ricq208_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 June 30, 2008, 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, a non-accelerated filer, or a smaller reporting company (as
defined in Rule 12b-2 of the Exchange Act).
Large
accelerated filer x Accelerated
filer o Non-accelerated
filer o Smaller
reporting company 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 101,340,803 shares of common stock outstanding as of July 21,
2008.
REALTY
INCOME CORPORATION
Form
10-Q
June
30, 2008
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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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6 |
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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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23 |
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28 |
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36 |
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38 |
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43 |
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43 |
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43 |
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Item
3:
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43 |
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Item
4:
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44 |
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Item
1A:
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45 |
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Item
4:
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45 |
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Item
6:
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46 |
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48 |
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REALTY
INCOME CORPORATION AND SUBSIDIARIES
June
30, 2008 and December 31, 2007
(dollars
in thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
(unaudited)
|
|
|
|
|
Real
estate, at cost:
|
|
|
|
|
|
|
Land
|
|
$ |
1,161,705 |
|
|
$ |
1,110,897 |
|
Buildings
and improvements
|
|
|
2,250,919 |
|
|
|
2,127,897 |
|
|
|
|
3,412,624 |
|
|
|
3,238,794 |
|
Less
accumulated depreciation and amortization
|
|
|
(512,082 |
) |
|
|
(470,695 |
) |
Net
real estate held for investment
|
|
|
2,900,542 |
|
|
|
2,768,099 |
|
Real
estate held for sale, net
|
|
|
13,892 |
|
|
|
56,156 |
|
Net
real estate
|
|
|
2,914,434 |
|
|
|
2,824,255 |
|
Cash
and cash equivalents
|
|
|
39,373 |
|
|
|
193,101 |
|
Accounts
receivable
|
|
|
9,130 |
|
|
|
7,142 |
|
Goodwill
|
|
|
17,206 |
|
|
|
17,206 |
|
Other
assets, net
|
|
|
62,794 |
|
|
|
35,648 |
|
Total
assets
|
|
$ |
3,042,937 |
|
|
$ |
3,077,352 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Distributions
payable
|
|
$ |
16,006 |
|
|
$ |
15,844 |
|
Accounts
payable and accrued expenses
|
|
|
37,377 |
|
|
|
38,112 |
|
Other
liabilities
|
|
|
11,233 |
|
|
|
15,304 |
|
Lines
of credit payable
|
|
|
-- |
|
|
|
-- |
|
Notes
payable
|
|
|
1,470,000 |
|
|
|
1,470,000 |
|
Total
liabilities
|
|
|
1,534,616 |
|
|
|
1,539,260 |
|
|
|
|
|
|
|
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|
|
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 2008 and 2007
|
|
|
337,790 |
|
|
|
337,790 |
|
Common
stock and paid in capital, par value $1.00 per share,
|
|
|
|
|
|
|
|
|
200,000,000
shares authorized, 101,341,289 and 101,082,717
|
|
|
|
|
|
|
|
|
shares
issued and outstanding in 2008 and 2007, respectively
|
|
|
1,548,052 |
|
|
|
1,545,037 |
|
Distributions
in excess of net income
|
|
|
(377,521 |
) |
|
|
(344,735 |
) |
Total
stockholders’ equity
|
|
|
1,508,321 |
|
|
|
1,538,092 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
3,042,937 |
|
|
$ |
3,077,352 |
|
The
accompanying notes to consolidated financial statements are an integral
part of these statements.
|
REALTY
INCOME CORPORATION AND SUBSIDIARIES
For the
three and six months ended June 30, 2008 and 2007
(dollars
in thousands, except per share data)
(unaudited)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$ |
82,352 |
|
|
$ |
70,112 |
|
|
$ |
163,948 |
|
|
$ |
138,895 |
|
Other
|
|
|
80 |
|
|
|
213 |
|
|
|
1,529 |
|
|
|
2,365 |
|
|
|
|
82,432 |
|
|
|
70,325 |
|
|
|
165,477 |
|
|
|
141,260 |
|
|
|
|
|
|
|
|
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|
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|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
Interest
|
|
|
23,929 |
|
|
|
13,029 |
|
|
|
47,315 |
|
|
|
25,449 |
|
Depreciation
and amortization
|
|
|
22,916 |
|
|
|
18,414 |
|
|
|
45,830 |
|
|
|
36,435 |
|
General
and administrative
|
|
|
5,924 |
|
|
|
5,838 |
|
|
|
11,467 |
|
|
|
10,929 |
|
Property
|
|
|
1,093 |
|
|
|
958 |
|
|
|
2,354 |
|
|
|
1,816 |
|
Income
taxes
|
|
|
218 |
|
|
|
353 |
|
|
|
615 |
|
|
|
598 |
|
|
|
|
54,080 |
|
|
|
38,592 |
|
|
|
107,581 |
|
|
|
75,227 |
|
Income
from continuing operations
|
|
|
28,352 |
|
|
|
31,733 |
|
|
|
57,896 |
|
|
|
66,033 |
|
Income
from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate acquired for resale by Crest
|
|
|
1,295 |
|
|
|
4,282 |
|
|
|
1,101 |
|
|
|
6,030 |
|
Real
estate held for investment
|
|
|
3,404 |
|
|
|
921 |
|
|
|
3,816 |
|
|
|
1,197 |
|
|
|
|
4,699 |
|
|
|
5,203 |
|
|
|
4,917 |
|
|
|
7,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
33,051 |
|
|
|
36,936 |
|
|
|
62,813 |
|
|
|
73,260 |
|
Preferred
stock cash dividends
|
|
|
(6,063 |
) |
|
|
(6,063 |
) |
|
|
(12,127 |
) |
|
|
(12,127 |
) |
Net
income available to common stockholders
|
|
$ |
26,988 |
|
|
$ |
30,873 |
|
|
$ |
50,686 |
|
|
$ |
61,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
available to common stockholders per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations, basic and diluted
|
|
$ |
0.22 |
|
|
$ |
0.26 |
|
|
$ |
0.46 |
|
|
$ |
0.54 |
|
Net
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.27 |
|
|
$ |
0.31 |
|
|
$ |
0.51 |
|
|
$ |
0.61 |
|
Diluted
|
|
$ |
0.27 |
|
|
$ |
0.31 |
|
|
$ |
0.50 |
|
|
$ |
0.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
100,346,512 |
|
|
|
100,133,094 |
|
|
|
100,326,039 |
|
|
|
100,111,734 |
|
Diluted
|
|
|
100,394,431 |
|
|
|
100,246,112 |
|
|
|
100,420,692 |
|
|
|
100,304,617 |
|
The
accompanying notes to consolidated financial statements are an integral part of
these statements.
REALTY
INCOME CORPORATION AND SUBSIDIARIES
For the
six months ended June 30, 2008 and 2007
(dollars
in thousands)(unaudited)
|
|
2008
|
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
income
|
|
$ |
62,813 |
|
|
$ |
73,260 |
|
Adjustments
to net income:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
45,830 |
|
|
|
36,435 |
|
Income
from discontinued operations:
|
|
|
|
|
|
|
|
|
Real
estate acquired for resale
|
|
|
(1,101 |
) |
|
|
(6,030 |
) |
Real
estate held for investment
|
|
|
(3,816 |
) |
|
|
(1,197 |
) |
Gain
on sales of land
|
|
|
(236 |
) |
|
|
(1,806 |
) |
Amortization
of share-based compensation
|
|
|
2,853 |
|
|
|
2,196 |
|
Cash
provided by (used in) discontinued operations:
|
|
|
|
|
|
|
|
|
Real
estate acquired for resale
|
|
|
4 |
|
|
|
(536 |
) |
Real
estate held for investment
|
|
|
442 |
|
|
|
829 |
|
Investment in real estate acquired for resale
|
|
|
(8 |
) |
|
|
-- |
|
Proceeds from sales of real estate acquired for resale
|
|
|
26,920 |
|
|
|
65,786 |
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable and other assets
|
|
|
(232 |
) |
|
|
990 |
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
(4,277 |
) |
|
|
2,330 |
|
Net
cash provided by operating activities
|
|
|
129,192 |
|
|
|
172,257 |
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from sales of investment properties:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
439 |
|
|
|
3,842 |
|
Discontinued operations
|
|
|
822 |
|
|
|
1,493 |
|
Acquisition
of and improvements to investment properties
|
|
|
(185,309 |
) |
|
|
(97,672 |
) |
Intangibles
acquired in connection with acquisitions of
|
|
|
|
|
|
|
|
|
investment
properties
|
|
|
(397 |
) |
|
|
(319 |
) |
Restricted
escrow funds acquired in connection with
|
|
|
|
|
|
|
|
|
acquisitions
of investment properties
|
|
|
-- |
|
|
|
(2,648 |
) |
Net
cash used in investing activities
|
|
|
(184,445 |
) |
|
|
(95,304 |
) |
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Cash
distributions to common stockholders
|
|
|
(83,310 |
) |
|
|
(76,863 |
) |
Cash
dividends to preferred stockholders
|
|
|
(12,127 |
) |
|
|
(12,457 |
) |
Debt
issuance costs
|
|
|
(3,200 |
) |
|
|
-- |
|
Borrowings
from lines of credit
|
|
|
-- |
|
|
|
135,400 |
|
Payments
under lines of credit
|
|
|
-- |
|
|
|
(125,400 |
) |
Proceeds
from other stock issuances
|
|
|
162 |
|
|
|
708 |
|
Net
cash used in financing activities
|
|
|
(98,475 |
) |
|
|
(78,612 |
) |
Net
decrease in cash and cash equivalents
|
|
|
(153,728 |
) |
|
|
(1,659 |
) |
Cash
and cash equivalents, beginning of period
|
|
|
193,101 |
|
|
|
10,573 |
|
Cash
and cash equivalents, end of period
|
|
$ |
39,373 |
|
|
$ |
8,914 |
|
For
supplemental disclosures, see note 12.
The
accompanying notes to consolidated financial statements are an integral part of
these statements.
REALTY
INCOME CORPORATION AND SUBSIDIARIES
June
30, 2008
(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 period
presented. Certain of the 2007 balances have been reclassified to conform to the
2008 presentation. Readers of this quarterly report should refer to
our audited financial statements for the year ended December 31, 2007, which are
included in our 2007 Annual Report on Form 10-K, as certain disclosures that
would substantially duplicate those contained in the audited financial
statements have not been included in this report.
At June
30, 2008, we owned 2,367 properties, located in 49 states, containing over
19.2 million leasable square feet, along with 8 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 and Recent Accounting
Pronouncements
|
A. The
accompanying consolidated financial statements include the accounts of Realty
Income, Crest and other entities for which we make operating and financial
decisions (i.e., control), after elimination of all material intercompany
balances and transactions. All of Realty Income’s and Crest’s
subsidiaries are wholly-owned. We have no unconsolidated or
off-balance sheet investments in variable interest entities.
B. We
have elected to be taxed as a real estate investment trust (“REIT”) under the
Tax Code. We believe we have at all times in the past qualified and do continue
to qualify as a REIT. Under the REIT operating structure, we are
permitted to deduct distributions paid to our stockholders and generally are not
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 the 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 was $707,000 at June 30, 2008 and $795,000 at
December 31, 2007.
|
|
June
30,
|
|
|
December
31,
|
|
D. Other
assets consist of the following (dollars in thousands) at:
|
|
2008
|
|
|
2007
|
|
Notes
issued in conjunction with Crest property sales
|
|
$ |
22,338 |
|
|
$ |
3,132 |
|
Deferred
bond financing costs, net
|
|
|
14,054 |
|
|
|
14,940 |
|
Value
of in-place and above-market leases, net
|
|
|
11,073 |
|
|
|
11,211 |
|
Escrow
deposits for Section 1031 tax-deferred exchanges
|
|
|
6,901 |
|
|
|
-- |
|
Prepaid
expenses
|
|
|
3,589 |
|
|
|
3,803 |
|
Unamortized
credit facility fees, net
|
|
|
3,125 |
|
|
|
434 |
|
Corporate
assets, net of accumulated depreciation and amortization
|
|
|
1,379 |
|
|
|
1,356 |
|
Settlements
on treasury lock agreements
|
|
|
324 |
|
|
|
759 |
|
Other
items
|
|
|
11 |
|
|
|
13 |
|
|
|
$ |
62,794 |
|
|
$ |
35,648 |
|
|
|
|
|
|
|
|
E. Accounts
payable and accrued expenses consist of the
|
|
June
30,
|
|
|
December
31,
|
|
following
(dollars in thousands) at:
|
|
2008
|
|
|
2007
|
|
Bond
interest payable
|
|
$ |
27,049 |
|
|
$ |
24,987 |
|
Other
items
|
|
|
10,328 |
|
|
|
13,125 |
|
|
|
$ |
37,377 |
|
|
$ |
38,112 |
|
|
|
June
30,
|
|
|
December
31,
|
|
F. Other
liabilities consist of the following (dollars in thousands)
at:
|
|
2008
|
|
|
2007
|
|
Rent
received in advance
|
|
$ |
5,619 |
|
|
$ |
10,626 |
|
Security
deposits
|
|
|
3,845 |
|
|
|
2,818 |
|
Value
of in-place below-market leases, net
|
|
|
1,769 |
|
|
|
1,860 |
|
|
|
$ |
11,233 |
|
|
$ |
15,304 |
|
G. Impact
of Recent Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141R (revised 2007), Business
Combinations. Effective January 1, 2009, Statement No. 141R
will change the accounting treatment and disclosures for certain specific items
in a business combination. Under Statement No. 141R, an acquiring
entity will be required to recognize all the assets acquired and liabilities
assumed in a transaction at the acquisition-date fair value with limited
exceptions. We do not expect Statement No. 141R to have an impact on
our financial position or results of operations.
In
June 2008, the FASB issued FASB Staff Position (“FSP”) EITF No. 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities. FSP EITF No. 03-6-1 clarified that all
outstanding nonvested share-based payment awards that contain rights to
nonforfeitable dividends are considered “participating securities,” as defined
by FSP EITF No. 03-6-1,which require the two-class method of computing
basic and diluted earnings per share to be applied. FSP
EITF No. 03-6-1 is effective for fiscal years beginning after December
15, 2008. We are currently assessing the impact of FSP EITF No.
03-6-1 on our calculation of basic and diluted earnings per share.
3.
|
Retail
Properties Acquired
|
We
acquire land, buildings and improvements that are used by retail
operators.
A. During
the first six months of 2008, Realty Income invested $184.2 million in 107
new retail properties and properties under development with an initial weighted
average contractual lease rate of 8.7%. These 107 properties are
located in 14 states, will contain over 711,000 leasable square feet, and are
100% leased with an average lease term of 20.6 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 six months of 2007, Realty Income invested
$98.3 million in 46 new retail properties and properties under
development. These 46 properties are located in 12 states, contain
over 554,000 leasable square feet, and are 100% leased with an average lease
term of 19.1 years.
B. During
the first six months of 2008 and 2007, Crest did not invest in any new retail
properties.
C. Crest’s
property inventory at June 30, 2008 consisted of eight properties with a total
investment of $10.4 million and at December 31, 2007 consisted of 30
properties with a total investment of $56.2 million. These
amounts are included on our consolidated balance sheets in “real estate held for
sale, net.”
D. Of
the $184.2 million invested by Realty Income in the first six months of 2008,
$10.0 million was used to acquire two properties with existing leases with
retail tenants. In accordance with Statement No. 141, Realty Income
recorded $397,000 as the intangible value of the in-place
leases. This amount is recorded to “other assets” on our consolidated
balance sheets and amortized over the life of the leases.
Of the
$98.3 million invested by Realty Income in the first six months of 2007, $7.1
million was used to acquire one property with an existing lease with a retail
tenant. In accordance with Statement No. 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 to “other assets” and “other liabilities,” respectively, on our
consolidated balance sheets and are amortized over the life of the
lease.
In May
2008, we entered into a new $355 million acquisition credit facility replacing
our existing $300 million acquisition credit facility that was scheduled to
expire in October 2008. The term of the new credit facility is for
three years until May 2011, plus two, one-year extension
options. Under the new credit facility, our investment grade credit
ratings provide for financing at LIBOR (London Interbank Offered Rate) plus 100
basis points with a facility commitment fee of 27.5 basis points, for all-in
drawn pricing of 127.5 basis points over LIBOR.
As a
result of entering into our new credit facility in May 2008, we expensed
$235,000 of unamortized credit facility origination costs from our prior credit
facility in the second quarter of 2008, which are included in interest
expense.
We did
not utilize our credit facility during the first six months of
2008. The effective borrowing rate at June 30, 2008 was 3.5%.
Our average borrowing rate on our credit facility during the first six months of
2007 was 6.0%. Our current and prior credit facilities are subject to
various leverage and interest coverage ratio limitations. We are and have been
in compliance with these covenants.
Our
credit facility is unsecured and, accordingly, we have not pledged any assets as
collateral for this obligation.
Our
senior unsecured note obligations consist of the following, sorted by maturity
date at both June 30, 2008 and December 31, 2007 (dollars in
millions):
|
|
|
|
8.25%
notes, issued in October 1998 and due in November 2008
|
|
$ |
100.0 |
|
8%
notes, issued in January 1999 and due in January 2009
|
|
|
20.0 |
|
5.375%
notes, issued in March 2003 and due in March 2013
|
|
|
100.0 |
|
5.5%
notes, issued in November 2003 and due in November 2015
|
|
|
150.0 |
|
5.95%
notes, issued in September 2006 and due in September 2016
|
|
|
275.0 |
|
5.375%
notes, issued in September 2005 and due in September 2017
|
|
|
175.0 |
|
6.75%
notes, issued in September 2007 and due in August 2019
|
|
|
550.0 |
|
5.875%
bonds, issued in March 2005 and due in March 2035
|
|
|
100.0 |
|
|
|
$ |
1,470.0 |
|
We
anticipate paying off the notes due in 2008 and 2009 by using cash on hand,
utilizing our credit facility or issuing new securities.
6. Fair
Value of Financial Assets and Liabilities
FASB
Statement No. 157, Fair Value
Measurements, became effective for us at the beginning of 2008 and
did not have an impact on our financial position or results of
operations. In February 2008, the FASB delayed the effective date of
Statement No. 157 for non-financial assets and non-financial liabilities, except
for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis, to the beginning of 2009.
Statement
No. 157 defines fair value as the price that would be received from the sale of
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date, and establishes a framework for
measuring fair value. Statement No. 157 also establishes a
three-level valuation hierarchy for disclosure of fair value
measurements. The valuation hierarchy is based upon the transparency
of inputs to the valuation of an asset or liability as of the measurement
date. A financial instrument’s categorization within this hierarchy
is based upon the lowest level of input that is significant to the fair value
measurement. This statement applies to fair value measurements and
disclosures that are already required or permitted by most existing FASB
accounting standards.
We
believe that the carrying values reflected in the consolidated balance sheets at
June 30, 2008 and December 31, 2007 reasonably approximate the fair values for
cash and cash equivalents, accounts receivable, and all liabilities, due to
their short-term nature, except for notes payable. In making these
assessments, we used estimates. The estimated fair value of the notes
payable at June 30, 2008 is $1.349 billion and at December 31, 2007 is $1.413
billion, based upon the closing market price per note or indicative price per
each note at June 30, 2008 and December 31, 2007, respectively.
7.
|
Gain
on Sales of Real Estate Acquired for Resale by
Crest
|
During
the second quarter of 2008, Crest sold seven properties for $28.6 million,
which resulted in a gain of $1.7 million. As part of two sales
during the second quarter and first six months of 2008, Crest provided buyer
financing of $19.2 million. In comparison, during the second quarter
of 2007, Crest sold 26 properties for $56.2 million, which resulted in a
gain of $5.3 million. In the second quarter of 2007, as part of one
sale, Crest provided buyer financing of $619,000. Crest’s gains on
sales are reported before income taxes and are included in discontinued
operations.
During
the first six months of 2008, Crest sold 22 properties for $46.1 million, which
resulted in a gain of $4.4 million. In comparison, during the first
six months of 2007, Crest sold 31 properties for $69.5 million, which resulted
in a gain of $6.6 million. In the first six months of 2007, as part
of two sales, Crest provided buyer financing of $3.8 million.
8.
|
Gain
on Sales of Investment Properties by Realty
Income
|
During
the second quarter of 2008, we sold eight investment properties for $7.4
million, which resulted in a gain of $3.3 million. The results of
operations for these properties have been reclassified as discontinued
operations. Additionally, we recorded an adjustment of $203,000 from
the sale of excess land from one property. This adjustment is
included in “other revenue” on our consolidated statements of income because
this property continues to be owned as part of our core operations.
In
comparison, during the second quarter of 2007, we sold two investment properties
for a total of $1.0 million, which resulted in a gain of
$585,000. The results of operations for these properties have been
reclassified as discontinued operations.
During
the first six months of 2008, we sold nine investment properties for $7.8
million, which resulted in a gain of $3.5 million. The results of
operations for these properties have been reclassified as discontinued
operations. Additionally, we received proceeds of $439,000 from a
sale of excess land from one property, which resulted in a gain of
$236,000. This gain is included in “other revenue” on our
consolidated statements of income because this property continues to be owned as
part of our core operations.
In
comparison, during the first six months of 2007, we sold three investment
properties for $1.5 million, which resulted in a gain of $585,000. The results
of operations for these properties have been reclassified as discontinued
operations. In addition, we sold excess land from three
properties for $3.8 million, which resulted in a gain of $1.8
million. The gain from the land sales is reported in “other revenue”
on our consolidated statements of income because these properties continue to be
owned as part of our core operations.
9.
|
Discontinued
Operations
|
In
accordance with FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, Realty Income’s operations from eight
investment properties classified as held for sale at June 30, 2008, plus
properties sold in 2008 and 2007, 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
typically classify properties acquired by Crest as held for sale at the date of
acquisition and do not depreciate them. In accordance with Statement
No. 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 held for sale are included in “income
from discontinued operations, real estate acquired for resale by Crest” on our
consolidated statements of income.
If
circumstances arise, which were previously considered unlikely and, as a result,
we decide not to sell a property previously classified as held for sale, the
property is reclassified as real estate held for investment. A
property that is reclassified to held for investment is measured and recorded at
the lower of (i) its carrying amount before the property was classified as held
for sale, adjusted for any depreciation expense that would have been recognized
had the property been continuously classified as held for investment, or (ii)
the fair value at the date of the subsequent decision not to sell.
A
provision for impairment of $953,000 was recorded by Crest on one property held
for sale in the second quarter of 2008. Provisions for impairment of
$3.3 million were recorded by Crest on three properties held for sale in the
first six months of 2008. No provisions for impairment were recorded
by Crest in the first six months of 2007. These provisions for
impairment are included in “income from discontinued operations, real estate
acquired for resale by Crest.” The provisions for impairment recorded
in the first six months of 2008 reduced the carrying values to the estimated
fair-market value of those properties, net of estimated selling
costs. These three properties were leased to a subsidiary of Buffets,
Inc. (“Buffets”) and the leases were guaranteed by Buffets.
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):
|
|
Three
months ended
|
|
|
Six
months ended
|
|
Crest’s
income from discontinued operations,
real
estate acquired for resale
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
Gain
on sales of real estate acquired for resale
|
|
$ |
1,737 |
|
|
$ |
5,326 |
|
|
$ |
4,444 |
|
|
$ |
6,566 |
|
Rental
revenue
|
|
|
598 |
|
|
|
2,310 |
|
|
|
1,634 |
|
|
|
5,188 |
|
Other
revenue
|
|
|
138 |
|
|
|
55 |
|
|
|
208 |
|
|
|
61 |
|
Interest
expense
|
|
|
(433 |
) |
|
|
(1,758 |
) |
|
|
(1,065 |
) |
|
|
(3,877 |
) |
General
and administrative expense
|
|
|
(126 |
) |
|
|
(179 |
) |
|
|
(287 |
) |
|
|
(282 |
) |
Property
expenses
|
|
|
(53 |
) |
|
|
(9 |
) |
|
|
(65 |
) |
|
|
(14 |
) |
Provisions
for impairment
|
|
|
(953 |
) |
|
|
-- |
|
|
|
(3,347 |
) |
|
|
-- |
|
Income
taxes
|
|
|
387 |
|
|
|
(1,463 |
) |
|
|
(421 |
) |
|
|
(1,612 |
) |
Income
from discontinued operations,
real
estate acquired for resale by Crest
|
|
$ |
1,295 |
|
|
$ |
4,282 |
|
|
$ |
1,101 |
|
|
$ |
6,030 |
|
The
following is a summary of Realty Income’s “income from discontinued operations,
from real estate held for investment” on our consolidated statements of income
(dollars in thousands):
|
|
Three
months ended
|
|
|
Six
months ended
|
|
Realty
Income’s income from discontinued operations,
real
estate held for investment
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
Gain
on sales of investment properties
|
|
$ |
3,255 |
|
|
$ |
585 |
|
|
$ |
3,473 |
|
|
$ |
585 |
|
Rental
revenue
|
|
|
206 |
|
|
|
447 |
|
|
|
474 |
|
|
|
853 |
|
Depreciation
and amortization
|
|
|
(39 |
) |
|
|
(104 |
) |
|
|
(99 |
) |
|
|
(217 |
) |
Property
expenses
|
|
|
(18 |
) |
|
|
(7 |
) |
|
|
(32 |
) |
|
|
(24 |
) |
Income
from discontinued operations,
real
estate held for investment
|
|
$ |
3,404 |
|
|
$ |
921 |
|
|
$ |
3,816 |
|
|
$ |
1,197 |
|
The
following is a summary of our total income from discontinued operations (dollars
in thousands, except per share data):
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
Real
estate acquired for resale by Crest
|
|
$ |
1,295 |
|
|
$ |
4,282 |
|
|
$ |
1,101 |
|
|
$ |
6,030 |
|
Real
estate held for investment
|
|
|
3,404 |
|
|
|
921 |
|
|
|
3,816 |
|
|
|
1,197 |
|
Income
from discontinued operations
|
|
$ |
4,699 |
|
|
$ |
5,203 |
|
|
$ |
4,917 |
|
|
$ |
7,227 |
|
Per
common share, basic and diluted
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.07 |
|
10. Distributions
Paid and Payable
A. Common
Stock
We pay
monthly distributions to our common stockholders. The following is a
summary of the monthly distributions paid per common share for the first six
months of 2008 and 2007:
Month
|
|
2008
|
|
|
2007
|
|
January
|
|
$ |
0.136750 |
|
|
$ |
0.126500 |
|
February
|
|
|
0.136750 |
|
|
|
0.126500 |
|
March
|
|
|
0.136750 |
|
|
|
0.126500 |
|
April
|
|
|
0.137375 |
|
|
|
0.127125 |
|
May
|
|
|
0.137375 |
|
|
|
0.127125 |
|
June
|
|
|
0.137375 |
|
|
|
0.127125 |
|
Total
|
|
$ |
0.822375 |
|
|
$ |
0.760875 |
|
At June
30, 2008, a distribution of $0.138 per common share was payable and was paid in
July 2008.
B. Preferred
Stock
In
2004, we issued 5.1 million shares of 7.375% 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 six months of 2008 and 2007, we paid six
monthly dividends to holders of our Class D preferred stock totaling $0.9218754
per share, or $4.7 million, and at June 30, 2008 a monthly dividend of
$0.1536459 per share was payable and was paid in July 2008.
In
2006, we issued 8.8 million shares of 6.75% Monthly Income Class E cumulative
redeemable preferred stock. Beginning December 7, 2011, the Class E
preferred shares are redeemable, at our option, for $25 per
share. During the first six months of 2008, we paid six monthly
dividends to holders of our Class E preferred stock totaling $0.84375 per share,
or $7.4 million, and at June 30, 2008 a monthly dividend of $0.140625 per share
was payable and was paid in July 2008. During the first six months of
2007, we paid six monthly dividends to holders of our Class E preferred stock
totaling $0.88125 per share, or $7.8 million. In January 2007,
we paid the first Class E preferred dividend of $0.178125, which covered a
period of 38 days.
11.
|
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
|
|
|
Six
months ended
|
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
Weighted
average shares used for the basic net income per share
computation
|
|
|
100,346,512 |
|
|
|
100,133,094 |
|
|
|
100,326,039 |
|
|
|
100,111,734 |
|
Incremental
shares from share-based compensation
|
|
|
47,919 |
|
|
|
113,018 |
|
|
|
94,653 |
|
|
|
192,883 |
|
Adjusted
weighted average shares used for diluted net income per share
computation
|
|
|
100,394,431 |
|
|
|
100,246,112 |
|
|
|
100,420,692 |
|
|
|
100,304,617 |
|
Unvested
shares from share-based compensation that were
anti-dilutive
|
|
|
620,670 |
|
|
|
267,231 |
|
|
|
620,770 |
|
|
|
600 |
|
No
stock options were anti-dilutive for the three and six months ended June 30,
2008 and 2007.
12.
|
Supplemental
Disclosures of Cash Flow
Information
|
Interest
paid in the first six months of 2008 was $44.5 million and in the first six
months of 2007 was $28.4 million.
Interest
capitalized to properties under development in the first six months of 2008 was
$55,000 and in the first six months of 2007 was $471,000.
Income
taxes paid by Realty Income and Crest in the first six months of 2008 totaled
$1.5 million and in the first six months of 2007 totaled $2.7
million.
The
following non-cash investing and financing activities are included in the
accompanying consolidated financial statements:
A. Share-based
compensation expense for the first six months of 2008 was $2.9 million and
for the first six months of 2007 was $2.2 million.
B. In
the first six months of 2008, Crest sold two properties for $23.5 million and
received notes totaling $19.2 million from the buyers, which are included in
“other assets” on our consolidated balance sheets.
C. At
June 30, 2008, Realty Income had escrow deposits of $6.9 million for
tax-deferred exchanges under Section 1031 of the Tax Code.
D. See
note 9 for a discussion of impairments recorded by Crest in the first six months
of 2008.
E. In
the first six months of 2007, Crest sold two properties for $5.5 million and
received notes totaling $3.8 million from the buyers, which are included in
“other assets” on our consolidated balance sheets.
F. In
connection with the acquisition of seven properties during the first six months
of 2007, we acquired restricted escrow funds totaling $2.6
million. We only had limited rights regarding the use of these
funds. During the remainder of 2007, all of these funds were invested
in improvements to these seven properties.
G. Distributions
payable on our balance sheets are comprised of the following declared
distributions as of June 30, 2008 and December 31, 2007 (dollars in
thousands):
|
|
2008
|
|
|
2007
|
|
Common
stock distributions
|
|
$ |
13,985 |
|
|
$ |
13,823 |
|
Preferred
stock dividends
|
|
|
2,021 |
|
|
|
2,021 |
|
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 as a segment). All of the properties are incorporated into
one of the applicable segments. Because almost all of our leases require the
tenant to pay operating expenses, revenue is the only component of segment
profit and loss we measure.
The
following tables set forth certain information regarding the properties owned by
us, classified according to the business of the respective tenants as of June
30, 2008 (dollars in thousands):
|
|
Three
months ended
|
|
|
Six
months ended
|
|
Revenue
|
|
June
30, 2008
|
|
|
June
30, 2007
|
|
|
June
30, 2008
|
|
|
June
30, 2007
|
|
Segment
rental revenue(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
service
|
|
$ |
3,958 |
|
|
$ |
3,709 |
|
|
$ |
7,959 |
|
|
$ |
7,409 |
|
Automotive
tire services
|
|
|
5,508 |
|
|
|
5,283 |
|
|
|
10,991 |
|
|
|
10,565 |
|
Child
care
|
|
|
6,182 |
|
|
|
6,066 |
|
|
|
12,491 |
|
|
|
12,117 |
|
Convenience
stores
|
|
|
13,345 |
|
|
|
9,854 |
|
|
|
25,084 |
|
|
|
19,486 |
|
Drug
stores
|
|
|
3,481 |
|
|
|
1,941 |
|
|
|
6,360 |
|
|
|
3,882 |
|
Health
and fitness
|
|
|
4,567 |
|
|
|
3,871 |
|
|
|
9,089 |
|
|
|
6,886 |
|
Home
furnishings
|
|
|
1,924 |
|
|
|
2,002 |
|
|
|
3,859 |
|
|
|
3,916 |
|
Motor
vehicle dealerships
|
|
|
2,601 |
|
|
|
2,358 |
|
|
|
5,153 |
|
|
|
4,721 |
|
Restaurants
|
|
|
17,832 |
|
|
|
13,339 |
|
|
|
37,016 |
|
|
|
26,547 |
|
Theaters
|
|
|
7,463 |
|
|
|
6,514 |
|
|
|
14,644 |
|
|
|
13,028 |
|
21
non-reportable segments
|
|
|
15,491 |
|
|
|
15,175 |
|
|
|
31,302 |
|
|
|
30,338 |
|
Total
rental revenue
|
|
|
82,352 |
|
|
|
70,112 |
|
|
|
163,948 |
|
|
|
138,895 |
|
Other
revenue
|
|
|
80 |
|
|
|
213 |
|
|
|
1,529 |
|
|
|
2,365 |
|
Total
revenue
|
|
$ |
82,432 |
|
|
$ |
70,325 |
|
|
$ |
165,477 |
|
|
$ |
141,260 |
|
(1)
Crest’s revenue appears in “income from discontinued operations, real estate
acquired for resale by Crest” and is not included in this table, which covers
revenue but does not include revenue classified as part of income from
discontinued operations.
|
|
June
30,
|
|
|
December
31,
|
|
Assets,
as of:
|
|
2008
|
|
|
2007
|
|
Segment
net real estate:
|
|
|
|
|
|
|
Automotive
service
|
|
$ |
108,555 |
|
|
$ |
110,100 |
|
Automotive
tire services
|
|
|
211,265 |
|
|
|
212,747 |
|
Child
care
|
|
|
88,209 |
|
|
|
90,757 |
|
Convenience
stores
|
|
|
478,788 |
|
|
|
408,119 |
|
Drug
stores
|
|
|
147,968 |
|
|
|
100,154 |
|
Health
and fitness
|
|
|
169,270 |
|
|
|
169,109 |
|
Home
furnishings
|
|
|
53,529 |
|
|
|
54,509 |
|
Motor
vehicle dealerships
|
|
|
106,505 |
|
|
|
101,887 |
|
Restaurants
|
|
|
764,809 |
|
|
|
776,973 |
|
Theaters
|
|
|
304,346 |
|
|
|
267,413 |
|
21
non-reportable segments
|
|
|
481,190 |
|
|
|
532,487 |
|
Total
segment net real estate
|
|
|
2,914,434 |
|
|
|
2,824,255 |
|
Other
intangible assets – Drug stores
|
|
|
7,058 |
|
|
|
6,988 |
|
Other
intangible assets – Theaters
|
|
|
2,343 |
|
|
|
2,496 |
|
Other
intangible assets – Grocery stores
|
|
|
937 |
|
|
|
962 |
|
Other
intangible assets – Automotive tire services
|
|
|
735 |
|
|
|
765 |
|
Other
corporate assets
|
|
|
117,430 |
|
|
|
241,886 |
|
Total
assets
|
|
$ |
3,042,937 |
|
|
$ |
3,077,352 |
|
14.
|
Common
Stock Incentive Plan
|
In
2003, our Board of Directors adopted, and our 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, which we consider to be essential to our
long-term success. The Stock Plan offers our directors,
employees and consultants an opportunity to own stock in Realty
Income and/or rights that will reflect our growth, development and
financial success. The Stock Plan was amended and restated by our
Board of Directors in February 2006 and in May 2007.
Effective
January 1, 2006, we adopted FASB Statement No. 123R, Share-Based
Payments. Statement No. 123R requires companies to recognize
in the income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees. Effective January 1,
2002, we adopted the fair value recognition provisions of FASB Statement No.
123, Accounting for
Stock-Based Compensation, and starting January 1, 2002 expensed costs for
all stock option awards granted, modified, or settled.
The
amount of share-based compensation costs charged against income during the
second quarter of 2008 was $1.7 million, during the second quarter of 2007 was
$1.4 million, during the first six months of 2008 was $2.9 million and during
the first six months of 2007 was $2.2 million.
The
following table summarizes our common stock grant activity under our Stock
Plan. Our common stock grants vest over periods ranging from
immediately to 10 years.
|
|
For
the six
months
ended
June
30, 2008
|
|
|
For
the year ended
December
31, 2007
|
|
|
|
Number
of
shares
|
|
|
Weighted
average
price
(1)
|
|
|
Number
of
shares
|
|
|
Weighted
average
price
(1)
|
|
Outstanding
nonvested
|
|
|
|
|
|
|
|
|
|
|
|
|
shares,
beginning of year
|
|
|
994,572 |
|
|
$ |
19.46 |
|
|
|
868,726 |
|
|
$ |
17.96 |
|
Shares
granted
|
|
|
248,447 |
|
|
|
26.64 |
|
|
|
276,631 |
|
|
|
27.64 |
|
Shares
vested
|
|
|
(175,818 |
) |
|
|
21.99 |
|
|
|
(149,284 |
) |
|
|
20.94 |
|
Shares
forfeited
|
|
|
(7,896 |
) |
|
|
24.76 |
|
|
|
(1,501 |
) |
|
|
24.81 |
|
Outstanding
nonvested
shares,
end of each period
|
|
|
1,059,305 |
|
|
$ |
21.64 |
|
|
|
994,572 |
|
|
$ |
19.46 |
|
(1) Grant
date fair value.
During
the first six months of 2008, we issued 248,447 shares of common stock under our
Stock Plan. These shares vest over the following service periods: 24,350 vested
upon grant, 16,000 vest over a service period of one year, 156 vest over a
service period of two years, 12,000 vest over a service period of three years,
3,681 vest over a service period of four years, 91,553 vest over a service
period of five years and 100,707 vest over a service period of 10
years.
As of
June 30, 2008, the remaining unamortized share-based compensation expense
totaled $22.9 million, which is being amortized on a straight-line basis
over the service period of each applicable award.
The
effect of pre-vesting forfeitures on our recorded expense has historically been
negligible. Any future pre-vesting forfeitures are also expected to
be negligible and we will record the benefit related to such forfeitures as they
occur. Under the terms of our Stock Plan, we pay non-refundable
dividends to the holders of our nonvested shares. Under Statement No.
123R, the dividends paid to holders of these nonvested shares should be charged
as compensation expense to the extent that they relate to nonvested shares that
do not or are not expected to vest. Given the negligible historical
and prospective forfeiture rate determined by us, we did not record any amount
to compensation expense related to dividends paid in 2008 or 2007.
No
stock options were granted after January 1, 2002 and all outstanding options
were fully vested as of December 31, 2006. Stock options were granted
with an exercise price equal to the underlying stock’s fair market value at the
date of grant. Stock options expire ten years from the date they were
granted and vested over service periods of one, three, four or five
years. As of June 30, 2008, there were 22,614 vested stock options
outstanding and exercisable with a weighted average exercise price of
$13.28. There were 22,393 stock options exercised in the first six
months of 2008, with a weighted average exercise price of
$12.14. There were no stock option forfeitures in the first six
months of 2008.
15.
|
Commitments
and Contingencies
|
In the
ordinary course of business, we are party to various legal actions which we
believe are routine in nature and incidental to the operation of our business.
We believe that the outcome of the proceedings will not have a material adverse
effect upon our consolidated financial position or results of
operations.
At June
30, 2008, we have committed $6.6 million under construction
contracts. These costs are expected to be paid in the next 12
months. In addition, we also have contingent payments for tenant
improvements and leasing costs of $832,000.
On
January 22, 2008, Buffets Holdings, Inc. (“Buffets Holdings”) together with each
of its subsidiaries, filed voluntary petitions for reorganization under Chapter
11 of the U.S. Bankruptcy Code. Realty Income owned 116 properties and
Crest owned three properties leased to subsidiaries of Buffets, Inc. (”Buffets”)
and guaranteed by Buffets. Buffets is a subsidiary of Buffets
Holdings. In February 2008, Buffets Holdings elected to reject the leases
for 12 properties owned by Realty Income and two properties owned by Crest, and
returned those 14 properties to us. In July 2008, Realty Income reached an
agreement with Buffets Holdings for the continued lease of all of its remaining
properties. Under the terms of the agreement, all 105 of the remaining
leases, including 104 owned by Realty Income and one owned by Crest, will be
assumed and continue to be operated by Buffets Holdings. Rents will be
modified, for the 104 Realty Income properties, from an annualized rent of $22.4
million to $19.4 million, or 87% of previous rents. In addition, rents are
to increase 2% annually. Subsequent to the approval of this
agreement, it is anticipated that Buffets Holdings will continue to be our
largest tenant and will represent approximately 5.9% of Realty Income’s
annualized lease revenue. The agreement has been filed with the Court
for approval and is subject to the requirements of the U.S. Bankruptcy
Code.
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 of 1933 and Section 21E of the Exchange Act of 1934, as amended.
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, 2007.
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. Our 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 and real estate research, portfolio management and
capital markets expertise. Over the past 39 years, Realty Income and its
predecessors have been acquiring and owning freestanding retail properties that
generate rental revenue under long-term lease agreements (primarily 15 to 20
years).
In
addition, we seek to increase distributions to stockholders and FFO per share
through both active portfolio management and the acquisition of additional
properties. Our portfolio management focus includes:
·
|
Contractual
rent increases on existing leases;
|
·
|
Rent
increases at the termination of existing leases, when market conditions
permit; and
|
·
|
The
active management of our property portfolio, including re-leasing vacant
properties and selectively selling
properties.
|
In
acquiring additional properties, we adhere to a focused strategy of primarily
acquiring properties that are:
·
|
Freestanding,
single-tenant, retail locations;
|
·
|
Leased
to regional and national retail chains;
and
|
·
|
Leased
under long-term, net-lease
agreements.
|
At June
30, 2008, we owned a diversified portfolio:
·
|
Of
2,367 retail properties;
|
·
|
With
an occupancy rate of 96.8%, or 2,292 properties occupied of the 2,367
properties in the portfolio;
|
·
|
With
only 75 properties available for
lease;
|
·
|
Leased
to 118 different retail chains doing business in 30 separate retail
industries;
|
·
|
With
over 19.2 million square feet of leasable space;
and
|
·
|
With
an average leasable retail space per property of approximately 8,100
square feet.
|
Of the
2,367 properties in the portfolio, 2,356, or 99.5%, are single-tenant, retail
properties and the remaining 11 are multi-tenant properties. At June 30, 2008,
2,282 of the 2,356 single-tenant properties were leased with a weighted average
remaining lease term (excluding extension options) of approximately
13.0 years.
In
addition, at June 30, 2008, our wholly-owned taxable REIT subsidiary, Crest, had
invested $10.4 million in eight 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”). Crest also holds notes receivable of $22.3
million.
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 98.5%, and the occupancy rate at the end of each
year has never been below 97%.
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 we deem to be profitable for the
retailers;
|
·
|
Properties
that are located within attractive demographic areas relative to the
business of their tenants, with high visibility and easy access to major
thoroughfares; and
|
·
|
Properties
that can be purchased with the simultaneous execution or assumption of
long-term, net-lease agreements, offering both current income and the
potential for rent increases.
|
Acquisitions
During the Second Quarter of 2008
During
the second quarter of 2008, Realty income invested $2.7 million in one new
retail property and properties under development with an initial weighted
average contractual lease rate of 8.5%. This new property will
contain over 5,000 leasable square feet and is leased with a lease term of 20.0
years. The new property acquired by Realty Income is net-leased to a
retail chain in the automotive tire service industry.
Acquisitions
During the First Six Months of 2008
During
the first six months of 2008, Realty Income invested $184.2 million in 107 new
retail properties and properties under development with an initial weighted
average contractual lease rate of 8.7%. These 107 properties are located in 14
states, will contain over 711,000 leasable square feet, and are 100% leased with
an average lease term of 20.6 years. The 107 new properties acquired
by Realty Income are net-leased to eight different retail chains in the
following seven industries: automotive tire service, convenience store, drug
store, financial service, motor vehicle dealership, restaurant and
theater. There were no acquisitions by Crest in the first six months
of 2008.
At June
30, 2008, Realty Income had invested $2.4 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 12 months. At June 30, 2008, we had
outstanding commitments to pay estimated unfunded development costs totaling
approximately $6.6 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 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.
$355
Million Acquisition Credit Facility
In May
2008, we entered into a new $355 million acquisition credit facility replacing
our existing $300 million acquisition credit facility that was scheduled to
expire in October 2008. The term of the new credit facility is for
three years until May 2011, plus two, one-year extension
options. Under the new credit facility, our investment grade credit
ratings provide for financing at the London Interbank Offered Rate, commonly
referred to as LIBOR, plus 100 basis points with a facility fee of 27.5 basis
points, for all-in drawn pricing of 127.5 basis points over LIBOR.
Investments
in Existing Properties
In the
second quarter of 2008, we capitalized costs of $502,000 on existing properties
in our portfolio, consisting of $270,000 for re-leasing costs and $232,000 for
building improvements.
In the
first six months of 2008, we capitalized costs of $1.2 million on existing
properties in our portfolio, consisting of $401,000 for re-leasing costs and
$786,000 for building improvements.
Net
Income Available to Common Stockholders
Net
income available to common stockholders was $27.0 million in the second quarter
of 2008 versus $30.9 million in the same quarter of 2007, a decrease of
$3.9 million. On a diluted per common share basis, net income was $0.27 per
share in the second quarter of 2008 compared to $0.31 in the second quarter of
2007.
Net
income available to common stockholders was $50.7 million in the first six
months of 2008 versus $61.1 million in the same period of 2007, a decrease of
$10.4 million. On a diluted per common share basis, net income was
$0.50 per share in the first six months of 2008 compared to $0.61 per share in
the first six months of 2007.
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.
The
gain recognized from the sale of investment properties during the second quarter
of 2008 was $3.1 million, as compared to a $585,000 gain recognized from
the sales of investment properties during the second quarter of
2007. The gain recognized during the first six months of 2008 from
the sale of investment properties and from the additional proceeds received from
a sale of excess land was $3.7 million, as compared to a $2.4 million gain
recognized from the sales of investment properties for the first six months of
2007.
Funds
from Operations (FFO)
In the
second quarter of 2008, our FFO decreased by $2.0 million, or 4.1%, to
$46.8 million versus $48.8 million in the second quarter of
2007. On a diluted per common share basis, FFO was $0.47 in the
second quarter of 2008 compared to $0.49 in the second quarter of 2007, a
decrease of $0.02, or 4.1%.
In the
first six months of 2008, our FFO decreased by $2.6 million, or 2.7%, to $92.7
million versus $95.3 million in the first six months of 2007. On
a diluted per common share basis, FFO was $0.92 in the first six months of 2008
compared to $0.95 in the first six months of 2007, a decrease of $0.03, or
3.2%.
See our
discussion of FFO later in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations for a reconciliation of net income
available to common stockholders to FFO.
Crest’s
Property Sales
During
the second quarter of 2008, Crest sold seven properties from its inventory for
an aggregate of $28.6 million, which resulted in a gain of $1.7
million. During the first six months of 2008, Crest sold 22
properties for an aggregate of $46.1 million, which resulted in a gain of $4.4
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
At June
30, 2008, Crest had $10.4 million invested in eight properties. At
December 31, 2007, Crest’s property inventory totaled $56.2 million in 30
properties. These properties are included in “real estate held for
sale, net” on our consolidated balance sheets.
Increases
in Monthly Distributions to Common Stockholders
We
continue our 39-year policy of paying distributions monthly. Monthly
distributions per share were increased in July 2008 by $0.000625 to
$0.138. The increase in July 2008 was our 43rd
consecutive quarterly increase and the 49th
increase in the amount of our dividend since our listing on the New York Stock
Exchange, or NYSE, in 1994. In the first six months of 2008, we paid three
monthly cash distributions per share in the amount of $0.13675 and three in the
amount of $0.137375, totaling $0.822375. In June 2008 and July 2008, we declared
distributions of $0.138 per share, which were paid in July 2008 and will be paid
in August 2008, respectively.
The
monthly distribution of $0.138 per share represents a current annualized
distribution of $1.656 per share, and an annualized distribution yield of
approximately 6.7% based on the last reported sale price of our common stock on
the NYSE of $24.70 on July 21, 2008. 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.
Matters
Pertaining to a Certain Tenant
On
January 22, 2008, Buffets Holdings, Inc. (“Buffets Holdings”) together with each
of its subsidiaries, filed voluntary petitions for reorganization under Chapter
11 of the U.S. Bankruptcy Code. Realty Income owned 116 properties
and Crest owned three properties leased to subsidiaries of Buffets, Inc.
(”Buffets”) and guaranteed by Buffets. Buffets is a subsidiary of
Buffets Holdings. In February 2008, Buffets Holdings elected to
reject the leases for 12 properties owned by Realty Income and two properties
owned by Crest, and returned those 14 properties to us. In July 2008,
Realty Income reached an agreement with Buffets Holdings for the continued lease
of all of its remaining properties. Under the terms of the agreement,
all 105 of the remaining leases, including 104 owned by Realty Income and one
owned by Crest, will be assumed and continue to be operated by Buffets
Holdings. Rents will be modified, for the 104 Realty Income
properties, from an annualized rent of $22.4 million to $19.4 million, or 87% of
previous rents. In addition, rents are to increase 2%
annually. Subsequent to the approval of this agreement, it is
anticipated that Buffets Holdings will continue to be our largest tenant and
will represent approximately 5.9% of Realty Income’s annualized lease
revenue. The agreement has been filed with the Court for approval and
is subject to the U.S. Bankruptcy Code.
Cash
Reserves
We are
organized to operate as an equity REIT that acquires and leases properties and
distributes to stockholders, in the form of monthly cash distributions, a
substantial portion of our net cash flow generated from leases on our retail
properties. We intend to retain an appropriate amount of cash as working
capital. At June 30, 2008, we had cash and cash equivalents totaling $39.4
million.
We
believe that our cash and cash equivalents on hand, cash provided from operating
activities and borrowing capacity is sufficient to meet our liquidity needs for
the foreseeable future. We intend, however, to use additional sources
of capital to fund property acquisitions and to repay future borrowings under
our credit facility.
$355
Million Acquisition Credit Facility
In May
2008, we entered into a new $355 million revolving, unsecured credit facility
replacing our existing $300 million acquisition credit facility that was
scheduled to expire in October 2008. The term of the new credit
facility is for three years until May 2011, plus, two, one-year extension
options. Under the new credit facility, our investment grade credit
ratings provide for financing at the London Interbank Offered Rate, commonly
referred to as LIBOR, plus 100 basis points with a facility fee of
27.5 basis points, for all-in drawn pricing of 127.5 basis points over
LIBOR. At July 21, 2008, we had a borrowing capacity of
$355 million available on our new credit facility and no outstanding
balance.
We
expect to use our credit facility to acquire additional retail properties and
for other corporate purposes. Any additional borrowings will increase
our exposure to interest rate risk. We have the right to request an
increase in the borrowing capacity of the credit facility by up to $100 million,
to a total borrowing capacity of $455 million. Any increase in the
borrowing capacity is subject to approval by the lending banks on our credit
facility.
Mortgage
Debt
We have
no mortgage debt on any of our properties.
Universal
Shelf Registration
In
April 2006, we filed a shelf registration statement with the SEC, which is
effective for a term of three years. In accordance with SEC rules, the amount of
the securities to be issued pursuant to this shelf registration statement was
not specified when it was filed. The securities covered by this
registration statement include common stock, preferred stock, debt securities,
or any combination of such securities. We may periodically offer one
or more of these securities in amounts, prices and on terms to be announced when
and if the securities are offered. The specifics of any future offerings, along
with the use of proceeds of any securities offered, will be described in detail
in a prospectus supplement, or other offering materials, at the time of any
offering. There is no specific limit to the dollar amount of new
securities that can be issued under this new shelf registration before it
expires in April 2009, and our common stock, preferred stock and notes issued
after April 2006 were all issued pursuant to this universal shelf registration
statement.
Conservative
Capital Structure
We
believe that our stockholders are best served by a conservative capital
structure. Therefore, we seek to maintain a conservative debt level on our
balance sheet and solid interest and fixed charge coverage ratios. At July 21,
2008, our total outstanding credit facility borrowings and outstanding notes
were $1.47 billion or approximately 34.0% of our total market
capitalization of $4.32 billion.
We
define our total market capitalization at July 21, 2008 as the sum
of:
·
|
Shares
of our common stock outstanding of 101,340,803 multiplied by the last
reported sales price of our common stock on the NYSE of $24.70 per share
on July 21, 2008, or
$2.5 billion;
|
·
|
Aggregate
liquidation value (par value of $25 per share) of the Class D preferred
stock of $127.5 million;
|
·
|
Aggregate
liquidation value (par value of $25 per share) 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 common stock should be the majority of our capital structure,
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. Fitch Ratings has assigned a rating of BBB+,
Moody’s Investors Service has assigned a rating of Baa1 and Standard &
Poor’s Ratings Group 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 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 rating will not be changed or withdrawn by a rating agency in the future if,
in its judgment, circumstances warrant. Moreover, a rating is not a
recommendation to buy, sell or hold our debt securities, preferred stock or
common stock.
Notes Outstanding
Our
senior unsecured note obligations consist of the following as of June 30, 2008,
sorted by maturity date (dollars in millions):
8.25%
notes, issued in October 1998 and due in November 2008
|
|
$ |
100.0 |
|
8%
notes, issued in January 1999 and due in January 2009
|
|
|
20.0 |
|
5.375%
notes, issued in March 2003 and due in March 2013
|
|
|
100.0 |
|
5.5%
notes, issued in November 2003 and due in November 2015
|
|
|
150.0 |
|
5.95%
notes, issued in September 2006 and due in September 2016
|
|
|
275.0 |
|
5.375%
notes, issued in September 2005 and due in September 2017
|
|
|
175.0 |
|
6.75%
notes, issued in September 2007 and due in August 2019
|
|
|
550.0 |
|
5.875%
bonds, issued in March 2005 and due in March 2035
|
|
|
100.0 |
|
|
|
$ |
1,470.0 |
|
All of
our outstanding notes and bonds have fixed interest rates.
Interest
on all of our senior note obligations is paid semiannually, with the exception
of the interest on the 8.25% 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 for our senior unsecured
notes, as defined and calculated per the terms of our notes. These
calculations, which are not based on GAAP measurements, are presented to
investors to show our ability to incur additional debt under the terms of our
notes only and are not measures of our liquidity or performance. The
actual amounts as of June 30, 2008 are:
Note
Covenants
|
Required
|
|
Actual
|
|
Limitation
on incurrence of total debt
|
≤
60%
|
|
|
41.8 |
% |
Limitation
on incurrence of secured debt
|
≤
40%
|
|
|
0.0 |
% |
Debt
service coverage (trailing 12 months)
|
≥
1.5 x
|
|
|
3.6 |
x |
Maintenance
of total unencumbered assets
|
≥
150% of unsecured debt
|
|
|
239 |
% |
The
following table summarizes the payments of each of our obligations as of June
30, 2008 (dollars in millions):
Table of
Obligations
|
|
|
|
|
|
|
|
|
|
|
Ground
|
|
|
Ground
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid
by
|
|
|
Paid
by
|
|
|
|
|
|
|
|
Year
of
|
|
Credit
|
|
|
|
|
|
|
|
|
Realty
|
|
|
Our
|
|
|
|
|
|
|
|
Maturity
|
|
Facility
(1)
|
|
|
Notes
|
|
|
Interest
(2)
|
|
|
Income(3)
|
|
|
Tenants(4)
|
|
|
Other
(5)
|
|
|
Totals
|
|
2008
|
|
$ |
-- |
|
|
$ |
100.0 |
|
|
$ |
45.1 |
|
|
$ |
-- |
|
|
$ |
1.9 |
|
|
$ |
7.4 |
|
|
$ |
154.4 |
|
2009
|
|
|
-- |
|
|
|
20.0 |
|
|
|
82.5 |
|
|
|
0.1 |
|
|
|
3.6 |
|
|
|
-- |
|
|
|
106.2 |
|
2010
|
|
|
-- |
|
|
|
-- |
|
|
|
82.4 |
|
|
|
0.1 |
|
|
|
3.5 |
|
|
|
-- |
|
|
|
86.0 |
|
2011
|
|
|
-- |
|
|
|
-- |
|
|
|
82.4 |
|
|
|
0.1 |
|
|
|
3.5 |
|
|
|
-- |
|
|
|
86.0 |
|
2012
|
|
|
-- |
|
|
|
-- |
|
|
|
82.4 |
|
|
|
0.1 |
|
|
|
3.4 |
|
|
|
-- |
|
|
|
85.9 |
|
Thereafter
|
|
|
-- |
|
|
|
1,350.0 |
|
|
|
505.9 |
|
|
|
0.9 |
|
|
|
43.2 |
|
|
|
-- |
|
|
|
1,900.0 |
|
Totals
|
|
$ |
-- |
|
|
$ |
1,470.0 |
|
|
$ |
880.7 |
|
|
$ |
1.3 |
|
|
$ |
59.1 |
|
|
$ |
7.4 |
|
|
$ |
2,418.5 |
|
|
(1)
There was no outstanding credit facility balance on July 21,
2008.
|
|
(2)
Interest on the credit facility and notes has been calculated based on
outstanding balances as of June 30, 2008 through their respective maturity
dates.
|
|
(3)
Realty Income currently pays the ground lessors directly for the rent
under the ground leases. A majority of this rent is reimbursed
to Realty Income as additional rent from our
tenants.
|
|
(4)
Our tenants, who are generally sub-tenants under the ground leases, are
responsible for paying the rent under these ground leases. In
the event a tenant fails to pay the ground lease rent, we are primarily
responsible.
|
|
(5)
“Other” consists of $6.6 million of commitments under construction
contracts and $832,000 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.
We
anticipate paying off the notes due in 2008 and 2009 by using cash on hand,
utilizing our credit facility or issuing new securities.
Preferred
Stock Outstanding
In
2004, we issued 5.1 million shares of 7.375% Class D cumulative redeemable
preferred stock. Beginning May 27, 2009, shares of Class D preferred
stock are redeemable at our option for $25 per share, plus any accrued and
unpaid dividends. Dividends on shares of Class D preferred are
paid monthly in arrears.
In
December 2006, we issued 8.8 million shares of 6.75% 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 2007, our cash distributions
totaled $182.2 million, or approximately 113.6% of our REIT taxable income
of $160.4 million. Our estimated REIT taxable income reflects non-cash
deductions for depreciation and amortization. Our estimated REIT
taxable income is a non-GAAP financial measure presented to show our compliance
with REIT distribution requirements and is not a measure of our liquidity or
performance.
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 six
months of 2008 totaled $83.3 million, representing 89.9% of our funds from
operations available to common stockholders of $92.7 million. In
comparison, our 2007 cash distributions to common stockholders totaled
$157.7 million, representing 83.1% of our funds from operations available
to common stockholders of $189.7 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 11.2% of the distributions to our common
stockholders, made or deemed to have been made in 2007, 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 and 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 policies. 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 that are classified as
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 a change in circumstances indicate
that the carrying amount of the asset may not be recoverable. Generally, a
provision is made for impairment loss if estimated future operating cash flows
(undiscounted and without interest charges) plus estimated disposition proceeds
(undiscounted) are less than the current book value. Impairment losses are
measured as the amount by which the current book value of the asset exceeds the
fair value of the asset. If a property is held for sale, it is carried at the
lower of carrying cost or estimated fair value, less cost to sell. The carrying
value of our real estate is the largest component of our consolidated balance
sheet. If events should occur that require us to reduce the carrying value of
our real estate by recording provisions for impairment losses, it could have a
material impact on our results of operations.
The
following is a comparison of our results of operations for the three and six
months ended June 30, 2008 to the three and six months ended June 30,
2007.
Rental
Revenue
Rental
revenue was $82.4 million for the second quarter of 2008 versus $70.1 million
for the second quarter of 2007, an increase of $12.3 million, or
17.5%. The increase in rental revenue in the second quarter of 2008
compared to the second quarter of 2007 is primarily attributable
to:
·
|
The
107 retail properties acquired by Realty Income in 2008, which generated
$3.9 million of rent in the second quarter of
2008;
|
·
|
The
325 retail properties acquired by Realty Income in 2007, which generated
$10.2 million of rent in the second quarter of 2008 compared to $1.2
million in the second quarter of 2007, an increase of
$9.0 million;
|
·
|
Same
store rents generated on 1,798 properties during the entire second
quarters of 2008 and 2007 increased by $869,000, or 1.4%, to $65.0 million
from $64.1 million; and
|
·
|
An
increase in straight-line rent and other non-cash adjustments to rent of
$54,000 in the second quarter of 2008 as compared to the second quarter of
2007; net of
|
·
|
A
net decrease of $1.5 million relating to the aggregate of (i) development
properties acquired before 2007 that started paying rent in 2007, (ii)
properties that were vacant during part of 2008 or 2007, (iii) properties
sold during 2008 and 2007 and (iv) lease termination
settlements. These items totaled $2.85 million, in aggregate,
in the second quarter of 2008 compared to $4.34 million in the same
quarter of 2007.
|
Rental
revenue was $163.9 million for the first six months of 2008 versus $138.9
million for the first six months of 2007, an increase of $25.0 million, or
18.0%. The increase in rental revenue in the first six months of 2008
compared to the first six months of 2007 is primarily attributable
to:
·
|
The
107 retail properties acquired by Realty Income in 2008, which generated
$5.2 million of rent in the first six months of
2008;
|
·
|
The
325 retail properties acquired by Realty Income in 2007, which generated
$20.06 million of rent in the first six months of 2008 compared to $1.54
million in the first six months of 2007, an increase of
$18.5 million;
|
·
|
Same
store rents generated on 1,798 properties during the entire first six
months of 2008 and 2007 increased by $1.8 million, or 1.4%, to $130.05
million from $128.24 million; and
|
·
|
An
increase in straight-line rent and other non-cash adjustments to rent of
$668,000 in the first six months of 2008 as compared to the first six
months of 2007; net of
|
·
|
A
net decrease of $1.2 million relating to the aggregate of (i) development
properties acquired before 2007 that started paying rent in 2007, (ii)
properties that were vacant during part of 2008 or 2007, (iii) properties
sold during 2008 and 2007 and (iv) lease termination
settlements. These items totaled $7.33 million, in aggregate,
in the first six months of 2008 compared to $8.57 million in the first six
months of 2007.
|
Of the
2,367 properties in the portfolio at June 30, 2008, 2,356, or 99.5%, are
single-tenant properties and the remaining 11 are multi-tenant properties. Of
the 2,356 single-tenant properties, 2,282, or 96.9%, 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 June 30, 2008. Of our
2,282 leased single-tenant properties, 2,079, or 91.1%, 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 $70,000 in the second quarter of
2008 and $167,000 in the second quarter of 2007. Percentage rent was $761,000 in
the first six months of 2008 and $329,000 in the first six months of
2007. Percentage rent in the second quarter and first six months of
2008 was less than 1% of rental revenue and we anticipate percentage rent to
continue to be less than 1% of rental revenue for 2008.
Our
portfolio of retail real estate, leased primarily to regional and national
chains under net leases, continues to perform well and provides dependable lease
revenue supporting the payment of monthly dividends to our
stockholders. At June 30, 2008, our portfolio of 2,367 retail
properties was 96.8% leased with 75 properties available for lease, one of which
is a multi-tenant property.
As of
July 28, 2008, transactions to lease or sell 20 of the 75 properties
available for lease at June
30, 2008 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.
Interest
Expense
Interest
expense was $10.9 million higher in the second quarter of 2008 than in the
second quarter of 2007. Interest expense was $21.9 million higher in
the first six months of 2008 than in the first six months of
2007. Interest expense increased in 2008 primarily due to higher
average outstanding balances and higher interest rates related to our average
outstanding borrowings. We issued $550 million of 12-year notes in
September 2007 which contributed to the increase in average outstanding balances
and higher average interest rates on our debt.
As a
result of entering into our new credit facility in May 2008, we expensed
$235,000 of unamortized credit facility origination costs from our prior credit
facility in the second quarter of 2008.
The
following is a summary of the components of our interest expense (dollars in
thousands):
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
Interest
on our credit facility and notes
|
|
$ |
23,061 |
|
|
$ |
14,178 |
|
|
$ |
46,122 |
|
|
$ |
28,090 |
|
Interest
included in discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
real estate acquired for resale by Crest
|
|
|
(433 |
) |
|
|
(1,758 |
) |
|
|
(1,065 |
) |
|
|
(3,877 |
) |
Amortization
of settlements on treasury lock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreement
|
|
|
217 |
|
|
|
217 |
|
|
|
435 |
|
|
|
435 |
|
Credit
facility commitment fees
|
|
|
181 |
|
|
|
114 |
|
|
|
295 |
|
|
|
228 |
|
Amortization
of credit facility origination costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
deferred bond financing costs
|
|
|
945 |
|
|
|
523 |
|
|
|
1,583 |
|
|
|
1,043 |
|
Interest
capitalized
|
|
|
(42 |
) |
|
|
(245 |
) |
|
|
(55 |
) |
|
|
(470 |
) |
Interest
expense
|
|
$ |
23,929 |
|
|
$ |
13,029 |
|
|
$ |
47,315 |
|
|
$ |
25,449 |
|
|
|
Three
months ended
|
|
|
Six
months ended
|
|
Credit
facility and notes outstanding
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
Average
outstanding balances (dollars in
thousands)
|
|
$ |
1,470,000 |
|
|
$ |
946,889 |
|
|
$ |
1,470,000 |
|
|
$ |
937,979 |
|
Average
interest rates
|
|
|
6.28 |
% |
|
|
5.99 |
% |
|
|
6.28 |
% |
|
|
5.99 |
% |
At July
21, 2008, the weighted average interest rate on our notes payable of $1.47
billion was 6.28% and on our credit line was 3.46%. There was no
outstanding balance on our credit line at July 21, 2008.
Interest
Coverage Ratio
Our
interest coverage ratio for the second quarter of 2008 was 3.2 times and for the
second quarter of 2007 was 4.8 times. Our interest coverage ratio for
the first six months of 2008 was 3.2 times and for the first six months of 2007
was 4.7 times. Interest coverage ratio is calculated as: the interest
coverage amount (as calculated in the following table) divided by interest
expense, including interest recorded as 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 flows to our interest coverage amount
(dollars in thousands):
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
Net
cash provided by operating activities
|
|
$ |
81,079 |
|
|
$ |
117,906 |
|
|
$ |
129,192 |
|
|
$ |
172,257 |
|
Interest
expense
|
|
|
23,929 |
|
|
|
13,029 |
|
|
|
47,315 |
|
|
|
25,449 |
|
Interest
expense included in discontinued operations(1)
|
|
|
433 |
|
|
|
1,758 |
|
|
|
1,065 |
|
|
|
3,877 |
|
Income
taxes
|
|
|
218 |
|
|
|
353 |
|
|
|
615 |
|
|
|
598 |
|
Income
taxes included in discontinued operations(1)
|
|
|
(387 |
) |
|
|
1,463 |
|
|
|
421 |
|
|
|
1,612 |
|
Investment
in real estate acquired for resale(1)
|
|
|
8 |
|
|
|
-- |
|
|
|
8 |
|
|
|
-- |
|
Proceeds
from sales of real estate acquired for resale(1)
|
|
|
(9,434 |
) |
|
|
(55,565 |
) |
|
|
(26,920 |
) |
|
|
(65,786 |
) |
Crest
provisions for impairment(1)
|
|
|
(953 |
) |
|
|
-- |
|
|
|
(3,347 |
) |
|
|
-- |
|
Gain
on sales of real estate acquired for resale(1)
|
|
|
1,737 |
|
|
|
5,326 |
|
|
|
4,444 |
|
|
|
6,566 |
|
Amortization
of share-based compensation
|
|
|
(1,709 |
) |
|
|
(1,374 |
) |
|
|
(2,853 |
) |
|
|
(2,196 |
) |
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable and other assets
|
|
|
61 |
|
|
|
(961 |
) |
|
|
232 |
|
|
|
(990 |
) |
Accounts
payable, accrued expenses and other
liabilities
|
|
|
(17,834 |
) |
|
|
(10,463 |
) |
|
|
4,277 |
|
|
|
(2,330 |
) |
Interest
coverage amount
|
|
$ |
77,148 |
|
|
$ |
71,472 |
|
|
$ |
154,449 |
|
|
$ |
139,057 |
|
Divided
by interest expense(2)
|
|
$ |
24,362 |
|
|
$ |
14,787 |
|
|
$ |
48,380 |
|
|
$ |
29,326 |
|
Interest
coverage ratio
|
|
|
3.2 |
|
|
|
4.8 |
|
|
|
3.2 |
|
|
|
4.7 |
|
|
(2) Includes
interest expense recorded to “income from discontinued operations, real
estate acquired for resale by Crest” on our consolidated statements of
income.
|
Fixed
Charge Coverage Ratio
Our
fixed charge coverage ratio for the second quarter of 2008 was 2.5 times and for
the second quarter of 2007 was 3.4 times. Our fixed charge coverage ratio for
the first six months of 2008 was 2.6 times and for the first six months of 2007
was 3.4 times. 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
|
|
|
Six
months ended
|
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
Interest
coverage amount
|
|
$ |
77,148 |
|
|
$ |
71,472 |
|
|
$ |
154,449 |
|
|
$ |
139,057 |
|
Divided
by interest expense plus preferred stock dividends(1)
|
|
$ |
30,425 |
|
|
$ |
20,850 |
|
|
$ |
60,507 |
|
|
$ |
41,453 |
|
Fixed
charge coverage ratio
|
|
|
2.5 |
|
|
|
3.4 |
|
|
|
2.6 |
|
|
|
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.
|
Depreciation
and Amortization
For the
second quarter of 2008, depreciation and amortization was $22.9 million as
compared to $18.4 million in the second quarter of 2007. For the first six
months of 2008, depreciation and amortization was $45.8 million as compared to
$36.4 million in the first six months of 2007. The increase in
depreciation and amortization in 2008 was primarily due to the acquisition of
properties in 2008 and 2007, 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.
General
and Administrative Expenses
General
and administrative expenses increased by $86,000 to $5.9 million in the second
quarter of 2008 as compared to $5.8 million in the second quarter of
2007. In the second quarter of 2008, general and administrative
expenses as a percentage of total revenue were 7.2% as compared to 8.3% in the
second quarter of 2007.
General
and administrative expenses increased by $538,000 to $11.5 million in the first
six months of 2008 as compared to $10.9 million in the first six months of
2007. In the first six months of 2008, general and administrative
expenses as a percentage of total revenue were 6.9% as compared to 7.7% in the
first six months of 2007.
General
and administrative expenses increased in total dollars during the first six
months of 2008 primarily due to increases in employee costs. We
anticipate that in the remainder of 2008, general and administrative expenses as
a percentage of total revenue will remain flat or decrease.
In July
2008, we had 72 permanent employees as compared to July 2007 when we had 75
permanent employees.
Property
Expenses
Property
expenses are broken down into costs associated with non-net leased multi-tenant
properties, unleased single-tenant properties and general portfolio expenses.
Expenses related to the multi-tenant and unleased single-tenant properties
include, but are not limited to, property taxes, maintenance, insurance,
utilities, property inspections, bad debt expense and legal fees. General
portfolio costs include, but are not limited to, insurance, legal, bad debt
expense, property inspections and title search fees. At June 30, 2008, 75
properties were available for lease, as compared to 48 at December 31, 2007 and
27 at June 30, 2007.
Property
expenses were $1.1 million in the second quarter of 2008 and $958,000 in the
second quarter of 2007. Property expenses were $2.4 million in the
first six months of 2008 and $1.8 million in the first six months of
2007. The increase in property expenses in 2008 is primarily
attributable to an increase in maintenance, utilities, property taxes and legal
fees associated with properties available for lease, net of a decrease in bad
debt expense.
Income
Taxes
Income
taxes were $218,000 in the second quarter of 2008 as compared to $353,000 in the
second quarter of 2007. Income taxes were $615,000 in the first six
months of 2008 as compared to $598,000 for the first six months of
2007. These amounts are for city and state income taxes paid by
Realty Income.
In
addition, Crest incurred state and federal income tax benefits of $387,000 in
the second quarter of 2008 as compared to tax expense of $1.5 million in the
second quarter of 2007. Crest incurred state and federal income taxes
of $421,000 in the first six months of 2008 as compared to $1.6 million in the
first six months of 2007. These amounts are included in “income from
discontinued operations, real estate acquired for resale by Crest” on our
consolidated statements of income.
Discontinued
Operations
Crest
acquires properties with the intention of reselling them rather than holding
them as investments and operating the properties. Consequently, we
typically classify properties acquired by Crest as held for sale at the date of
acquisition and do not depreciate them. 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.
If we
decide not to sell a property previously classified as held for sale, the
property is reclassified as real estate held for investment. A
property that is reclassified to held for investment is measured and recorded at
the lower of (i) its carrying amount before the property was classified as held
for sale, adjusted for any depreciation expense that would have been recognized
had the property been continuously classified as held for investment, or (ii)
the fair value at the date of the subsequent decision not to sell.
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):
|
|
Three
months ended
|
|
|
Six
months ended
|
|
Crest’s
income from discontinued
operations,
real estate acquired for resale
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
Gain
on sales of real estate acquired for resale
|
|
$ |
1,737 |
|
|
$ |
5,326 |
|
|
$ |
4,444 |
|
|
$ |
6,566 |
|
Rental
revenue
|
|
|
598 |
|
|
|
2,310 |
|
|
|
1,634 |
|
|
|
5,188 |
|
Other
revenue
|
|
|
138 |
|
|
|
55 |
|
|
|
208 |
|
|
|
61 |
|
Interest
expense
|
|
|
(433 |
) |
|
|
(1,758 |
) |
|
|
(1,065 |
) |
|
|
(3,877 |
) |
General
and administrative expense
|
|
|
(126 |
) |
|
|
(179 |
) |
|
|
(287 |
) |
|
|
(282 |
) |
Property
expenses
|
|
|
(53 |
) |
|
|
(9 |
) |
|
|
(65 |
) |
|
|
(14 |
) |
Provisions
for impairment
|
|
|
(953 |
) |
|
|
-- |
|
|
|
(3,347 |
) |
|
|
-- |
|
Income
taxes
|
|
|
387 |
|
|
|
(1,463 |
) |
|
|
(421 |
) |
|
|
(1,612 |
) |
Income
from discontinued operations,
real
estate acquired for resale by Crest
|
|
$ |
1,295 |
|
|
$ |
4,282 |
|
|
$ |
1,101 |
|
|
$ |
6,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
common share, basic and diluted
|
|
$ |
0.01 |
|
|
$ |
0.04 |
|
|
$ |
0.01 |
|
|
$ |
0.06 |
|
Realty
Income’s operations from eight investment properties classified as held for sale
at June 30, 2008, plus properties sold in 2008 and 2007, 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):
|
|
Three
months ended
|
|
|
Six
months ended
|
|
Realty
Income’s income from discontinued
operations,
real estate held for investment
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
Gain
on sales of investment properties
|
|
$ |
3,255 |
|
|
$ |
585 |
|
|
$ |
3,473 |
|
|
$ |
585 |
|
Rental
revenue
|
|
|
206 |
|
|
|
447 |
|
|
|
474 |
|
|
|
853 |
|
Depreciation
and amortization
|
|
|
(39 |
) |
|
|
(104 |
) |
|
|
(99 |
) |
|
|
(217 |
) |
Property
expenses
|
|
|
(18 |
) |
|
|
(7 |
) |
|
|
(32 |
) |
|
|
(24 |
) |
Income
from discontinued operations,
real
estate held for investment
|
|
$ |
3,404 |
|
|
$ |
921 |
|
|
$ |
3,816 |
|
|
$ |
1,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
common share, basic and diluted
|
|
$ |
0.03 |
|
|
$ |
0.01 |
|
|
$ |
0.04 |
|
|
$ |
0.01 |
|
The
following is a summary of our total income from discontinued operations (dollars
in thousands, except per share data):
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
Real
estate acquired for resale by Crest
|
|
$ |
1,295 |
|
|
$ |
4,282 |
|
|
$ |
1,101 |
|
|
$ |
6,030 |
|
Real
estate held for investment
|
|
|
3,404 |
|
|
|
921 |
|
|
|
3,816 |
|
|
|
1,197 |
|
Income
from discontinued operations
|
|
$ |
4,699 |
|
|
$ |
5,203 |
|
|
$ |
4,917 |
|
|
$ |
7,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
common share, basic and diluted
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.07 |
|
The
above per share amounts have each been calculated independently.
Crest’s
Property Sales
During
the second quarter of 2008, Crest sold seven properties for $28.6 million,
which resulted in a gain of $1.7 million. As part of two sales
during the second quarter and first six months of 2008, Crest provided buyer
financing of $19.2 million. In comparison, during the second quarter
of 2007, Crest sold 26 properties for $56.2 million, which resulted in a
gain of $5.3 million. In the second quarter of 2007, Crest provided
buyer financing of $619,000. Crest’s gains on sales are reported
before income taxes and are included in discontinued operations.
During
the first six months of 2008, Crest sold 22 properties for $46.1 million, which
resulted in a gain of $4.4 million. In comparison, during the first
six months of 2007, Crest sold 31 properties for $69.5 million, which resulted
in a gain of $6.6 million. In the first six months of 2007, Crest
provided buyer financing of $3.8 million.
Crest’s
Property Inventory
At June
30, 2008, Crest had $10.4 million invested in eight properties, all of which are
held for sale.
Gain
on Sales of Investment Properties by Realty Income
During
the second quarter of 2008, we sold eight investment properties for $7.4
million, which resulted in a gain of $3.3 million. The results of
operations for these properties have been reclassified as discontinued
operations. Additionally, we recorded an adjustment of $203,000 from
the sale of excess land from one property. This adjustment is
included in “other revenue” on our consolidated statements of income because
this property continues to be owned as part of our core operations.
In
comparison, during the second quarter of 2007, we sold two investment properties
for a total of $1.0 million, which resulted in a gain of
$585,000. The results of operations for these properties have been
reclassified as discontinued operations.
During
the first six months of 2008, we sold nine investment properties for $7.8
million, which resulted in a gain of $3.5 million. The results of
operations for these properties have been reclassified as discontinued
operations. Additionally, we received proceeds of $439,000 from the
sale of excess land from one property, which resulted in a gain of
$236,000. This gain is included in “other revenue” on our
consolidated statements of income because this property continues to be owned as
part of our core operations.
In
comparison, during the first six months of 2007, we sold three investment
properties for $1.5 million, which resulted in a gain of
$585,000. The results of operations for these properties have been
reclassified as discontinued operations. In addition, we sold excess
land from three properties for $3.8 million, which resulted in a gain of
$1.8 million. The gain from the land sales is reported in “other
revenue” on our consolidated statements of income because these properties
continue to be owned as part of our core operations.
We have
an active portfolio management program that incorporates the sale of assets when
we believe the reinvestment of the sale proceeds will generate higher returns,
enhance the credit quality of our real estate portfolio or extend our average
remaining lease term. At June 30, 2008, we classified real estate with a
carrying amount of $13.9 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
A
provision for impairment of $953,000 was recorded by Crest on one property held
for sale in the second quarter of 2008. Provisions for impairment of
$3.3 million were recorded by Crest on three properties held for sale in the
first six months of 2008. These provisions for impairment are
included in “income from discontinued operations, real estate acquired for
resale by Crest.” These three properties were leased to a subsidiary
of Buffets and guaranteed by Buffets. In February 2008, Buffets
Holdings elected to reject the leases for two of these properties owned by
Crest. No provisions for impairment were recorded by Crest in the
first six months of 2007. The provisions for impairment recorded in
the first six months of 2008 reduced the carrying costs to the estimated
fair-market value of those properties, net of estimated selling
costs.
Provisions
for Impairment on Realty Income Investment Properties
No
provisions for impairment were recorded in the first six months of 2008 and
2007.
Preferred
Stock Dividends
Preferred
stock cash dividends totaled $6.1 million in the second quarters of 2008 and
2007. Preferred stock cash dividends totaled $12.1 million in the
first six months of 2008 and 2007.
Net
Income Available to Common Stockholders
Net
income available to common stockholders was $27.0 million in the second quarter
of 2008, a decrease of $3.9 million as compared to $30.9 million in
the second quarter of 2007. Net income available to common
stockholders was $50.7 million in the first six months of 2008, a decrease of
$10.4 million as compared to $61.1 million in the first six months of
2007.
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.
The
gain recognized from the sale of investment properties during the second quarter
of 2008 was $3.1 million, as compared to a $585,000 gain recognized from
the sales of investment properties during the second quarter of
2007. The gain recognized during the first six months of 2008 from
the sale of investment properties and from the additional proceeds received from
a sale of excess land was $3.7 million, as compared to a $2.4 million gain
recognized from the sales of investment properties for the first six months of
2007.
FFO for
the second quarter of 2008 decreased by $2.0 million, or 4.1%, to $46.8 million
as compared to $48.8 million in the second quarter of 2007. FFO
for the first six months of 2008 decreased by $2.6 million, or 2.7%, to
$92.7 million as compared to $95.3 in the first six months of
2007. 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
|
|
|
Six
months ended
|
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
Net
income available to common stockholders
|
|
$ |
26,988 |
|
|
$ |
30,873 |
|
|
$ |
50,686 |
|
|
$ |
61,133 |
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
22,916 |
|
|
|
18,414 |
|
|
|
45,830 |
|
|
|
36,435 |
|
Discontinued
operations
|
|
|
39 |
|
|
|
104 |
|
|
|
99 |
|
|
|
217 |
|
Depreciation
of furniture, fixtures and
equipment
|
|
|
(79 |
) |
|
|
(46 |
) |
|
|
(157 |
) |
|
|
(95 |
) |
(Gain)
loss on sales of land and investment properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
203 |
|
|
|
-- |
|
|
|
(236 |
) |
|
|
(1,806 |
) |
Discontinued
operations
|
|
|
(3,255 |
) |
|
|
(585 |
) |
|
|
(3,473 |
) |
|
|
(585 |
) |
FFO
available to common stockholders
|
|
$ |
46,812 |
|
|
$ |
48,760 |
|
|
$ |
92,749 |
|
|
$ |
95,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
per common share, basic and diluted:
|
|
$ |
0.47 |
|
|
$ |
0.49 |
|
|
$ |
0.92 |
|
|
$ |
0.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
paid to common stockholders
|
|
$ |
41,756 |
|
|
$ |
38,533 |
|
|
$ |
83,310 |
|
|
$ |
76,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
in excess of distributions paid to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders
|
|
$ |
5,056 |
|
|
$ |
10,227 |
|
|
$ |
9,439 |
|
|
$ |
18,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used
for computation per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
100,346,512 |
|
|
|
100,133,094 |
|
|
|
100,326,039 |
|
|
|
100,111,734 |
|
Diluted
|
|
|
100,394,431 |
|
|
|
100,246,112 |
|
|
|
100,420,692 |
|
|
|
100,304,617 |
|
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.
|
|
Three
months ended
|
|
|
Six
months ended
|
|
(dollars
in thousands)
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
Amortization
of settlement on treasury lock agreement(1)
|
|
$ |
217 |
|
|
$ |
217 |
|
|
$ |
435 |
|
|
$ |
435 |
|
Amortization
of deferred note financing costs(2)
|
|
|
454 |
|
|
|
336 |
|
|
|
908 |
|
|
|
673 |
|
Amortization
of share-based compensation
|
|
|
1,709 |
|
|
|
1,374 |
|
|
|
2,853 |
|
|
|
2,196 |
|
Capitalized
leasing costs and commissions
|
|
|
(270 |
) |
|
|
(111 |
) |
|
|
(401 |
) |
|
|
(238 |
) |
Capitalized
building improvements
|
|
|
(232 |
) |
|
|
(216 |
) |
|
|
(786 |
) |
|
|
(794 |
) |
Straight-line
rent revenue(3)
|
|
|
(441 |
) |
|
|
(370 |
) |
|
|
(1,195 |
) |
|
|
(513 |
) |
Crest
provisions for impairment
|
|
|
953 |
|
|
|
-- |
|
|
|
3,347 |
|
|
|
-- |
|
(1)
|
The
settlement on the treasury lock agreement resulted from an interest rate
risk prevention strategy that we used in 1998, which correlated to a
pending issuance 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 revenue was greater
than our actual cash rent
collected.
|
At June
30, 2008, we owned a diversified portfolio:
·
|
Of
2,367 retail properties;
|
·
|
With
an occupancy rate of 96.8%, or 2,292 properties occupied of the 2,367
properties in the portfolio;
|
·
|
With
only 75 properties available for
lease;
|
·
|
Leased
to 118 different retail chains doing business in 30 separate retail
industries;
|
·
|
With
over 19.2 million square feet of leasable space;
and
|
·
|
With
an average leasable retail space per property of approximately 8,100
square feet.
|
In
addition to our real estate portfolio, our subsidiary, Crest had invested
$10.4 million in eight properties located in seven states at June 30, 2008.
These properties are classified as held for sale.
At June
30, 2008, 96.4% of our 2,367 retail properties, or 2,282 properties, were leased
under net-lease agreements. A net lease typically requires the tenant to be
responsible for minimum monthly rent and property operating expenses including
property taxes, insurance and maintenance. In addition, our 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
June
30,
2008
|
|
|
Dec
31,
2007
|
|
|
Dec
31,
2006
|
|
|
Dec
31,
2005
|
|
|
Dec
31,
2004
|
|
|
Dec
31,
2003
|
|
|
Dec
31,
2002
|
|
Apparel
stores
|
|
|
1.1 |
% |
|
|
1.2 |
% |
|
|
1.7 |
% |
|
|
1.6 |
% |
|
|
1.8 |
% |
|
|
2.1 |
% |
|
|
2.3 |
% |
Automotive
collision services
|
|
|
1.0 |
|
|
|
1.1 |
|
|
|
1.3 |
|
|
|
1.3 |
|
|
|
1.0 |
|
|
|
0.3 |
|
|
|
-- |
|
Automotive
parts
|
|
|
1.6 |
|
|
|
2.1 |
|
|
|
2.8 |
|
|
|
3.4 |
|
|
|
3.8 |
|
|
|
4.5 |
|
|
|
4.9 |
|
Automotive
service
|
|
|
4.8 |
|
|
|
5.2 |
|
|
|
6.9 |
|
|
|
7.6 |
|
|
|
7.7 |
|
|
|
8.3 |
|
|
|
7.0 |
|
Automotive
tire services
|
|
|
6.7 |
|
|
|
7.3 |
|
|
|
6.1 |
|
|
|
7.2 |
|
|
|
7.8 |
|
|
|
3.1 |
|
|
|
2.7 |
|
Book
stores
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.4 |
|
Business
services
|
|
|
* |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Child
care
|
|
|
7.5 |
|
|
|
8.4 |
|
|
|
10.3 |
|
|
|
12.7 |
|
|
|
14.4 |
|
|
|
17.8 |
|
|
|
20.8 |
|
Consumer
electronics
|
|
|
0.8 |
|
|
|
0.9 |
|
|
|
1.1 |
|
|
|
1.3 |
|
|
|
2.1 |
|
|
|
3.0 |
|
|
|
3.3 |
|
Convenience
stores
|
|
|
16.2 |
|
|
|
14.0 |
|
|
|
16.1 |
|
|
|
18.7 |
|
|
|
19.2 |
|
|
|
13.3 |
|
|
|
9.1 |
|
Crafts
and novelties
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.5 |
|
|
|
0.6 |
|
|
|
0.4 |
|
Distribution
and office
|
|
|
1.0 |
|
|
|
0.6 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Drug
stores
|
|
|
4.2 |
|
|
|
2.7 |
|
|
|
2.9 |
|
|
|
2.8 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Entertainment
|
|
|
1.2 |
|
|
|
1.4 |
|
|
|
1.6 |
|
|
|
2.1 |
|
|
|
2.3 |
|
|
|
2.6 |
|
|
|
2.3 |
|
Equipment
rental services
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.3 |
|
|
|
0.2 |
|
|
|
-- |
|
Financial
services
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
-- |
|
|
|
-- |
|
General
merchandise
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
0.6 |
|
|
|
0.5 |
|
|
|
0.4 |
|
|
|
0.5 |
|
|
|
0.5 |
|
Grocery
stores
|
|
|
0.6 |
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
0.8 |
|
|
|
0.4 |
|
|
|
0.5 |
|
Health
and fitness
|
|
|
5.5 |
|
|
|
5.1 |
|
|
|
4.3 |
|
|
|
3.7 |
|
|
|
4.0 |
|
|
|
3.8 |
|
|
|
3.8 |
|
Home
furnishings
|
|
|
2.3 |
|
|
|
2.6 |
|
|
|
3.1 |
|
|
|
3.7 |
|
|
|
4.1 |
|
|
|
4.9 |
|
|
|
5.4 |
|
Home
improvement
|
|
|
1.9 |
|
|
|
2.1 |
|
|
|
3.4 |
|
|
|
1.1 |
|
|
|
1.0 |
|
|
|
1.1 |
|
|
|
1.2 |
|
Motor
vehicle dealerships
|
|
|
3.2 |
|
|
|
3.1 |
|
|
|
3.4 |
|
|
|
2.6 |
|
|
|
0.6 |
|
|
|
-- |
|
|
|
-- |
|
Office
supplies
|
|
|
1.0 |
|
|
|
1.1 |
|
|
|
1.3 |
|
|
|
1.5 |
|
|
|
1.6 |
|
|
|
1.9 |
|
|
|
2.1 |
|
Pet
supplies and services
|
|
|
0.8 |
|
|
|
0.9 |
|
|
|
1.1 |
|
|
|
1.3 |
|
|
|
1.4 |
|
|
|
1.7 |
|
|
|
1.7 |
|
Private
education
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
1.1 |
|
|
|
1.2 |
|
|
|
1.3 |
|
Restaurants
|
|
|
21.7 |
|
|
|
21.2 |
|
|
|
11.9 |
|
|
|
9.4 |
|
|
|
9.7 |
|
|
|
11.8 |
|
|
|
13.5 |
|
Shoe
stores
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.9 |
|
|
|
0.8 |
|
Sporting
goods
|
|
|
2.3 |
|
|
|
2.6 |
|
|
|
2.9 |
|
|
|
3.4 |
|
|
|
3.4 |
|
|
|
3.8 |
|
|
|
4.1 |
|
Theaters
|
|
|
9.1 |
|
|
|
9.0 |
|
|
|
9.6 |
|
|
|
5.2 |
|
|
|
3.5 |
|
|
|
4.1 |
|
|
|
3.9 |
|
Travel
plazas
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.3 |
|
|
|
-- |
|
Video
rental
|
|
|
1.0 |
|
|
|
1.7 |
|
|
|
2.1 |
|
|
|
2.5 |
|
|
|
2.8 |
|
|
|
3.3 |
|
|
|
3.3 |
|
Other
|
|
|
1.9 |
|
|
|
2.3 |
|
|
|
2.7 |
|
|
|
3.0 |
|
|
|
3.4 |
|
|
|
3.8 |
|
|
|
4.4 |
|
Totals
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
* Less
than 0.1%
(1)
|
Includes
rental revenue for all properties owned by Realty Income at the end of
each period presented, including revenue from properties reclassified as
discontinued operations.
|
Service
Category Diversification
The
following table sets forth certain information regarding the properties owned by
Realty Income (excluding properties owned by Crest) at June 30, 2008, 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
June
30, 2008(1)
|
|
|
Percentage
of
Rental
Revenue
|
|
Tenants Providing
Services
|
|
|
|
|
|
|
|
|
|
Automotive
collision services
|
|
|
13 |
|
|
$ |
831 |
|
|
|
1.0 |
% |
Automotive
service
|
|
|
237 |
|
|
|
3,958 |
|
|
|
4.8 |
|
Child
care
|
|
|
265 |
|
|
|
6,188 |
|
|
|
7.5 |
|
Entertainment
|
|
|
8 |
|
|
|
999 |
|
|
|
1.2 |
|
Equipment
rental services
|
|
|
2 |
|
|
|
150 |
|
|
|
0.2 |
|
Financial
services
|
|
|
12 |
|
|
|
195 |
|
|
|
0.2 |
|
Health
and fitness
|
|
|
26 |
|
|
|
4,567 |
|
|
|
5.5 |
|
Private
education
|
|
|
7 |
|
|
|
616 |
|
|
|
0.8 |
|
Theaters
|
|
|
34 |
|
|
|
7,463 |
|
|
|
9.1 |
|
Other
|
|
|
10 |
|
|
|
1,605 |
|
|
|
1.9 |
|
|
|
|
614 |
|
|
|
26,572 |
|
|
|
32.2 |
|
Tenants Selling Goods
and Services
|
|
|
|
|
|
|
|
|
|
Automotive
parts (with installation)
|
|
|
30 |
|
|
|
568 |
|
|
|
0.7 |
|
Automotive
tire services
|
|
|
155 |
|
|
|
5,508 |
|
|
|
6.7 |
|
Business
services
|
|
|
2 |
|
|
|
37 |
|
|
|
* |
|
Convenience
stores
|
|
|
573 |
|
|
|
13,345 |
|
|
|
16.2 |
|
Distribution
and office
|
|
|
3 |
|
|
|
831 |
|
|
|
1.0 |
|
Home
improvement
|
|
|
1 |
|
|
|
57 |
|
|
|
0.1 |
|
Motor
vehicle dealerships
|
|
|
21 |
|
|
|
2,601 |
|
|
|
3.2 |
|
Pet
supplies and services
|
|
|
9 |
|
|
|
606 |
|
|
|
0.7 |
|
Restaurants
|
|
|
654 |
|
|
|
17,916 |
|
|
|
21.7 |
|
Travel
plazas
|
|
|
1 |
|
|
|
187 |
|
|
|
0.2 |
|
Video
rental
|
|
|
32 |
|
|
|
854 |
|
|
|
1.0 |
|
|
|
|
1,481 |
|
|
|
42,510 |
|
|
|
51.5 |
|
Tenants Selling
Goods
|
|
|
|
|
|
|
|
|
|
|
|
|
Apparel
stores
|
|
|
6 |
|
|
|
902 |
|
|
|
1.1 |
|
Automotive
parts
|
|
|
55 |
|
|
|
746 |
|
|
|
0.9 |
|
Book
stores
|
|
|
2 |
|
|
|
156 |
|
|
|
0.2 |
|
Consumer
electronics
|
|
|
14 |
|
|
|
656 |
|
|
|
0.8 |
|
Crafts
and novelties
|
|
|
5 |
|
|
|
226 |
|
|
|
0.3 |
|
Drug
stores
|
|
|
51 |
|
|
|
3,481 |
|
|
|
4.2 |
|
General
merchandise
|
|
|
31 |
|
|
|
588 |
|
|
|
0.7 |
|
Grocery
stores
|
|
|
8 |
|
|
|
540 |
|
|
|
0.6 |
|
Home
furnishings
|
|
|
42 |
|
|
|
1,900 |
|
|
|
2.3 |
|
Home
improvement
|
|
|
31 |
|
|
|
1,472 |
|
|
|
1.8 |
|
Office
supplies
|
|
|
10 |
|
|
|
788 |
|
|
|
1.0 |
|
Pet
supplies
|
|
|
3 |
|
|
|
52 |
|
|
|
0.1 |
|
Sporting
goods
|
|
|
14 |
|
|
|
1,872 |
|
|
|
2.3 |
|
|
|
|
272 |
|
|
|
13,379 |
|
|
|
16.3 |
|
Totals
|
|
|
2,367 |
|
|
$ |
82,461 |
|
|
|
100.0 |
% |
* Less
than 0.1%
(1)
|
Includes
rental revenue for all properties owned by Realty Income at June 30, 2008,
including revenue from properties reclassified as discontinued operations
of $109.
|
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 2,282 net
leased, single-tenant retail properties as of June 30, 2008 (dollars in
thousands):
|
|
Total
Portfolio
|
|
|
Initial
Expirations(3)
|
|
|
Subsequent
Expirations(4)
|
|
Year
|
|
Total
Number
of Leases
Expiring(1)
|
|
|
Rental
Revenue
for
the
Quarter
Ended
June
30, 2008(2)
|
|
|
%
of
Total
Rental
Revenue
|
|
|
Number
of
Leases Expiring
|
|
|
Rental
Revenue
for
the
Quarter
Ended
June
30, 2008
|
|
|
%
of
Total
Rental
Revenue
|
|
|
Number
of Leases
Expiring
|
|
|
Rental
Revenue
for
the
Quarter
Ended
June
30, 2008
|
|
|
%
of
Total
Rental
Revenue
|
|
2008
|
|
|
81 |
|
|
$ |
1,795 |
|
|
|
2.3 |
% |
|
|
37 |
|
|
$ |
769 |
|
|
|
1.0 |
% |
|
|
44 |
|
|
$ |
1,026 |
|
|
|
1.3 |
% |
2009
|
|
|
124 |
|
|
|
2,741 |
|
|
|
3.4 |
|
|
|
42 |
|
|
|
914 |
|
|
|
1.1 |
|
|
|
82 |
|
|
|
1,827 |
|
|
|
2.3 |
|
2010
|
|
|
81 |
|
|
|
1,668 |
|
|
|
2.1 |
|
|
|
41 |
|
|
|
1,026 |
|
|
|
1.3 |
|
|
|
40 |
|
|
|
642 |
|
|
|
0.8 |
|
2011
|
|
|
81 |
|
|
|
2,343 |
|
|
|
2.9 |
|
|
|
30 |
|
|
|
1,283 |
|
|
|
1.6 |
|
|
|
51 |
|
|
|
1,060 |
|
|
|
1.3 |
|
2012
|
|
|
114 |
|
|
|
2,704 |
|
|
|
3.4 |
|
|
|
74 |
|
|
|
1,777 |
|
|
|
2.2 |
|
|
|
40 |
|
|
|
927 |
|
|
|
1.2 |
|
2013
|
|
|
102 |
|
|
|
3,924 |
|
|
|
4.9 |
|
|
|
84 |
|
|
|
3,526 |
|
|
|
4.4 |
|
|
|
18 |
|
|
|
398 |
|
|
|
0.5 |
|
2014
|
|
|
49 |
|
|
|
1,992 |
|
|
|
2.5 |
|
|
|
41 |
|
|
|
1,823 |
|
|
|
2.3 |
|
|
|
8 |
|
|
|
169 |
|
|
|
0.2 |
|
2015
|
|
|
90 |
|
|
|
1,807 |
|
|
|
2.3 |
|
|
|
65 |
|
|
|
1,272 |
|
|
|
1.6 |
|
|
|
25 |
|
|
|
535 |
|
|
|
0.7 |
|
2016
|
|
|
112 |
|
|
|
1,915 |
|
|
|
2.4 |
|
|
|
103 |
|
|
|
1,700 |
|
|
|
2.1 |
|
|
|
9 |
|
|
|
215 |
|
|
|
0.3 |
|
2017
|
|
|
50 |
|
|
|
2,024 |
|
|
|
2.5 |
|
|
|
45 |
|
|
|
1,929 |
|
|
|
2.4 |
|
|
|
5 |
|
|
|
95 |
|
|
|
0.1 |
|
2018
|
|
|
27 |
|
|
|
1,094 |
|
|
|
1.4 |
|
|
|
17 |
|
|
|
869 |
|
|
|
1.1 |
|
|
|
10 |
|
|
|
225 |
|
|
|
0.3 |
|
2019
|
|
|
95 |
|
|
|
4,691 |
|
|
|
5.9 |
|
|
|
94 |
|
|
|
4,616 |
|
|
|
5.8 |
|
|
|
1 |
|
|
|
75 |
|
|
|
0.1 |
|
2020
|
|
|
82 |
|
|
|
2,986 |
|
|
|
3.7 |
|
|
|
79 |
|
|
|
2,922 |
|
|
|
3.6 |
|
|
|
3 |
|
|
|
64 |
|
|
|
0.1 |
|
2021
|
|
|
147 |
|
|
|
5,814 |
|
|
|
7.3 |
|
|
|
145 |
|
|
|
5,738 |
|
|
|
7.2 |
|
|
|
2 |
|
|
|
76 |
|
|
|
0.1 |
|
2022
|
|
|
104 |
|
|
|
3,226 |
|
|
|
4.1 |
|
|
|
102 |
|
|
|
3,153 |
|
|
|
4.0 |
|
|
|
2 |
|
|
|
73 |
|
|
|
0.1 |
|
2023
|
|
|
244 |
|
|
|
7,240 |
|
|
|
9.1 |
|
|
|
243 |
|
|
|
7,195 |
|
|
|
9.0 |
|
|
|
1 |
|
|
|
45 |
|
|
|
0.1 |
|
2024
|
|
|
64 |
|
|
|
1,900 |
|
|
|
2.4 |
|
|
|
64 |
|
|
|
1,900 |
|
|
|
2.4 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
2025
|
|
|
74 |
|
|
|
6,152 |
|
|
|
7.7 |
|
|
|
68 |
|
|
|
5,997 |
|
|
|
7.5 |
|
|
|
6 |
|
|
|
155 |
|
|
|
0.2 |
|
2026
|
|
|
210 |
|
|
|
11,020 |
|
|
|
13.8 |
|
|
|
198 |
|
|
|
10,287 |
|
|
|
12.9 |
|
|
|
12 |
|
|
|
733 |
|
|
|
0.9 |
|
2027
|
|
|
163 |
|
|
|
5,218 |
|
|
|
6.6 |
|
|
|
162 |
|
|
|
5,147 |
|
|
|
6.5 |
|
|
|
1 |
|
|
|
71 |
|
|
|
0.1 |
|
2028
|
|
|
83 |
|
|
|
3,786 |
|
|
|
4.7 |
|
|
|
81 |
|
|
|
3,769 |
|
|
|
4.7 |
|
|
|
2 |
|
|
|
17 |
|
|
|
* |
|
2029
|
|
|
44 |
|
|
|
1,053 |
|
|
|
1.3 |
|
|
|
44 |
|
|
|
1,053 |
|
|
|
1.3 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
2030
|
|
|
21 |
|
|
|
939 |
|
|
|
1.2 |
|
|
|
21 |
|
|
|
939 |
|
|
|
1.2 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
2031
|
|
|
26 |
|
|
|
637 |
|
|
|
0.8 |
|
|
|
26 |
|
|
|
637 |
|
|
|
0.8 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
2032
|
|
|
2 |
|
|
|
56 |
|
|
|
0.1 |
|
|
|
2 |
|
|
|
56 |
|
|
|
0.1 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
2033
|
|
|
7 |
|
|
|
423 |
|
|
|
0.5 |
|
|
|
7 |
|
|
|
423 |
|
|
|
0.5 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
2034
|
|
|
2 |
|
|
|
230 |
|
|
|
0.3 |
|
|
|
2 |
|
|
|
230 |
|
|
|
0.3 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
2037
|
|
|
2 |
|
|
|
354 |
|
|
|
0.4 |
|
|
|
2 |
|
|
|
354 |
|
|
|
0.4 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
2043
|
|
|
1 |
|
|
|
13 |
|
|
|
* |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
1 |
|
|
|
13 |
|
|
|
* |
|
Totals
|
|
|
2,282 |
|
|
$ |
79,745 |
|
|
|
100.0 |
% |
|
|
1,919 |
|
|
$ |
71,304 |
|
|
|
89.3 |
% |
|
|
363 |
|
|
$ |
8,441 |
|
|
|
10.7 |
% |
* Less
than 0.1%
(1)
|
Excludes
ten multi-tenant properties and 75 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 $109 from properties reclassified as discontinued
operations and excludes revenue of $2,716 from ten multi-tenant properties
and from 75 vacant and unleased properties at June 30,
2008.
|
(3)
|
Represents
leases to the initial tenant of the property that are expiring for the
first time.
|
(4)
|
Represents
lease expirations on properties in the portfolio, which have previously
been renewed, extended or
re-tenanted.
|
State
Diversification
The
following table sets forth certain state-by-state information regarding Realty
Income’s property portfolio (excluding properties owned by Crest) as of June 30,
2008 (dollars in thousands):
State
|
|
Number
of
Properties
|
|
|
Percent
Leased
|
|
|
Approximate
Leasable
Square
Feet
|
|
|
Rental
Revenue for
the
Quarter Ended
June
30, 2008(1)
|
|
|
Percentage
of
Rental
Revenue
|
|
Alabama
|
|
|
63 |
|
|
|
98 |
% |
|
|
425,400 |
|
|
$ |
1,872 |
|
|
|
2.3 |
% |
Alaska
|
|
|
2 |
|
|
|
100 |
|
|
|
128,500 |
|
|
|
277 |
|
|
|
0.3 |
|
Arizona
|
|
|
80 |
|
|
|
98 |
|
|
|
395,800 |
|
|
|
2,413 |
|
|
|
2.9 |
|
Arkansas
|
|
|
18 |
|
|
|
100 |
|
|
|
98,500 |
|
|
|
460 |
|
|
|
0.6 |
|
California
|
|
|
65 |
|
|
|
100 |
|
|
|
1,167,300 |
|
|
|
4,512 |
|
|
|
5.5 |
|
Colorado
|
|
|
53 |
|
|
|
96 |
|
|
|
486,300 |
|
|
|
1,862 |
|
|
|
2.3 |
|
Connecticut
|
|
|
26 |
|
|
|
100 |
|
|
|
282,300 |
|
|
|
1,351 |
|
|
|
1.6 |
|
Delaware
|
|
|
17 |
|
|
|
100 |
|
|
|
33,300 |
|
|
|
427 |
|
|
|
0.5 |
|
Florida
|
|
|
168 |
|
|
|
97 |
|
|
|
1,451,000 |
|
|
|
6,688 |
|
|
|
8.1 |
|
Georgia
|
|
|
132 |
|
|
|
98 |
|
|
|
926,900 |
|
|
|
3,946 |
|
|
|
4.8 |
|
Idaho
|
|
|
14 |
|
|
|
71 |
|
|
|
90,200 |
|
|
|
348 |
|
|
|
0.4 |
|
Illinois
|
|
|
74 |
|
|
|
96 |
|
|
|
870,300 |
|
|
|
4,207 |
|
|
|
5.1 |
|
Indiana
|
|
|
82 |
|
|
|
96 |
|
|
|
692,400 |
|
|
|
3,190 |
|
|
|
3.9 |
|
Iowa
|
|
|
22 |
|
|
|
95 |
|
|
|
296,200 |
|
|
|
999 |
|
|
|
1.2 |
|
Kansas
|
|
|
33 |
|
|
|
94 |
|
|
|
573,500 |
|
|
|
1,113 |
|
|
|
1.4 |
|
Kentucky
|
|
|
22 |
|
|
|
100 |
|
|
|
111,500 |
|
|
|
698 |
|
|
|
0.8 |
|
Louisiana
|
|
|
33 |
|
|
|
97 |
|
|
|
190,400 |
|
|
|
912 |
|
|
|
1.1 |
|
Maine
|
|
|
3 |
|
|
|
100 |
|
|
|
22,500 |
|
|
|
160 |
|
|
|
0.2 |
|
Maryland
|
|
|
29 |
|
|
|
100 |
|
|
|
271,200 |
|
|
|
1,607 |
|
|
|
2.0 |
|
Massachusetts
|
|
|
67 |
|
|
|
100 |
|
|
|
582,800 |
|
|
|
2,561 |
|
|
|
3.1 |
|
Michigan
|
|
|
52 |
|
|
|
98 |
|
|
|
257,300 |
|
|
|
1,323 |
|
|
|
1.6 |
|
Minnesota
|
|
|
21 |
|
|
|
100 |
|
|
|
392,100 |
|
|
|
1,516 |
|
|
|
1.8 |
|
Mississippi
|
|
|
72 |
|
|
|
96 |
|
|
|
359,600 |
|
|
|
1,441 |
|
|
|
1.7 |
|
Missouri
|
|
|
62 |
|
|
|
97 |
|
|
|
640,100 |
|
|
|
2,098 |
|
|
|
2.5 |
|
Montana
|
|
|
2 |
|
|
|
100 |
|
|
|
30,000 |
|
|
|
74 |
|
|
|
0.1 |
|
Nebraska
|
|
|
19 |
|
|
|
100 |
|
|
|
196,300 |
|
|
|
649 |
|
|
|
0.8 |
|
Nevada
|
|
|
15 |
|
|
|
93 |
|
|
|
191,000 |
|
|
|
858 |
|
|
|
1.0 |
|
New
Hampshire
|
|
|
14 |
|
|
|
100 |
|
|
|
109,900 |
|
|
|
544 |
|
|
|
0.7 |
|
New
Jersey
|
|
|
35 |
|
|
|
100 |
|
|
|
266,300 |
|
|
|
1,922 |
|
|
|
2.3 |
|
New
Mexico
|
|
|
8 |
|
|
|
100 |
|
|
|
56,400 |
|
|
|
176 |
|
|
|
0.2 |
|
New
York
|
|
|
42 |
|
|
|
95 |
|
|
|
503,200 |
|
|
|
2,514 |
|
|
|
3.1 |
|
North
Carolina
|
|
|
97 |
|
|
|
99 |
|
|
|
551,100 |
|
|
|
2,951 |
|
|
|
3.6 |
|
North
Dakota
|
|
|
6 |
|
|
|
100 |
|
|
|
36,600 |
|
|
|
57 |
|
|
|
0.1 |
|
Ohio
|
|
|
137 |
|
|
|
98 |
|
|
|
850,900 |
|
|
|
3,453 |
|
|
|
4.2 |
|
Oklahoma
|
|
|
25 |
|
|
|
96 |
|
|
|
145,900 |
|
|
|
593 |
|
|
|
0.7 |
|
Oregon
|
|
|
18 |
|
|
|
100 |
|
|
|
297,300 |
|
|
|
846 |
|
|
|
1.0 |
|
Pennsylvania
|
|
|
101 |
|
|
|
100 |
|
|
|
688,800 |
|
|
|
3,512 |
|
|
|
4.3 |
|
Rhode
Island
|
|
|
4 |
|
|
|
100 |
|
|
|
14,500 |
|
|
|
87 |
|
|
|
0.1 |
|
South
Carolina
|
|
|
100 |
|
|
|
99 |
|
|
|
374,400 |
|
|
|
2,223 |
|
|
|
2.7 |
|
South
Dakota
|
|
|
9 |
|
|
|
100 |
|
|
|
24,900 |
|
|
|
102 |
|
|
|
0.1 |
|
Tennessee
|
|
|
135 |
|
|
|
95 |
|
|
|
635,500 |
|
|
|
2,928 |
|
|
|
3.6 |
|
Texas
|
|
|
216 |
|
|
|
92 |
|
|
|
2,317,100 |
|
|
|
7,668 |
|
|
|
9.3 |
|
Utah
|
|
|
6 |
|
|
|
67 |
|
|
|
35,100 |
|
|
|
87 |
|
|
|
0.1 |
|
Vermont
|
|
|
4 |
|
|
|
100 |
|
|
|
12,700 |
|
|
|
122 |
|
|
|
0.2 |
|
Virginia
|
|
|
104 |
|
|
|
99 |
|
|
|
637,100 |
|
|
|
3,504 |
|
|
|
4.2 |
|
Washington
|
|
|
36 |
|
|
|
89 |
|
|
|
235,100 |
|
|
|
673 |
|
|
|
0.8 |
|
West
Virginia
|
|
|
3 |
|
|
|
67 |
|
|
|
35,100 |
|
|
|
145 |
|
|
|
0.2 |
|
Wisconsin
|
|
|
20 |
|
|
|
95 |
|
|
|
248,100 |
|
|
|
774 |
|
|
|
0.9 |
|
Wyoming
|
|
|
1 |
|
|
|
100 |
|
|
|
4,200 |
|
|
|
18 |
|
|
|
* |
|
Totals/Average
|
|
|
2,367 |
|
|
|
97 |
% |
|
|
19,242,900 |
|
|
$ |
82,461 |
|
|
|
100.0 |
% |
* Less
than 0.1%
(1)
|
Includes
rental revenue for all properties owned by Realty Income at June 30, 2008,
including revenue from properties reclassified as discontinued operations
of $109.
|
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
96.4% of our 2,367 retail properties, or 2,282 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.
For
information on the impact of recent accounting pronouncements on our business,
see note 2 of the Notes to Consolidated Financial Statements.
Our
common stock is listed on the NYSE under the ticker symbol “O” with a cusip
number of 756109-104. Our central index key number is
726728.
Our
Class D cumulative redeemable preferred stock is listed on the NYSE under the
ticker symbol “OprD” with a cusip number of 756109-609.
Our
Class E cumulative redeemable preferred stock is listed on the NYSE under the
ticker symbol “OprE” with a cusip number of 756109-708.
Our
8.25% Monthly Income Senior Notes due 2008 are listed on the NYSE under the
ticker symbol “OUI” with a cusip number of 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 June 30, 2008. 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, and fair values as of June 30, 2008. 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
|
|
2008(1)
|
|
$ |
100.0 |
|
|
|
8.25 |
% |
|
$ |
-- |
|
|
|
-- |
% |
2009(2)
|
|
|
20.0 |
|
|
|
8.00 |
|
|
|
-- |
|
|
|
-- |
|
2010
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
2011(3)
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
2012
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Thereafter(4)
|
|
|
1,350.0 |
|
|
|
6.10 |
|
|
|
-- |
|
|
|
-- |
|
Totals
|
|
$ |
1,470.0 |
|
|
|
6.28 |
% |
|
$ |
-- |
|
|
|
-- |
% |
Fair
Value(5)
|
|
$ |
1,349.2 |
|
|
|
|
|
|
$ |
-- |
|
|
|
|
|
(1)
|
$100
million matures in November 2008.
|
(2)
|
$20
million matures in January 2009.
|
(3)
|
The
credit facility expires in May 2011. There was no outstanding
credit facility balance as of July 21,
2008.
|
(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 June 30, 2008 on the closing
market price or indicative price per each
note.
|
The
table incorporates only those exposures that exist as of June 30, 2008. 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 June 30, 2008, 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 Procedures
We
maintain disclosure controls and procedures (as defined in Securities Exchange
Act 1934 Rules 13a-15(e) and 15d-15(e)) 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
SEC’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 of
and for the quarter ended June 30, 2008, 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
2007 Annual Report on Form 10-K.
Our
annual meeting of stockholders was held on May 13, 2008. As of
March 14, 2008, the record date for the annual meeting, there were 101,293,987
common shares issued and outstanding and entitled to vote at the annual meeting.
Proxies for the meeting were solicited pursuant to Section 14(a) of the
Securities Exchange Act of 1934.
The
first proposal considered at the annual meeting was the election of ten
directors to serve until the 2009 annual meeting of stockholders and until their
respective successors are duly elected and qualify. All of
management’s nominees for directors as listed in the proxy statement were
elected with the following vote:
|
|
Shares
Voted
For
|
|
|
Votes
Withheld
|
|
Kathleen
R. Allen
|
|
|
87,985,210 |
|
|
|
721,063 |
|
Donald
R. Cameron
|
|
|
87,815,624 |
|
|
|
890,649 |
|
William
E. Clark
|
|
|
87,781,753 |
|
|
|
924,520 |
|
Priya
Cherian Huskins
|
|
|
87,927,890 |
|
|
|
778,383 |
|
Roger
P. Kuppinger
|
|
|
87,822,858 |
|
|
|
883,415 |
|
Thomas
A. Lewis
|
|
|
87,844,712 |
|
|
|
861,561 |
|
Michael
D. McKee
|
|
|
87,879,976 |
|
|
|
826,297 |
|
Gregory
T. McLaughlin
|
|
|
87,887,571 |
|
|
|
818,702 |
|
Ronald
L. Merriman
|
|
|
87,628,375 |
|
|
|
1,077,898 |
|
Willard
H. Smith Jr
|
|
|
87,780,498 |
|
|
|
925,775 |
|
The
second proposal considered at the annual meeting was the ratification of the
appointment of KPMG LLP as the independent registered public accounting
firm for the year ended December 31, 2008. This proposal was approved
by 87,469,994 shares voted for, 673,091 shares voted against and 563,188 shares
representing abstentions.
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, and as amended and
restated on December 12, 2007 and amended and restated on May 13, 2008
(filed as exhibit 3.1 to the Company’s Form 8-K dated May 13, 2008, and
incorporated herein by reference).
|
3.3
|
Articles
Supplementary to the Articles of Incorporation of the Company classifying
and designating the 7.375% Monthly Income Class D Cumulative Redeemable
Preferred Stock (filed as exhibit 3.8 to the Company’s Form 8-A filed on
May 25, 2004 and incorporated herein by reference).
|
3.4
|
Articles
Supplementary to the Articles of Incorporation of the Company classifying
and designating additional shares of the 7.375% Monthly Income Class D
Cumulative Redeemable Preferred Stock (filed as exhibit 3.2 to the
Company’s Form 8-K filed on October 19, 2004 and incorporated herein by
reference).
|
3.5
|
Articles
Supplementary to the Articles of Incorporation of the Company classifying
and designating the 6.75% 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 8.25% Notes due 2008 (filed as exhibit 4.3 to Company’s Form 8-K, dated
October 27, 1998 and incorporated herein by
reference).
|
4.3
|
Indenture
dated as of October 28, 1998 between the Company and The Bank of New York
(filed as exhibit 4.1 to the Company’s Form 8-K, dated October
27, 1998 and incorporated herein by reference).
|
4.4
|
Pricing
Committee Resolutions and Form of 8% Notes due 2009 (filed as exhibit 4.2
to the Company’s Form 8-K, dated January 21, 1999 and incorporated herein
by reference).
|
4.5
|
Form
of 5.375% Senior Notes due 2013 (filed as exhibit 4.2 to the Company’s
Form 8-K, dated March 5, 2003 and incorporated herein by
reference).
|
4.6
|
Officer’s
Certificate pursuant to sections 201, 301 and 303 of the Indenture dated
October 28, 1998 between the Company and The Bank of New York, as
Trustee, establishing a series of securities entitled 5.375% Senior Notes
due 2013 (filed as exhibit 4.3 to the Company’s Form 8-K, dated
March 5, 2003 and incorporated herein by
reference).
|
4.7
|
Form
of 5.50% Senior Notes due 2015 (filed as exhibit 4.2 to the Company’s Form
8-K, dated November 19, 2003 and incorporated herein by
reference).
|
4.8
|
Officer’s
Certificate pursuant to sections 201, 301 and 303 of the Indenture dated
October 28, 1998 between the Company and The Bank of New York, as
Trustee, establishing a series of securities entitled 5.50% Senior Notes
due 2015 (filed as exhibit 4.3 to the Company’s Form 8-K, dated
November 19, 2003 and incorporated herein by
reference).
|
4.9
|
Form
of 5.875% 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 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 5.875% Senior
Debentures due 2035 (filed as exhibit 4.3 to the Company’s Form 8-K,
dated March 8, 2005 and incorporated herein by
reference).
|
4.11
|
Form
of 5.375% 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 5.375% 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 6.75% 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
6.75% 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
|
$355
million Credit Agreement dated May 15, 2008 (filed as exhibit 10.1 to the
Company’s Form 8-K filed on May 16, 2008 and incorporated herein by
reference).
|
Certifications
*
31.1
|
Rule
13a-14(a) Certifications as filed by the Chief Executive Officer pursuant
to SEC release No. 33-8212 and 34-47551.
|
*
31.2
|
Rule
13a-14(a) Certifications as filed by the Chief Financial Officer pursuant
to SEC release No. 33-8212 and 34-47551.
|
*
32
|
Section
1350 Certifications as furnished by the Chief Executive Officer and the
Chief Financial Officer pursuant to SEC release No. 33-8212 and
34-47551.
|
|
|
|
*
Filed herewith
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
REALTY
INCOME CORPORATION
|
|
|
Date:
July 30, 2008
|
/s/ GREGORY J.
FAHEY
|
|
Gregory
J. Fahey
|
|
Vice
President, Controller
|
|
(Principal
Accounting Officer)
|
|
|
48