue
|
|
|
Number
of Leases Expiring
|
|
|
Rental
Revenue
for
the Quarter Ended 9/30/07
|
|
|
%
of
Total
Rental Revenue
|
|
2007
|
|
|
55
|
|
|
$ |
971
|
|
|
|
1.4 |
% |
|
|
33
|
|
|
$ |
605
|
|
|
|
0.9 |
% |
|
|
22
|
|
|
$ |
366
|
|
|
|
0.5 |
% |
2008
|
|
|
115
|
|
|
|
2,436
|
|
|
|
3.5
|
|
|
|
60
|
|
|
|
1,386
|
|
|
|
2.0
|
|
|
|
55
|
|
|
|
1,050
|
|
|
|
1.5
|
|
2009
|
|
|
119
|
|
|
|
2,601
|
|
|
|
3.7
|
|
|
|
37
|
|
|
|
886
|
|
|
|
1.3
|
|
|
|
82
|
|
|
|
1,715
|
|
|
|
2.4
|
|
2010
|
|
|
75
|
|
|
|
1,561
|
|
|
|
2.2
|
|
|
|
33
|
|
|
|
817
|
|
|
|
1.2
|
|
|
|
42
|
|
|
|
744
|
|
|
|
1.0
|
|
2011
|
|
|
80
|
|
|
|
2,356
|
|
|
|
3.3
|
|
|
|
36
|
|
|
|
1,365
|
|
|
|
1.9
|
|
|
|
44
|
|
|
|
991
|
|
|
|
1.4
|
|
2012
|
|
|
94
|
|
|
|
2,290
|
|
|
|
3.2
|
|
|
|
74
|
|
|
|
1,919
|
|
|
|
2.7
|
|
|
|
20
|
|
|
|
371
|
|
|
|
0.5
|
|
2013
|
|
|
79
|
|
|
|
3,494
|
|
|
|
5.0
|
|
|
|
70
|
|
|
|
3,270
|
|
|
|
4.7
|
|
|
|
9
|
|
|
|
224
|
|
|
|
0.3
|
|
2014
|
|
|
48
|
|
|
|
2,039
|
|
|
|
2.9
|
|
|
|
35
|
|
|
|
1,738
|
|
|
|
2.5
|
|
|
|
13
|
|
|
|
301
|
|
|
|
0.4
|
|
2015
|
|
|
90
|
|
|
|
1,818
|
|
|
|
2.6
|
|
|
|
65
|
|
|
|
1,237
|
|
|
|
1.8
|
|
|
|
25
|
|
|
|
581
|
|
|
|
0.8
|
|
2016
|
|
|
112
|
|
|
|
1,905
|
|
|
|
2.7
|
|
|
|
111
|
|
|
|
1,880
|
|
|
|
2.7
|
|
|
|
1
|
|
|
|
25
|
|
|
|
*
|
|
2017
|
|
|
45
|
|
|
|
1,795
|
|
|
|
2.5
|
|
|
|
40
|
|
|
|
1,708
|
|
|
|
2.4
|
|
|
|
5
|
|
|
|
87
|
|
|
|
0.1
|
|
2018
|
|
|
24
|
|
|
|
1,023
|
|
|
|
1.5
|
|
|
|
24
|
|
|
|
1,023
|
|
|
|
1.5
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2019
|
|
|
94
|
|
|
|
4,650
|
|
|
|
6.6
|
|
|
|
93
|
|
|
|
4,456
|
|
|
|
6.3
|
|
|
|
1
|
|
|
|
194
|
|
|
|
0.3
|
|
2020
|
|
|
81
|
|
|
|
3,087
|
|
|
|
4.4
|
|
|
|
78
|
|
|
|
3,024
|
|
|
|
4.3
|
|
|
|
3
|
|
|
|
63
|
|
|
|
0.1
|
|
2021
|
|
|
149
|
|
|
|
5,648
|
|
|
|
8.0
|
|
|
|
148
|
|
|
|
5,594
|
|
|
|
7.9
|
|
|
|
1
|
|
|
|
54
|
|
|
|
0.1
|
|
2022
|
|
|
99
|
|
|
|
2,933
|
|
|
|
4.2
|
|
|
|
99
|
|
|
|
2,933
|
|
|
|
4.2
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2023
|
|
|
238
|
|
|
|
6,493
|
|
|
|
9.2
|
|
|
|
237
|
|
|
|
6,468
|
|
|
|
9.2
|
|
|
|
1
|
|
|
|
25
|
|
|
|
*
|
|
2024
|
|
|
63
|
|
|
|
1,838
|
|
|
|
2.6
|
|
|
|
63
|
|
|
|
1,838
|
|
|
|
2.6
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2025
|
|
|
76
|
|
|
|
6,409
|
|
|
|
9.1
|
|
|
|
72
|
|
|
|
6,344
|
|
|
|
9.0
|
|
|
|
4
|
|
|
|
65
|
|
|
|
0.1
|
|
2026
|
|
|
216
|
|
|
|
11,208
|
|
|
|
15.9
|
|
|
|
214
|
|
|
|
11,151
|
|
|
|
15.8
|
|
|
|
2
|
|
|
|
57
|
|
|
|
0.1
|
|
2027
|
|
|
96
|
|
|
|
1,626
|
|
|
|
2.3
|
|
|
|
96
|
|
|
|
1,626
|
|
|
|
2.3
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2028
|
|
|
36
|
|
|
|
514
|
|
|
|
0.7
|
|
|
|
35
|
|
|
|
506
|
|
|
|
0.7
|
|
|
|
1
|
|
|
|
8
|
|
|
|
*
|
|
2029
|
|
|
27
|
|
|
|
454
|
|
|
|
0.6
|
|
|
|
27
|
|
|
|
454
|
|
|
|
0.6
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2030
|
|
|
13
|
|
|
|
411
|
|
|
|
0.6
|
|
|
|
13
|
|
|
|
411
|
|
|
|
0.6
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2031
|
|
|
1
|
|
|
|
18
|
|
|
|
*
|
|
|
|
1
|
|
|
|
18
|
|
|
|
*
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2032
|
|
|
1
|
|
|
|
6
|
|
|
|
*
|
|
|
|
1
|
|
|
|
6
|
|
|
|
*
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2033
|
|
|
3
|
|
|
|
357
|
|
|
|
0.5
|
|
|
|
3
|
|
|
|
357
|
|
|
|
0.5
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2034
|
|
|
2
|
|
|
|
230
|
|
|
|
0.3
|
|
|
|
2
|
|
|
|
230
|
|
|
|
0.3
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2037
|
|
|
2
|
|
|
|
341
|
|
|
|
0.5
|
|
|
|
2
|
|
|
|
341
|
|
|
|
0.5
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2043
|
|
|
1
|
|
|
|
13
|
|
|
|
*
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1
|
|
|
|
13
|
|
|
|
*
|
|
Totals
|
|
|
2,134
|
|
|
$ |
70,525
|
|
|
|
100.0 |
% |
|
|
1,802
|
|
|
$ |
63,591
|
|
|
|
90.4 |
% |
|
|
332
|
|
|
$ |
6,934
|
|
|
|
9.6 |
% |
*Less
than 0.1%
|
(1)
Excludes ten multi-tenant properties and 37 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 $2,284 from ten
multi-tenant properties and from 37 vacant and unleased properties
at
September 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
September 30, 2007 (dollars in thousands):
State
|
|
Number
of
Properties
|
|
|
Percent
Leased
|
|
|
Approximate
Leasable
Square
Feet
|
|
|
Rental
Revenue for the Quarter Ended September 30, 2007(1)
|
|
|
Percentage
of
Rental
Revenue
|
|
Alabama
|
|
|
60
|
|
|
|
100 |
% |
|
|
410,900
|
|
|
$ |
1,898
|
|
|
|
2.6 |
% |
Alaska
|
|
|
2
|
|
|
|
100
|
|
|
|
128,500
|
|
|
|
277
|
|
|
|
0.4
|
|
Arizona
|
|
|
79
|
|
|
|
99
|
|
|
|
394,100
|
|
|
|
2,168
|
|
|
|
3.0
|
|
Arkansas
|
|
|
15
|
|
|
|
100
|
|
|
|
94,500
|
|
|
|
411
|
|
|
|
0.6
|
|
California
|
|
|
62
|
|
|
|
98
|
|
|
|
1,107,200
|
|
|
|
3,990
|
|
|
|
5.5
|
|
Colorado
|
|
|
54
|
|
|
|
98
|
|
|
|
451,000
|
|
|
|
1,787
|
|
|
|
2.5
|
|
Connecticut
|
|
|
25
|
|
|
|
100
|
|
|
|
278,900
|
|
|
|
1,132
|
|
|
|
1.6
|
|
Delaware
|
|
|
16
|
|
|
|
100
|
|
|
|
31,500
|
|
|
|
332
|
|
|
|
0.5
|
|
Florida
|
|
|
167
|
|
|
|
99
|
|
|
|
1,451,700
|
|
|
|
6,342
|
|
|
|
8.7
|
|
Georgia
|
|
|
131
|
|
|
|
98
|
|
|
|
924,200
|
|
|
|
3,941
|
|
|
|
5.4
|
|
Idaho
|
|
|
14
|
|
|
|
100
|
|
|
|
91,900
|
|
|
|
387
|
|
|
|
0.5
|
|
Illinois
|
|
|
71
|
|
|
|
100
|
|
|
|
853,300
|
|
|
|
3,787
|
|
|
|
5.2
|
|
Indiana
|
|
|
80
|
|
|
|
98
|
|
|
|
683,200
|
|
|
|
2,868
|
|
|
|
3.9
|
|
Iowa
|
|
|
19
|
|
|
|
95
|
|
|
|
138,700
|
|
|
|
449
|
|
|
|
0.6
|
|
Kansas
|
|
|
33
|
|
|
|
94
|
|
|
|
573,500
|
|
|
|
1,036
|
|
|
|
1.4
|
|
Kentucky
|
|
|
22
|
|
|
|
100
|
|
|
|
111,500
|
|
|
|
687
|
|
|
|
0.9
|
|
Louisiana
|
|
|
33
|
|
|
|
100
|
|
|
|
190,400
|
|
|
|
965
|
|
|
|
1.3
|
|
Maine
|
|
|
2
|
|
|
|
100
|
|
|
|
8,000
|
|
|
|
13
|
|
|
|
*
|
|
Maryland
|
|
|
28
|
|
|
|
100
|
|
|
|
256,200
|
|
|
|
1,417
|
|
|
|
1.9
|
|
Massachusetts
|
|
|
68
|
|
|
|
100
|
|
|
|
585,400
|
|
|
|
1,581
|
|
|
|
2.2
|
|
Michigan
|
|
|
22
|
|
|
|
100
|
|
|
|
165,200
|
|
|
|
696
|
|
|
|
1.0
|
|
Minnesota
|
|
|
21
|
|
|
|
100
|
|
|
|
392,100
|
|
|
|
1,263
|
|
|
|
1.7
|
|
Mississippi
|
|
|
70
|
|
|
|
97
|
|
|
|
353,800
|
|
|
|
1,453
|
|
|
|
2.0
|
|
Missouri
|
|
|
62
|
|
|
|
98
|
|
|
|
640,100
|
|
|
|
2,116
|
|
|
|
2.9
|
|
Montana
|
|
|
2
|
|
|
|
100
|
|
|
|
30,000
|
|
|
|
74
|
|
|
|
0.1
|
|
Nebraska
|
|
|
19
|
|
|
|
100
|
|
|
|
196,300
|
|
|
|
615
|
|
|
|
0.8
|
|
Nevada
|
|
|
15
|
|
|
|
100
|
|
|
|
191,000
|
|
|
|
838
|
|
|
|
1.2
|
|
New
Hampshire
|
|
|
14
|
|
|
|
100
|
|
|
|
109,900
|
|
|
|
447
|
|
|
|
0.6
|
|
New
Jersey
|
|
|
35
|
|
|
|
100
|
|
|
|
261,700
|
|
|
|
1,747
|
|
|
|
2.4
|
|
New
Mexico
|
|
|
8
|
|
|
|
100
|
|
|
|
56,400
|
|
|
|
154
|
|
|
|
0.2
|
|
New
York
|
|
|
44
|
|
|
|
98
|
|
|
|
508,100
|
|
|
|
2,288
|
|
|
|
3.1
|
|
North
Carolina
|
|
|
61
|
|
|
|
98
|
|
|
|
441,100
|
|
|
|
2,032
|
|
|
|
2.8
|
|
North
Dakota
|
|
|
6
|
|
|
|
100
|
|
|
|
36,600
|
|
|
|
55
|
|
|
|
0.1
|
|
Ohio
|
|
|
128
|
|
|
|
100
|
|
|
|
813,900
|
|
|
|
3,045
|
|
|
|
4.2
|
|
Oklahoma
|
|
|
25
|
|
|
|
100
|
|
|
|
145,900
|
|
|
|
600
|
|
|
|
0.8
|
|
Oregon
|
|
|
18
|
|
|
|
94
|
|
|
|
289,100
|
|
|
|
805
|
|
|
|
1.1
|
|
Pennsylvania
|
|
|
94
|
|
|
|
100
|
|
|
|
592,800
|
|
|
|
2,730
|
|
|
|
3.7
|
|
Rhode
Island
|
|
|
4
|
|
|
|
100
|
|
|
|
14,500
|
|
|
|
52
|
|
|
|
0.1
|
|
South
Carolina
|
|
|
59
|
|
|
|
98
|
|
|
|
250,700
|
|
|
|
1,522
|
|
|
|
2.1
|
|
South
Dakota
|
|
|
9
|
|
|
|
100
|
|
|
|
24,900
|
|
|
|
97
|
|
|
|
0.1
|
|
Tennessee
|
|
|
126
|
|
|
|
99
|
|
|
|
608,800
|
|
|
|
2,961
|
|
|
|
4.1
|
|
Texas
|
|
|
217
|
|
|
|
96
|
|
|
|
2,287,600
|
|
|
|
7,760
|
|
|
|
10.7
|
|
Utah
|
|
|
6
|
|
|
|
67
|
|
|
|
35,100
|
|
|
|
93
|
|
|
|
0.1
|
|
Vermont
|
|
|
4
|
|
|
|
100
|
|
|
|
12,700
|
|
|
|
59
|
|
|
|
0.1
|
|
Virginia
|
|
|
74
|
|
|
|
100
|
|
|
|
511,300
|
|
|
|
2,689
|
|
|
|
3.7
|
|
Washington
|
|
|
37
|
|
|
|
89
|
|
|
|
240,800
|
|
|
|
693
|
|
|
|
1.0
|
|
West
Virginia
|
|
|
2
|
|
|
|
50
|
|
|
|
23,200
|
|
|
|
44
|
|
|
|
0.1
|
|
Wisconsin
|
|
|
17
|
|
|
|
94
|
|
|
|
157,400
|
|
|
|
395
|
|
|
|
0.5
|
|
Wyoming
|
|
|
1
|
|
|
|
100
|
|
|
|
4,200
|
|
|
|
18
|
|
|
|
*
|
|
Totals/Average
|
|
|
2,181
|
|
|
|
98 |
% |
|
|
18,159,800
|
|
|
$ |
72,809
|
|
|
|
100.0 |
% |
*
Less than 0.1%
|
(1)
Includes rental revenue for all properties owned by Realty Income
at
September 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
97.8%, or 2,134, of the 2,181 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
81/4% 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.
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 September 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 September 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 |
% |
|
|
--
|
|
|
|
--
|
|
2009(3)
|
|
|
20.0
|
|
|
|
8.00 |
% |
|
|
--
|
|
|
|
--
|
|
2010
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
2011
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Thereafter(4)
|
|
|
1,350.0
|
|
|
|
6.10 |
% |
|
|
--
|
|
|
|
--
|
|
Totals
|
|
$ |
1,470.0
|
|
|
|
6.28 |
% |
|
$ |
--
|
|
|
|
-- |
% |
Fair
Value(5)
|
|
$ |
1,425.3
|
|
|
|
|
|
|
$ |
--
|
|
|
|
|
|
|
(1)
$100 million matures in November
2008.
|
|
(2)
The credit facility expires in October 2008. There was no
outstanding credit facility balance as of September 30, 2007 and
October
25, 2007.
|
|
(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, $550 million matures in August 2019 and $100 million matures in
March 2035.
|
|
(5)
We base the fair value of the fixed rate debt at September 30, 2007
on the
closing market price or indicative price per each
note.
|
The
table incorporates only those exposures that exist as of September 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 balance is variable. At September 30, 2007, our credit
facility balance was zero; however, we intend to borrow funds on our credit
facility in the future. Based on a hypothetical credit facility
borrowing of $50 million, a 1% change in interest rates would change our
interest costs by $500,000 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 September 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.
There
have been no material changes in our risk factors from those disclosed in our
2006 Annual Report on Form 10-K, with the exception of the
following:
The
United States credit markets have recently experienced significant dislocations
and liquidity disruptions which have caused the spreads on prospective debt
financings to widen considerably. These circumstances have materially impacted
liquidity in the debt markets, making financing terms for borrowers less
attractive, and in certain cases have resulted in the unavailability of certain
types of debt financing. Continued uncertainty in the credit markets may
negatively impact our ability to access additional debt financing at reasonable
terms, which may negatively affect our ability to make acquisitions. A prolonged
downturn in the credit markets may cause us to seek alternative sources of
potentially less attractive financing, and may require us to adjust our business
plan accordingly. In addition, these factors may make it more difficult for
us
to sell properties or may adversely affect the price we receive for properties
that we do sell, as prospective buyers may experience increased costs of debt
financing or difficulties in obtaining debt financing. These events in the
credit markets have also had an adverse effect on other financial markets in
the
United States, which may make it more difficult or costly for us to raise
capital through the issuance of our common stock or preferred stock. These
disruptions in the financial markets may have other adverse effects on us or
the
economy generally.
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 73/8% 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 73/8% 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 63/4% 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 to the Company’s Form 8-K,
dated October 27, 1998 and incorporated herein by
reference).
|
|
4.2
|
|
Form
of
81/4% 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
53/8% 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 53/8%
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
51/2% 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 51/2%
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
57/8% 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
57/8%
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
53/8% 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 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 53/8%
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 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 5.95% 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).
|
|
4.15
|
|
Form
of
63/4% Notes due 2019 (filed as exhibit 4.2 to Company’s Form
8-K, dated August 30, 2007 and incorporated herein by
reference).
|
|
4.16
|
|
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 Trust
Company, N.A., as Trustee, establishing a series of securities
entitled
63/4% Senior Notes due 2019 (filed as exhibit 4.3 to the
Company’s Form 8-K, dated August 30, 2007 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 (filed as exhibit 10.1 to the
Company’s
Form 10-Q, dated June 30, 2007 and incorporated herein by
reference).
|
|
10.2
|
|
Form
of Restricted Stock Agreement (filed as exhibit 10.2 to the Company’s Form
10-Q, dated June 30, 2007 and incorporated herein by
reference).
|
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
|
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:
October 31, 2007
|
/s/
GREGORY J. FAHEY
|
|
Gregory
J. Fahey
|
|
Vice
President, Controller
|
|
(Principal
Accounting Officer)
|
50