-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FV3fLRELAYNQEnhrhO0pWqzSyo/RxebWxZ5cGI9yBHWPtsjbHLMQdP6htxUbvhtV 39BwaZkz/EgfFBQnXt7eaQ== 0000726728-98-000014.txt : 19980514 0000726728-98-000014.hdr.sgml : 19980514 ACCESSION NUMBER: 0000726728-98-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: REALTY INCOME CORP CENTRAL INDEX KEY: 0000726728 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 330580106 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13374 FILM NUMBER: 98618088 BUSINESS ADDRESS: STREET 1: 220 W CREST ST CITY: ESCONDIDO STATE: CA ZIP: 92025-1707 BUSINESS PHONE: 6197412111 MAIL ADDRESS: STREET 1: 220 WEST CREST ST CITY: ESCONDIDO STATE: CA ZIP: 92025-1707 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q ========= [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended MARCH 31, 1998, or ================== [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 COMMISSION FILE NUMBER 1-13318 ============================== REALTY INCOME CORPORATION ========================= (Exact name of registrant as specified in its charter) MARYLAND ======== (State or other jurisdiction of incorporation or organization) 33-0580106 ========== (I.R.S. Employer Identification No.) 220 WEST CREST STREET, ESCONDIDO, CALIFORNIA 92025 =================================================== (Address of principal executive offices) (760) 741-2111 ============== (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] There were 26,836,564 shares of common stock outstanding as of May 13, 1998. Page 1 REALTY INCOME CORPORATION Form 10-Q March 31, 1998 Table of Contents -----------------
PART I. FINANCIAL INFORMATION Pages ============================== ----- Item 1: Financial Statements Consolidated Balance Sheets........................ 3-4 Consolidated Statements of Income.................. 5 Consolidated Statements of Cash Flows.............. 6-7 Notes to Consolidated Financial Statements......... 8-10 Item 2: Management's Discussion and Analysis Of Financial Condition and Results Of Operations......10-25 PART II. OTHER INFORMATION ========================== Item 6: Exhibits and Reports on Form 8-K...................25-26 SIGNATURE................................................... 26 EXHIBIT INDEX............................................... 26
Page 2 PART I. FINANCIAL INFORMATION ============================== ITEM 1. FINANCIAL STATEMENTS
REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets =========================== March 31, 1998 and December 31, 1997 (dollars in thousands, except per share data) 1998 1997 (Unaudited) =========== ========= ASSETS Real estate, at cost: Land $ 232,496 $ 214,342 Buildings and improvements 516,582 485,455 --------- --------- 749,078 699,797 Less - accumulated depreciation and amortization (156,182) (152,206) --------- --------- Net real estate 592,896 547,591 Cash and cash equivalents 1,713 2,123 Accounts receivable 1,771 2,888 Due from affiliates 333 348 Other assets 3,259 3,170 Goodwill, net 20,669 20,901 --------- --------- TOTAL ASSETS $ 620,641 $ 577,021 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Distributions payable $ 4,361 $ 4,112 Accounts payable and accrued expenses 4,133 2,180 Other liabilities 4,810 4,814 Lines of credit payable 38,000 22,600 Notes payable 110,000 110,000 --------- --------- TOTAL LIABILITIES 161,304 143,706 --------- ---------
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REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets =========================== March 31, 1998 and December 31, 1997 (dollars in thousands, except per share data) 1998 1997 (Unaudited) =========== ========= Stockholders' equity Preferred stock, par value $1.00 per share, 20,000,000 shares authorized, no shares issued or outstanding -- -- Common stock, par value $1.00 per share, 100,000,000 shares authorized, 26,836,564 and 25,698,464 shares issued and outstanding in 1998 and 1997, respectively 26,837 25,698 Paid in capital in excess of par value 610,119 582,450 Accumulated distributions in excess of net income (177,619) (174,833) --------- --------- TOTAL STOCKHOLDERS' EQUITY 459,337 433,315 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 620,641 $ 577,021 ========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements. Page 4
REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Statements Of Income ================================= For the three months ended March 31, 1998 and 1997 (dollars in thousands, except per share data) (Unaudited) 1998 1997 ========== ========== REVENUE Rental $ 19,168 $ 15,449 Interest and other 54 31 ---------- ---------- 19,222 15,480 ---------- ---------- EXPENSES Depreciation and amortization 5,084 4,464 General and administrative 1,465 1,253 Property 473 491 Interest 2,491 1,312 ---------- ---------- 9,513 7,520 ---------- ---------- Income from operations 9,709 7,960 Gain on sales of properties 215 225 ---------- ---------- NET INCOME $ 9,924 $ 8,185 ========== ========== Basic and diluted net income per share $ 0.38 $ 0.36 ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. Page 5
REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Statements Of Cash Flows ===================================== For the three months ended March 31, 1998 and 1997 (dollars in thousands) (Unaudited) 1998 1997 ========= ========= CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 9,924 $ 8,185 Adjustments to net income: Depreciation and amortization 5,084 4,464 Gain on sales of properties (215) (225) Change in assets and liabilities: Accounts receivable and other assets 1,280 657 Accounts payable, accrued expenses and other liabilities 2,186 (2,053) --------- --------- Net cash provided by operating activities 18,259 11,028 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of properties 1,948 1,339 Acquisition of and additions to properties (52,061) (17,933) --------- --------- Net cash used in investing activities (50,113) (16,594) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Payments of distributions (12,462) (10,861) Proceeds from line of credit 54,700 18,200 Payment of lines of credit (39,300) -- Proceeds from stock offerings, net offering costs of $64 28,437 -- Proceeds from stock options exercised 69 -- --------- --------- Net cash provided by financing activities 31,444 7,339 --------- ---------
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REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Statements Of Cash Flows ===================================== For the three months ended March 31, 1998 and 1997 (dollars in thousands) (Unaudited) 1998 1997 ========= ========= Net increase (decrease) in cash and cash equivalents (410) 1,773 Cash and cash equivalents, beginning of period 2,123 1,559 --------- --------- Cash and cash equivalents, end of period $ 1,713 $ 3,332 ========= =========
Interest paid during the first three months of 1998 and 1997 was $92,000 and $1.2 million, respectively. The accompanying notes to consolidated financial statements are an integral part of these statements. Page 7 REALTY INCOME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements ========================================== March 31, 1998 (Unaudited) 1. Management Statement and General The financial statements of Realty Income Corporation ("Realty Income" or the "Company") were prepared from the books and records of the Company without audit and in the opinion of management include all adjustments (consisting of only normal recurring accruals) necessary to present a fair statement of results for the interim periods presented. Readers of this quarterly report should refer to the audited financial statements of the Company for the year ended December 31, 1997, which are included in the Company's 1997 Annual Report on Form 10-K, as certain disclosures which would substantially duplicate those contained in such audited financial statements have been omitted from this report. 2. Property Acquisitions During the first quarter of 1998, the Company acquired 22 retail properties in 16 states for $50.1 million (excluding the estimated unfunded development costs of $5.1 million on properties under construction at March 31, 1998). During the first quarter of 1998, the Company also invested $1.7 million in 14 development properties acquired in 1997. The 22 properties acquired in the first quarter of 1998 are 100% leased under net leases, with an average initial lease term of 15.5 years. During the first quarter of 1997, the Company acquired 11 retail properties located in six states, investing $17.9 million. 3. Credit Facility Available For Acquisitions The Company has a $150 million, three year, revolving, unsecured acquisition credit facility that expires in December 2000. The credit facility is from The Bank of New York, as agent, and several U.S. and non-U.S. banks. In November 1997, the Company obtained a $10 million unsecured line of credit with The Bank of New York, which was repaid and canceled in January 1998. As of March 31, 1998 and December 31, 1997, the outstanding balances on the credit facility and line of credit were $38.0 million and $22.6 million, respectively, with an effective interest rate of approximately 6.55% and 6.66%, respectively. The credit facility currently bears interest at 0.85% over the London Interbank Offered Rate ("LIBOR") and offers the Company other interest rate options. A facility fee of 0.15%, per annum, accrues on the total commitment of the credit facility. Page 8 The credit facility is subject to various leverage and interest coverage ratio limitations. The Company is and has been in compliance with these limitations. In the first quarter of 1998 and 1997, interest of $80,000 and $36,000 respectively, was capitalized on properties under construction. 4. Common Stock Offerings A. In March 1998, the Company issued 372,093 shares of common stock to a unit investment trust at a net price to the Company of $25.53125 per share. The net proceeds of $9.5 million were used to repay borrowings under the credit facility of $7.9 million and to acquire properties. B. In February 1998, the Company issued 751,174 shares of common stock to a unit investment trust at a net price to the Company of $25.295 per share. The net proceeds of $19.0 million were used to repay borrowings under the credit facility. 5. Distributions Paid And Payable During the three months ended March 31, 1998, the Company paid three monthly distributions of $0.16 per share, totaling $0.48 per share. For the three months ended March 31, 1997, the Company paid three monthly distributions of $0.1575 per share, totaling $0.4725 per share. As of March 31, 1998, a distribution of $0.1625 per share was declared and paid on April 15, 1998. 6. Gain on Sales of Properties For the three months ended March 31, 1998, the Company sold three properties (one child care center, one multi-tenant location and one restaurant) for $1.9 million and recognized a gain of $215,000. For the three months ended March 31, 1997, the company sold four properties (two restaurants, one child care center and one multi- tenant location) for $1.3 million and recognized a gain of $225,000. 7. Net Income per Share Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted net income per share is computed by dividing the amount of net income for the period by each share that would have been outstanding assuming the issuance of common shares for all potentially dilutive common shares outstanding during the reporting period. Page 9 The following is a reconciliation of the denominator of the basic net income per share computation to the denominator of the diluted net income per share computation, for the three months ended March 31, 1998 and 1997 (net income was available to common shareholders for all periods presented): 1998 1997 ---------- ---------- Weighted average shares used for the basic net income computation 26,028,589 22,986,690 Incremental shares from the assumed conversion of stock options 9,006 3,038 ---------- ---------- Adjusted weighted average shares used for diluted net income computation 26,037,595 22,989,728 ========== ========== 8. Subsequent Event In May 1998, the Company entered into a treasury interest rate lock agreement to hedge against the possibility of rising interest rates applicable to an anticipated debt offering. Under the interest rate lock agreement, the Company receives or makes a payment based on the differential between a specified interest rate, 5.726%, and the actual 10-year treasury interest rate on a notional principal amount of $100 million, at the end of six months. The Company has only limited involvement with a derivative financial instrument and does not use it for trading purposes. The derivative financial instrument is used to manage a well-defined interest rate risk. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS - -------------------------- This report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. When used in this quarterly report, the words estimated, anticipated and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are inherently subject to risk and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. In particular, among the factors that could cause actual results to differ materially are the continued qualification as a real estate investment trust, general business and Page 10 economic conditions, competition, interest rates, accessibility of debt and equity capital markets and other risks inherent in the real estate business including tenant defaults, potential liability relating to environmental matters and illiquidity of real estate investments. For further description and detail of other factors please see "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on the From 10-K for the fiscal year ended December 31, 1997. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. GENERAL - ------- Realty Income Corporation, a Maryland corporation ("Realty Income" or the "Company") was organized to operate as an equity real estate investment trust ("REIT"). Realty Income is a fully integrated self- administered real estate company with in-house acquisition, leasing, legal, retail and real estate research, portfolio management and capital markets expertise. As of March 31, 1998, the Company owned a diversified portfolio of 845 retail properties located in 43 states with over 6.6 million square feet of leasable space. Of the 845 properties in the portfolio, 839 are single-tenant properties with the remainder being multi-tenant properties. As of March 31, 1998, 835, or over 99%, of the 839 single-tenant properties were net leased with an average remaining lease term (excluding extension options) of approximately 8.4 years. The Company's primary business objective is to generate a consistent and predictable level of funds from operations ("FFO") per share and distributions to stockholders. Additionally, the Company generally will seek to increase FFO per share and distributions to stockholders through both active portfolio management and the acquisition of additional properties. The Company also seeks to lower the ratio of distributions to stockholders as a percentage of FFO in order to allow internal cash flow to be used to fund additional acquisitions and for other corporate purposes. The Company's portfolio management focus includes: (i) contractual rent increases or existing leases; (ii) rental increases at the termination of existing leases when market conditions permit; and (iii) the active management of the Company's property portfolio, including selective sales of properties. The Company generally pursues the acquisition of additional properties under long-term, net lease agreements with initial contractual base rent which, at the time Page 11 of acquisition and as a percentage of acquisition costs, is in excess of the Company's estimated cost of capital. Realty Income adheres to a focused strategy of acquiring freestanding, single-tenant, retail properties leased to regional and national retail chains under long-term, net lease agreements. The Company typically acquires retail store locations, which provides capital to the operators for continued expansion and other corporate purposes. Realty Income's acquisition and investment activities are concentrated in highly specific target markets and focus primarily on middle-market and upper-market retailers providing goods and services which satisfy basic consumer needs. The Company's net lease agreements generally are for initial terms of 10 to 20 years, require the tenant to pay a minimum monthly rent and property operating expenses (taxes, insurance and maintenance), and provide for future rent increases (typically subject to ceilings) based on increases in the consumer price index or additional rent calculated as a percentage of the tenant's gross sales above a specific level. From 1970 through December 31, 1997, Realty Income has acquired and leased back to regional and national retail chains 797 properties (including 32 properties that have been sold) and has collected over 98% of the original contractual rent obligation on these properties. Realty Income believes that the long-term ownership of an actively managed, diversified portfolio of retail properties leased under long- term, net lease agreements can produce consistent, predictable income and the potential for long-term share price appreciation. Management believes that the income generated under long-term leases, coupled with the tenant's responsibility for property expenses under the net lease structure, generally produces a more predictable income stream than many other types of real estate portfolios. Other Information The Company's common stock is listed on the New York Stock Exchange under the symbol "O" and its central index key ("CIK") number is 726728. The Company anticipates that the year 2000 date issue will not adversely affect its current software or computers and will not have a material impact on its consolidated financial position, results of operations, or liquidity. Page 12 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Cash Reserves Realty Income was organized for the purpose of operating as an equity REIT which acquires and leases properties and distributes to stockholders, in the form of monthly cash distributions, a substantial portion of its net cash flow generated from leases on its retail properties. The Company intends to retain an appropriate amount of cash as working capital reserves. At March 31, 1998, the Company had cash and cash equivalents totaling $1.7 million. Management believes that the Company's cash and cash equivalents on hand, cash provided from operating activities and borrowing capacity are sufficient to meet its liquidity needs for the foreseeable future, except that the Company intends to utilize additional sources of capital to fund property acquisitions. Capital Funding Realty Income has a $150 million, three-year revolving, unsecured acquisition credit facility that expires in December 2000. The credit facility currently bears interest at 0.85% over the London Interbank Offered Rate ("LIBOR") and offers the Company other interest rate options. As of May 8, 1998, $106.1 million of borrowing capacity was available to the Company under the acquisition credit facility. At that time, the outstanding balance was $43.9 million with an effective interest rate of 6.54%. This credit facility has been and is expected to be used to acquire additional retail properties leased to national and regional retail chains under long term lease agreements. Any additional borrowings will increase the Company's exposure to interest rate risk. Realty Income expects to meet its long-term capital needs for the acquisition of properties through the issuance of public or private debt or equity. In August 1997, the Company filed a universal shelf registration statement with the Securities and Exchange Commission covering up to $300 million in value of common stock, preferred stock and/or debt securities. Approximately $101.4 million in value of common stock and debt securities has been issued under the universal shelf registration statement through May 8, 1998. In May 1998, the Company entered into a treasury interest rate lock agreement to hedge against the possibility of rising interest rates applicable to an anticipated debt offering. Under the interest rate lock agreement, the Company receives or makes a payment based on the differential between a specified interest rate, 5.726%, and the actual 10-year treasury interest rate on a notional principal amount of $100 million, at the end of six months. Page 13 On March 30, 1998, Realty Income issued 372,093 shares of common stock at a net price to the Company of $25.53125 per share to a unit investment trust. The net proceeds were used to repay borrowings of $7.9 million under the acquisition credit facility and to acquire additional properties. On February 23, 1998, Realty Income issued 751,174 shares of common stock at a net price to the Company of $25.295 per share to a unit investment trust. The net proceeds were used to repay borrowings of $19.0 million under the acquisition credit facility. The Company received investment grade corporate credit ratings from Duff & Phelps Rating Company, Moody's Investor Service, Inc., and Standard & Poor's Rating Group in December 1996. Currently, Duff & Phelps has assigned a rating of BBB, Moody's has assigned a rating of Baa3, and Standard & Poor's has assigned a rating of BBB- to the Company's senior debt. These ratings are subject to change based upon, among other things, the Company's results of operations and financial condition. Property Acquisitions During the first quarter of 1998, Realty Income acquired 22 retail properties located in 16 states for $50.1 million (excluding the estimated unfunded development costs of $5.1 million on properties under construction at March 31, 1998) and selectively sold three properties, increasing the number of properties in its portfolio by 2.3% to 845 from 826 at December 31, 1997. During the first quarter of 1998, the Company also invested $1.7 million in development properties acquired in 1997 and $14,000 in three existing properties in its portfolio. The 22 properties acquired will contain approximately 357,000 leasable square feet and are 100% leased under net leases, with an average initial lease term of 15.5 years. The weighted average annual unleveraged return on the cost of the 22 properties (including the estimated unfunded development cost of the properties under development) is estimated to be 10.6%, computed as estimated contractual net operating income (which in the case of a net leased property is equal to the base rent or, in the case of properties under construction, the estimated base rent under the lease) for the first year of each lease, divided by total acquisition and estimated development costs. Since it is possible that a tenant could default on the payment of contractual rent, no assurance can be given that the actual return on the cost of the 22 properties acquired in 1998 will not differ from the foregoing percentage. Of the properties acquired during first quarter of 1998, 14 were occupied as of May 8, 1998 and the remaining properties were pre- leased and under construction pursuant to contracts under which the tenant has agreed to develop the properties (with development costs funded by the Company) and to begin paying rent when the premises open Page 14 for business. All of the properties acquired in 1998, including the properties under development, are leased with initial terms of 11 to 19 years. Distributions Cash distributions paid during the first quarter of 1998 and 1997 were $12.5 million and $10.9 million, respectively. During the first three months of 1998, the Company paid three monthly distributions of $0.16 per share, totaling $0.48 per share. In April 1998, the monthly distribution was increased to $0.1625 per share. In March and April 1998, the Company declared distributions of $0.1625 per share which were paid on April 15, 1998 and payable on May 18, 1998, respectively. FUNDS FROM OPERATIONS ("FFO") - ----------------------------- FFO for the first quarter of 1998 increased by $2.34 million or 18.9% to $14.75 million versus $12.41 million during the first quarter of 1997. The following is a reconciliation of net income to FFO, and information regarding distributions paid and diluted weighted average number of shares outstanding for the first quarter of 1998 and 1997 (dollars in thousands, except per share data):
1998 1997 -------- -------- Net income $ 9,924 $ 8,185 Plus depreciation and amortization 5,084 4,464 Less depreciation of furniture, fixtures and equipment and amortization of organization costs (39) (11) Less gain on sales of properties (215) (225) -------- -------- Total Funds From Operations $ 14,754 $ 12,413 ======== ======== Cash Distributions Paid $ 12,462 $ 10,861 FFO in excess of Distributions $ 2,292 $ 1,552 Diluted weighted average number of shares outstanding 26,037,595 22,989,728
Management considers FFO to be an appropriate measure of the performance of an equity REIT. FFO is used by financial analysts in evaluating REITs and can be one measure of a REIT's ability to make Page 15 cash distribution payments. Presentation of this information provides the reader with an additional measure to compare the performance of different REITs, although it should be noted that not all REITs calculate FFO the same way so comparisons with such REITs may not be meaningful. Realty Income defines FFO as net income before gain on sales of properties, plus depreciation and amortization. In accordance with the recommendations of the National Association of Real Estate Investment Trusts ("NAREIT"), amortization of deferred financing costs is not added back to net income to calculate FFO. Amortization of financing costs are included in interest expense in the consolidated statements of income. 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 the Company's performance or to cash flows from operating, investing, and financing activities as a measure of liquidity or ability to make cash distributions or to pay debt service. RESULTS OF OPERATIONS - --------------------- The following is a comparison of the three months ended March 31, 1998 to the three months ended March 31, 1997 Rental revenue was $19.17 million for 1998 versus $15.45 million for 1997, an increase of 24.1% or $3.72 million. The increase in rental revenue was primarily due to the acquisition of 118 properties during 1997 and the first quarter of 1998 (the "New Properties"). The New Properties generated revenue of $3.69 million in 1998 compared to $129,000 in 1997, an increase of $3.56 million. Of the 845 properties in the portfolio as of March 31, 1998, 839 are single-tenant properties with the remaining properties being multi- tenant properties. Of the 839 single-tenant properties, 835, or over 99%, were net leased with an average remaining lease term (excluding extension options) of approximately 8.4 years. At March 31, 1998, 835 of the Company's 839 single tenant properties had leases which provide for increases in rents through: (i) base rent increases tied to a consumer price index with adjustment ceilings; (ii) overage rent based on a percentage of the tenants' gross sales or (iii) fixed increases. Some leases contain more than one of these clauses. Percentage rent, which is included in rental revenue, was $208,000 during 1998 and $293,000 in 1997. Page 16 Same store rents generated on 719 properties owned during all of both the first quarter of 1998 and 1997 increased by $124,000 or 0.8%, to $15.25 million from $15.13 million. The following tables represent Realty Income's rental revenue by industry (dollars in thousands):
Annualized as For the Quarter Ended of April 1, 1998 March 31, 1998 ---------------------- ---------------------- Rental(1) Percentage Rental Percentage Industry Revenue of Total Revenue of Total - -------------------- ------- ---------- ------- ---------- Apparel Stores $ 3,927 4.8% $ 515 2.7% Automotive Parts 6,717 8.1 1,436 7.5 Automotive Service 6,667 8.1 1,501 7.8 Book Stores 450 0.5 113 0.6 Child Care 24,509 29.6 5,947 31.0 Consumer Electronics 4,432 5.4 1,172 6.1 Convenience Stores 4,470 5.4 1,110 5.8 Health and Fitness 408 0.5 -- -- Home Furnishings 5,704 6.9 1,295 6.8 Office Supplies 2,476 3.0 615 3.2 Pet Supplies 253 0.3 63 0.3 Private Education 923 1.1 40 0.2 Restaurants 13,576 16.4 3,369 17.6 Shoe Stores 529 0.6 115 0.6 Video Rental 2,813 3.4 641 3.3 Other 4,881 5.9 1,236 6.5 - -------------------- ------- ------ ------- ------ Totals $82,735 100.0% $19,168 100.0% ==================== ======= ====== ======= ======
[FN] (1) Annualized rental revenue is calculated by multiplying the monthly contracted base rent as of April 1, 1998 by 12 and adding the previous 12 month's historic percentage rent, which totaled $1.7 million. For properties under construction, an estimated contractual base rent is used based upon the estimated total costs of each property. Page 17
For the Quarter Ended March 31, 1997 --------------------- Rental Percentage Industry Revenue of Total - -------------------- ------- ---------- Apparel Stores $ -- --% Automotive Parts 1,560 10.1 Automotive Service 888 5.7 Book Stores 32 0.2 Child Care 5,889 38.1 Consumer Electronics 1,044 6.8 Convenience Stores 786 5.1 Health and Fitness -- -- Home Furnishings 642 4.2 Office Supplies 80 0.5 Pet Supplies -- -- Private Education -- -- Restaurants 3,303 21.4 Shoe Stores -- -- Video Rental -- -- Other 1,225 7.9 - -------------------- ------- ------ Totals $15,449 100.0% ==================== ======= ======
At March 31, 1998, the Company had four properties that were not under lease as compared to eight at December 31, 1997. At March 31, 1998, 841, or over 99%, of the 845 properties in the portfolio were under lease agreements with third party tenants. Interest and other revenue during the first quarter of 1998 and 1997 totaled $54,000 and $31,000, respectively, an increase of $23,000. Depreciation and amortization was $5.1 million in the first quarter of 1998 versus $4.5 million in the comparable quarter of 1997. The increase of $620,000 in 1998 was primarily due to depreciation of the New Properties. General and administrative expenses increased by $212,000 to $1.5 million in the first quarter of 1998 versus $1.3 million in 1997. The increase in general and administrative expenses was primarily due to an increase in property acquisition expenses and employee costs. General and administrative expenses as a percentage of revenue decreased to 7.6% in 1998 as compared to 8.1% in 1997. During 1997, the Company increased its number of employees to 47 from 35. The majority of the new employees work primarily on new property acquisitions and were hired during the second and third quarter of 1997. Page 18 Property expenses are broken down into costs associated with non-net leased multi-tenant properties, unleased single-tenant properties and general portfolio expenses. Expenses related to the multi-tenant and unleased single-tenant properties include, but are not limited to, property taxes, maintenance, insurance, utilities, property inspections, bad debt expense and legal fees. General portfolio costs include, but are not limited to, insurance, legal, property inspections and title search fees. At March 31, 1998, four properties were available for lease as compared to eight at December 31, 1997. Property expenses were $473,000 in the first quarter of 1998 and $491,000 in 1997, a decrease of $18,000. The decrease in property expenses was primarily attributable to having fewer properties available for lease. It is anticipated that as additional properties are acquired, property expenses will increase. Interest expense in 1998 increased by $1.2 million to $2.5 million, as compared to $1.3 million in 1997. The following is a summary of the five components of interest expense for the first quarter of 1998 and 1997 (dollars in thousands):
1998 1997 Net Change -------- -------- ---------- Interest on outstanding loans and notes $ 2,449 $ 1,279 $ 1,170 Amortization of the gain on the 1996 treasury lock agreement (28) -- (28) Credit facility commitment fees 56 20 36 Amortization of credit facility origination costs and deferred bond financing costs 94 49 45 Interest capitalized (80) (36) (44) -------- -------- -------- Totals $ 2,491 $ 1,312 $ 1,179 ======== ======== ========
Interest on outstanding loans and notes was $1.2 million higher in the first quarter of 1998 than in 1997, due to an increase in the average outstanding balances and a higher average interest rate. The higher average outstanding balances and higher average interest rate was due to the Notes issued in May 1997. During the 1998, the average outstanding balances and interest rate (after taking into effect amortization of the gain on the treasury lock agreement) on the Notes and credit facility were $129.3 million and 7.59% as compared to $77.0 million and 6.73% during 1997. During 1998, the credit facility's average interest rate was 6.66% and average outstanding balance was $19.3 million. Page 19 The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. No charge was recorded for impairment loss during the first quarter of 1998 and 1997. During the first quarter of 1998, the Company sold three properties (one restaurant, one child care center and one multi-tenant location) for a total of $1.9 million and recorded a gain of $215,000. During the first quarter of 1997, the Company sold four properties (two restaurants and one child care center and one multi-tenant location) for $1.3 million and recognized a gain of $225,000. In the first quarter of 1998, the Company had net income of $9.92 million versus $8.19 million in 1997. The $1.73 million increase in net income is primarily due to the increase in rental revenue from the New Properties of $3.56 million, which was partially offset by an increase in depreciation and amortization, general and administrative, and interest expense totaling $2.0 million. PROPERTIES - ---------- As of April 1, 1998, Realty Income owned a diversified portfolio of 845 properties in 43 states consisting of over 6.6 million square feet of leasable space. At April 1, 1998, over 98% of the properties were under net lease agreements. Net leases typically require the tenant to be responsible for property operating costs including property taxes, insurance and maintenance. The Company's net leased retail properties are retail locations primarily leased to regional and national retail chain store operators. The average leasable retail space of the 845 properties is approximately 7,800 square feet on approximately 47,000 square feet of land. Generally, buildings are single-story properties with adequate parking on site to accommodate peak retail traffic periods. The properties tend to be on major thoroughfares with relatively high traffic counts and adequate access, egress and proximity to sufficient population base to constitute a sufficient market or trade area for the retailer's business. Page 20 The following table sets forth certain information regarding the Company's properties as of April 1, 1998, classified according to the business of the respective tenants.
Annualized Approximate Rent (1) Number of Leaseable (in thou- Industry Properties Square Feet sands) - ------------------------------ ---------- ----------- ---------- Apparel Stores 5 228,800 $ 3,927 Automotive Parts 103 556,900 6,717 Automotive Service 96 320,000 6,667 Book Stores 1 30,000 450 Child Care 316 2,011,900 24,509 Consumer Electronics 37 559,200 4,432 Convenience Stores 53 153,900 4,470 Health & Fitness 1 32,700 408 Home Furnishings & Accessories 15 831,700 5,704 Office Supplies 8 198,400 2,476 Pet Supplies 1 16,000 253 Private Education 2 52,500 923 Restaurants 171 868,700 13,576 Shoe Stores 2 27,700 529 Video Rental 22 166,300 2,813 Other 12 555,600 4,881 - ------------------------------ ---------- ----------- ---------- TOTALS 845 6,610,300 $ 82,735 ============================== ========== =========== ==========
[FN] (1) Annualized Rent is calculated by multiplying the monthly contractual base rent as of April 1, 1998 by 12 and adding the previous twelve month's historic percentage rent, which totaled $1.7 million, (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level). For properties under construction, an estimated contractual base rent is used based upon the estimated total costs of each property. Of the 845 properties in the portfolio at April 1, 1998, 839 were single-tenant properties with the remaining properties being multi- tenant properties. As of April 1, 1998 835 or over 99% of the single- tenant properties were net leased with an average remaining lease term (excluding extension options) of approximately 8.4 years. Page 21 The following table sets forth certain information regarding the timing of the lease term expirations (excluding extension options) on April 1, 1998.
Number of Annualized Base Percent of Leases Rent (1) (2) Annualized Year Expiring (in thousands) Base Rent - ------ --------- --------------- ---------- 1998 2 $ 96 0.1% 1999 37 1,580 2.1 2000 31 1,645 2.1 2001 54 4,315 5.6 2002 74 5,966 7.8 2003 66 5,140 6.7 2004 110 8,956 11.6 2005 85 6,046 7.8 2006 29 2,467 3.2 2007 87 5,499 7.1 2008 47 3,843 5.0 2009 16 1,144 1.5 2010 39 3,634 4.7 2011 36 4,660 6.0 2012 52 5,848 7.6 2013 16 4,797 6.2 2014 6 755 1.0 2015 27 4,976 6.5 2016 9 1,562 2.0 2017 11 4,090 5.3 2018 1 39 0.1 - ------ --------------- --------------- ---------- Totals 835 $ 77,058 100.0% ====== =============== =============== ==========
[FN] (1) Annualized base rent is calculated by multiplying the monthly contractual base rent as of April 1, 1998 by 12. For properties under construction, an estimated contractual base rent is used based upon the estimated total costs of each property. Annualized base rent does not include percentage rents (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level), if any, that may be payable under leases covering certain properties. Percentage rent for the previous twelve months totaled $1.7 million. (2) This table does not include six multi-tenant properties and four vacant, unleased single-tenant properties owned by the Company. The lease expirations for properties under construction are based on the estimated date of completion of such properties. Page 22 The following table sets forth certain state-by-state information regarding the properties owned by the Company as of April 1, 1998.
Annualized Approximate Rent (1) Percent of Number of Percent Leasable (in thou- Annualized State Properties Leased Square Feet sands) Rent - ------------ ---------- ------- ----------- ---------- ---------- Alabama 7 100% 49,800 $ 458 0.6% Arizona 27 99 181,200 2,474 3.0 Arkansas 1 100 3,100 61 0.1 California 52 94 987,800 11,018 13.3 Colorado 42 100 231,800 3,234 3.9 Connecticut 9 100 216,300 2,815 3.4 Florida 54 100 545,600 5,616 6.8 Georgia 46 100 266,600 3,802 4.6 Idaho 11 100 52,000 759 0.9 Illinois 28 100 192,200 2,451 3.0 Indiana 24 100 130,000 1,662 2.0 Iowa 8 100 51,700 462 0.6 Kansas 18 100 183,500 2,018 2.4 Kentucky 12 100 36,000 927 1.1 Louisiana 2 100 10,700 148 0.2 Maryland 6 100 34,900 537 0.6 Massachusetts 5 100 25,900 545 0.7 Michigan 6 100 35,000 518 0.6 Minnesota 18 100 126,500 1,954 2.4 Mississippi 12 100 128,900 902 1.1 Missouri 30 100 176,800 2,165 2.6 Montana 2 100 30,000 297 0.4 Nebraska 9 100 93,700 1,135 1.4 Nevada 7 100 86,400 1,336 1.6 New Hampshire 1 100 6,400 125 0.2 New Jersey 2 100 22,700 351 0.4 New Mexico 3 100 12,000 107 0.1 New York 9 100 170,600 3,591 4.4 North Carolina 28 100 125,800 2,211 2.7 Ohio 59 100 280,000 4,492 5.4 Oklahoma 14 100 80,700 935 1.1 Oregon 17 100 92,400 1,262 1.5 Pennsylvania 9 100 62,700 922 1.1 South Carolina 21 100 80,600 1,280 1.5 South Dakota 2 100 12,600 172 0.2 Tennessee 19 100 179,600 2,101 2.5 Texas 137 100 1,102,600 10,995 13.3 Utah 7 100 45,400 594 0.7 Virginia 20 100 101,000 1,689 2.0
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(continued) Annualized Approximate Rent (1) Percent of Number of Percent Leasable (in thou- Annualized State Properties Leased Square Feet sands) Rent - ------------ ---------- ------- ----------- ---------- ---------- Washington 43 98 252,600 3,317 4.0 West Virginia 2 100 16,800 147 0.2 Wisconsin 12 100 69,300 882 1.1 Wyoming 4 100 20,100 268 0.3 - ------------ ---------- ------- ----------- ---------- ---------- Totals 845 99% 6,610,300 $82,735 100.0% ============ ========== ======= =========== ========== ==========
[FN] (1) Annualized Rent is calculated by multiplying the monthly contractual base rent as of April 1, 1998 by 12 and adding the previous twelve month's historic percentage rent, which totaled $1.7 million, (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level). For properties under construction, an estimated contractual base rent is used based upon the estimated total costs of each property. IMPACT OF INFLATION - ------------------- Tenant leases generally provide for limited increases in rent as a result of increases in the tenant's sales volumes and/or increases in the consumer price index. Management expects that inflation will cause these lease provisions to result in increases in rent over time. However, during times when inflation is greater than increases in rent as provided for in the leases, rent increases may not keep up with the rate of inflation. Over 98% of the properties in the portfolio are leased to tenants under net leases in which the tenant is responsible for property costs and expenses. These features in the leases reduce the Company's exposure to rising property expenses due to inflation. Inflation and increased costs may have an adverse impact on the tenants if increases in the tenant's operating expenses exceed increases in revenue. Page 24 IMPACT OF ACCOUNTING PRONOUNCEMENTS - ----------------------------------- In March 1998, the Financial Accounting Standards Board's Emerging Issues Task Force reached a consensus on Issue No. 97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions" ("EITF 97-11"), EITF 97-11 states that internal costs of preacquisition activities incurred in connection with the acquisition of an operating property should be expensed as incurred. EITF 97-11 is to be implemented on a prospective basis effective on the date the consensus was reached. The Company anticipates that the adoption of EITF 97-11 will not have a material effect on the financial position, results of operations or liquidity of the Company, nor result in disclosures that will be materially different from those presently included in its financial statements. PART II. OTHER INFORMATION - --------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits:
Exhibit No. Description =========== =========== 3.1 Articles of Incorporation of the Company (filed) as Appendix B to the Company's Proxy Statement dated March 28, 1997 ("1997 Proxy Statement") and incorporated herein by reference) 3.2 Bylaws of the Company (filed as Appendix C to the Company's 1997 Proxy Statement and incorporated herein by reference) 4.1 Pricing Committee Resolutions and Form of 7.75% Notes due 2007 (filed as Exhibit 4.2 to the Company's Form 8-K dated May 5, 1997 and incorporated herein by reference) 4.2 Indenture dated as of May 6, 1997 between the Company and The Bank of New York (filed as Exhibit 4.1 to the Company's Form 8-K dated May 5, 1997 and incorporated herein by reference)
Page 25 4.3 First Supplemental Indenture dated as of May 28, 1997, between the Company and The Bank of New York (filed as Exhibit 4.3 to the Company's Form 8-B and incorporated herein by reference) 27 Financial Data Schedule
B. Two reports on Form 8-K were filed by registrant during the quarter for which this report is filed. A report on Form 8-K was dated February 23, 1998 and filed on February 24, 1998 reporting the issuance of 751,174 shares of common stock on February 23, 1998. A report on From 8-K was dated March 30, 1998 and filed on March 31, 1998 reporting the issuance of 372,093 shares of common stock on March 30, 1998. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REALTY INCOME CORPORATION (Signature and Title) /s/ GARY M. MALINO Date: May 13, 1998 ------------------------------------- Gary M. Malino, Senior Vice President Chief Financial Officer (Principal Financial and Accounting Officer) EXHIBIT INDEX
Exhibit No. Description Page =========== =========== ==== 27 Financial Data Schedule .................... 27
Page 26 EX-27 2
5 This Schedule contains summary financial information extracted from the registrant's Balance Sheet as of March 31, 1998 and Income Statement for the three months ended March 31, 1998 and is qualified in its entirety by reference to such financial statements. 1 3-MOS DEC-31-1998 MAR-31-1998 1,713,000 0 2,104,000 0 0 0 749,078,000 (156,182,000) 620,641,000 0 148,000,000 26,837,000 0 0 432,500,000 620,641,000 0 19,222,000 0 0 7,022,000 0 2,491,000 9,924,000 0 9,924,000 0 0 0 9,924,000 0.38 0.38 Current assets and current liabilities are not applicable to the Company under current industry standards. /FN Page 27
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