-----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, G3KBXgClcpoZya4mt0l4534hGHZlOGDFYcAhgIStdKP34B6I8J8i/RFL+RPDUq+t 9SuYrDkpS1zY5ZQyzmqSdw== 0000726728-01-500010.txt : 20020410 0000726728-01-500010.hdr.sgml : 20020410 ACCESSION NUMBER: 0000726728-01-500010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13374 FILM NUMBER: 1785501 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 sept0110q.txt THIRD QUARTER 2001 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2001, or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 COMMISSION FILE NUMBER 1-13374 REALTY INCOME CORPORATION ------------------------- (Exact name of registrant as specified in its charter) Maryland -------- (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 32,779,131 shares of common stock outstanding as of November 12, 2001. 1 REALTY INCOME CORPORATION Form 10-Q September 30, 2001 TABLE OF CONTENTS ----------------- PART I. FINANCIAL INFORMATION Page ---- Item 1: Financial Statements Consolidated Balance Sheets.................................................... 3 Consolidated Statements of Income.............................................. 4 Consolidated Statements of Cash Flows.......................................... 5 Notes to Consolidated Financial Statements..................................... 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 13 Item 3: Quantitative and Qualitative Disclosures about Market Risk.......................... 34 PART II. OTHER INFORMATION Item 6: Exhibits and Reports on Form 8-K.................................................... 35 SIGNATURE .................................................................................... 36 EXHIBIT INDEX .................................................................................... 36
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements REALTY INCOME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------- September 30, 2001 and December 31, 2000 (dollars in thousands, except per share data) 2001 2000 (Unaudited) - ------------------------------------------------------------------------------------------------------------------ ASSETS Real estate, at cost: Land $ 379,970 $ 368,057 Buildings and improvements 713,204 705,470 - ------------------------------------------------------------------------------------------------------------------ 1,093,174 1,073,527 Less accumulated depreciation and amortization (228,587) (212,379) - ------------------------------------------------------------------------------------------------------------------ Net real estate held for investment 864,587 861,148 Real estate held for sale, net 31,192 33,130 - ------------------------------------------------------------------------------------------------------------------ Net real estate 895,779 894,278 Cash and cash equivalents 11,624 3,815 Accounts receivable 3,606 5,053 Goodwill, net 17,437 18,130 Other assets 13,049 13,490 - ------------------------------------------------------------------------------------------------------------------ Total assets $ 941,495 $ 934,766 ================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Distributions payable $ 7,521 $ 4,914 Accounts payable and accrued expenses 6,096 5,969 Other liabilities 4,208 4,314 Lines of credit payable 97,500 174,000 Notes payable 230,000 230,000 - ------------------------------------------------------------------------------------------------------------------ Total liabilities 345,325 419,197 - ------------------------------------------------------------------------------------------------------------------ Commitments and contingencies Stockholders' equity: Preferred stock and paid in capital, par value $1.00 per share, 20,000,000 shares authorized, 4,125,700 shares issued and outstanding 99,368 99,368 Common stock and paid in capital, par value $1.00 per share, 100,000,000 shares authorized, 29,876,241 and 26,563,519 shares issued and outstanding in 2001 and 2000, respectively 717,312 630,932 Distributions in excess of net income (220,510) (214,731) - ------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 596,170 515,569 - ------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 941,495 $ 934,766 ================================================================================================================== The accompanying notes to consolidated financial statements are an integral part of these statements.
3 REALTY INCOME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME --------------------------------- For the three and nine months ended September 30, 2001 and 2000 (dollars in thousands, except per share data) (unaudited) Three Three Nine Nine months months months months ended ended ended ended 9/30/01 9/30/00 9/30/01 9/30/00 - ------------------------------------------------------------------------------------------------------------------------- REVENUE Rental $ 30,314 $ 29,180 $ 89,396 $ 85,859 Gain on sales of real estate acquired for resale 284 558 2,373 558 Interest and other 409 147 729 264 - ------------------------------------------------------------------------------------------------------------------------- 31,007 29,885 92,498 86,681 - ------------------------------------------------------------------------------------------------------------------------- EXPENSES Interest 6,080 8,184 20,726 22,813 Depreciation and amortization 7,234 6,913 21,602 20,505 General and administrative 1,914 1,723 5,820 4,997 Property 585 536 1,773 1,517 Other 814 409 2,363 554 - ------------------------------------------------------------------------------------------------------------------------- 16,627 17,765 52,284 50,386 - ------------------------------------------------------------------------------------------------------------------------- Income from operations 14,380 12,120 40,214 36,295 Gain on sales of investment properties 2,806 231 8,921 1,831 - ------------------------------------------------------------------------------------------------------------------------- Net income 17,186 12,351 49,135 38,126 Preferred stock dividends (2,428) (2,428) (7,284) (7,284) - ------------------------------------------------------------------------------------------------------------------------- Net income available to common stockholders $ 14,758 $ 9,923 $ 41,851 $ 30,842 ========================================================================================================================= Basic and diluted net income per common share $ 0.50 $ 0.37 $ 1.48 $ 1.15 The accompanying notes to consolidated financial statements are an integral part of these statements.
4 REALTY INCOME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- For the nine months ended September 30, 2001 and 2000 (dollars in thousands) (unaudited) 2001 2000 - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 49,135 $ 38,126 Adjustments to net income: Depreciation and amortization 21,602 20,505 Provision for impairment losses on properties held for sale 1,050 -- Investment in real estate acquired for resale (19,113) (26,349) Proceeds from sales of real estate acquired for resale 18,792 3,508 Gain on sales of real estate acquired for resale (2,373) (558) Gain on sales of investment properties (8,921) (1,831) Change in assets and liabilities: Accounts receivable and other assets 2,631 1,732 Accounts payable, accrued expenses and other liabilities 823 5,010 - -------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 63,626 40,143 - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of investment properties 29,650 5,768 Acquisition of and additions to investment properties (41,681) (53,576) Increase in other assets -- (450) - -------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (12,031) (48,258) - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings from lines of credit 98,900 130,400 Payments under lines of credit (175,400) (63,300) Distributions to common stockholders (46,905) (43,612) Distributions to preferred stockholders (5,402) (5,402) Proceeds from stock offerings, net of offering costs of $4,526 in 2001 and $35 in 2000 77,485 (35) Repurchase of stock (169) (5,628) Proceeds from other common stock issuances 7,705 216 - -------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (43,786) 12,639 - -------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 7,809 4,524 Cash and cash equivalents, beginning of period 3,815 773 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 11,624 $ 5,297 ==================================================================================================================== For supplemental disclosures, see note 12. The accompanying notes to consolidated financial statements are an integral part of these statements.
5 REALTY INCOME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ September 30, 2001 (Unaudited) 1. MANAGEMENT STATEMENT The consolidated financial statements of Realty Income Corporation ("Realty Income", the "Company", "we" or "our") were prepared from our books and records without audit and include all adjustments (consisting of only normal recurring accruals) necessary to present a fair statement of results for the interim periods presented. Certain of the 2000 balances have been reclassified to conform to the 2001 presentation. Readers of this quarterly report should refer to our audited financial statements for the year ended December 31, 2000, which are included in our 2000 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. ACCOUNTING POLICIES AND PROCEDURES Maintenance and Repairs. - Expenditures for maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized. Principles of Consolidation. - The accompanying consolidated financial statements include the accounts of Realty Income, including Crest Net Lease, Inc. (Crest Net) and other entities for which we make operational and financial decisions (control), after elimination of all material intercompany balances and transactions. Leases. - All leases are accounted for as operating leases. Under this method, lease payments are recognized as revenue on a straight-line basis over the lease term regardless of when the payments are due. We recognize contingent rent revenue from tenants only after the tenants exceed their sales breakpoint. Rental increases based upon changes in the consumer price indexes are recognized only after the changes in the indexes have occurred, and then applied according to the lease agreements. During December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements." ("SAB 101"). SAB 101 reflects the basic principles of revenue recognition in existing generally accepted accounting principles. The Company adopted SAB 101 during the first quarter of 2000, which had no effect on the Company's consolidated financial statements. Provision for Impairment Losses. - We review long-lived assets, including goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an 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 6 2. ACCOUNTING POLICIES AND PROCEDURES (CONTINUED) disposition proceeds (undiscounted) are less than the current book value. Impairment losses are measured as the amount 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 cost or estimated fair value, less costs to sell. A provision for impairment losses of $520,000 was recorded in the three months ended September 30, 2001 and $1,050,000 was recorded for the nine months ended September 30, 2001. No provision for impairment loss was recorded in 2000. 3. INVESTMENT IN SUBSIDIARY In January 2000, we acquired 95% of the common stock of Crest Net Lease, all of which is non-voting and certain members of our management and Crest Net Lease management acquired 5% of the common stock, all of which is voting stock. In May 2001, we acquired the 5% of common stock of Crest Net Lease owned by certain members of our management and management of Crest Net Lease for $507,000. The acquisition of the 5% of common stock was accounted for under the purchase method of accounting. After this transaction, Realty Income owns 100% of the stock of Crest Net Lease. Crest Net Lease was created to buy, own and sell properties, primarily to buyers using tax-deferred exchanges, under Section 1031 of the Internal Revenue Code of 1986, as amended (the "Code"). 4. PROPERTY ACQUISITIONS A. During the first nine months of 2001, we invested $41.1 million in 37 new retail properties and properties under development with an initial weighted average contractual lease rate of 11.1%. These 37 properties are located in 13 states, will contain approximately 227,800 leasable square feet and are 100% leased, with an average initial lease term of 20.3 years. During the first nine months of 2000, we invested $44.8 million in 11 new retail properties and properties under development with an initial aggregate contractual lease rate of 10.8% and an average initial lease term of 18.2 years. B. During the first nine months of 2001, Crest Net Lease invested $18.7 million in 19 new retail properties and properties under development. During the first nine months of 2000, Crest Net Lease invested $26.3 million in eight new retail properties. 5. DISTRIBUTIONS PAID AND PAYABLE A. Realty Income pays distributions monthly to our common stockholders. The following is a summary of the monthly cash distributions per common share for the nine months ended September 30, 2001 and 2000. As of September 30, 2001, a distribution of $0.18875 per common share was declared (and was paid on October 15, 2001). 7 5. DISTRIBUTIONS PAID AND PAYABLE (CONTINUED) Month 2001 2000 -------------------------------------------------------------------------- January $0.18500 $0.18000 February 0.18500 0.18000 March 0.18500 0.18000 April 0.18625 0.18125 May 0.18625 0.18125 June 0.18625 0.18125 July 0.18750 0.18250 August 0.18750 0.18250 September 0.18750 0.18250 -------------------------------------------------------------------------- Total $1.67625 $1.63125 ========================================================================== B. In May 1999, we issued 9 3/8% Class B cumulative redeemable preferred stock. Dividends on the Class B preferred stock are paid quarterly in arrears. During each of the first three quarters of 2001 and 2000, we declared a quarterly dividend to our Class B preferred stockholders of $0.5859 per share, totaling $1.7577. The 2001 third quarter dividend was paid on October 1, 2001. C. In July 1999, we issued 9 1/2% Class C cumulative redeemable preferred stock. Dividends on the Class C preferred stock are paid monthly in arrears. During each of the first nine months of 2001 and 2000, we declared a monthly dividend to our Class C preferred stockholders of $0.1979 per share, totaling $1.7811. The September 2001 dividend was paid on October 1, 2001. 6. GAIN ON SALES OF REAL ESTATE ACQUIRED FOR RESALE During the three months ended September 30, 2001, Crest Net Lease sold one property for $3.3 million. We recognized a gain of $284,000 on the sale of this property. During the nine months ended September 30, 2001, Crest Net Lease sold six properties for $18.8 million. We recognized a gain of $2.4 million on the sale of these properties. For the three and nine months ended September 30, 2000, Crest Net Lease sold one property for $3.5 million. We recognized a gain of $558,000 on the sale of this property. 7. GAIN ON SALES OF INVESTMENT PROPERTIES During the three months ended September 30, 2001, we sold 10 properties for $10.0 million and recognized a gain of $2.8 million. During the three months ended September 30, 2000, we sold three properties for $2.2 million and recognized a gain of $231,000. During the nine months ended September 30, 2001, we sold 23 properties for $29.7 million and recognized a gain of $8.9 million. During the nine months ended September 30, 2000, we sold nine properties for $5.8 million and recognized a gain of $1.8 million. 8 8. NET INCOME PER COMMON SHARE Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted net income per common share is computed by dividing the amount of net income available to common stockholders for the period by the number of common shares that would have been outstanding assuming the issuance of common shares for all potentially dilutive common shares outstanding during the reporting period. The following is a reconciliation of the denominator of the basic net income per common share computation to the denominator of the diluted net income per common share computation, for the three and nine months ended September 30, 2001 and 2000: Three Three Nine Nine Months Months Months Months Ended Ended Ended Ended 9/30/01 9/30/00 9/30/01 9/30/00 -------------------------------------------------------------------------------------------------------------------- Weighted average shares used for the basic net income per share computation 29,752,807 26,649,315 28,264,186 26,722,408 Incremental shares from the assumed exercise of stock options 51,501 22,158 39,442 13,752 -------------------------------------------------------------------------------------------------------------------- Adjusted weighted average shares used for diluted net income per share computation 29,804,308 26,671,473 28,303,628 26,736,160 ====================================================================================================================
For the three and nine months ended September 30, 2001, no stock options were anti-dilutive. For the three and nine months ended September 30, 2000, 436,352 and 447,552 stock options, respectively, that were anti-dilutive have been excluded from the incremental shares from the assumed exercise of stock options. 9. ACQUISITION CREDIT FACILITY In April 2001, the expiration date on $180 million of our $200 million acquisition credit facility was extended one year to December 30, 2003. The remaining $20 million is scheduled to expire on December 30, 2002. 9 10. STOCK OFFERINGS A. In May 2001, we issued 2,950,000 shares of common stock at a price of $27.80 per share. The net proceeds of $77.5 million were used to repay borrowings under our $200 million acquisition credit facility and for other general corporate purposes. B. In October 2001, we issued 2,600,000 shares of common stock at a price of $28.50 per share. In November, 300,000 additional shares were issued when the underwriters exercised their over-allotment option. The net proceeds of approximately $78.1 million were used to repay borrowings under our $200 million acquisition credit facility and for other general corporate purposes. 11. PURCHASES OF REALTY INCOME SECURITIES In January 2000, our Board of Directors authorized the purchase of up to $10 million of our outstanding common stock, preferred shares and senior debt securities. From January 2000 through September 2001, we have purchased $6.7 million of our securities. During the first nine months of 2001, we purchased 6,800 shares of our common stock at an average price of $24.82, for a total investment of $169,000. During the first nine months of 2000, we purchased 246,600 shares of our common stock at an average price of $21.70 and 14,300 shares of our Class B preferred stock at an average price of $19.27, for a total investment of $5.6 million. 12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid during the first nine months of 2001 and 2000 was $18.2 million and $19.0 million, respectively. During the first nine months of 2001 and 2000, interest of $276,000 and $991,000, respectively, was capitalized with respect to properties under development. The following non-cash operating activity is included in the accompanying consolidated financial statements: A. During the first nine months of 2001, we issued 61,400 shares of restricted common stock, with an average vesting period of 9.0 years, to directors and employees of the Company resulting in the following non-cash charges (in thousands): Other assets $ 1,561 Common stock and paid in capital $(1,561) 10 12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (CONTINUED) B. During the first nine months of 2001, 8,115 shares of restricted common stock issued to employees of the Company were forfeited resulting in the following non-cash charges (in thousands): Other assets $ (201) Common stock and paid in capital $ 201 C. In the first nine months of 2001, provision for impairment losses were recorded to reduce the net carrying value of four properties held for sale in 2001. This resulted in the following non-cash charges (in thousands): Land and building $(1,050) Other expenses $ 1,050 D. In May 2001, the acquisition of the 5% of Crest Net Lease common stock not previously owned by Realty Income resulted in the following non-cash charges (in thousands): Accounts receivable $ (450) Accounts payable and accrued expenses $ 450 13. SEGMENT INFORMATION We evaluate performance and make resource allocation decisions on a property by property basis. For financial reporting purposes, we have grouped our tenants into 11 reportable segments based upon the business the tenants are in, except for properties owned by Crest Net Lease that are grouped in a separate segment. The Crest Net Lease segment is included in "other non-reportable segments". All of the our properties have been incorporated into one of the applicable segments. Rental revenue is the only component of segment profit and loss we measure. The following tables set forth certain information regarding the properties owned by us, classified according to the business of the respective tenants as of September 30, 2001 (dollars in thousands): 11 13. SEGMENT INFORMATION (CONTINUED) Assets as of: September 30, 2001 December 31, 2000 - --------------------------------------------------------------------------------------------------------------------- Segment net real estate: Apparel $ 25,037 $ 25,638 Automotive parts 73,241 74,487 Automotive service 45,381 47,603 Child care 144,368 149,838 Consumer electronics 36,201 40,820 Convenience stores 82,211 81,639 Health and fitness 42,582 34,918 Home furnishings 68,888 70,140 Restaurants 100,716 82,402 Theaters 47,461 48,003 Video rental 38,523 39,598 Other non-reportable segments 191,170 199,192 - --------------------------------------------------------------------------------------------------------------------- Total segment net real estate 895,779 894,278 Non-real estate assets 45,716 40,488 - --------------------------------------------------------------------------------------------------------------------- Total assets $941,495 $934,766 =====================================================================================================================
Three Three Nine Nine Months Months Months Months Ended Ended Ended Ended Revenue for the: 9/30/01 9/30/00 9/30/01 9/30/00 - --------------------------------------------------------------------------------------------------------------------- Segment rental revenue: Apparel $ 738 $ 687 $2,138 $2,162 Automotive parts 2,431 2,319 7,352 7,040 Automotive service 1,720 1,708 5,208 5,134 Child care 7,223 7,018 21,115 20,795 Consumer electronics 1,125 1,405 3,594 4,308 Convenience stores 2,537 2,292 7,581 7,217 Health and fitness 1,134 807 3,149 1,850 Home furnishings 1,819 1,724 5,391 5,032 Restaurants 3,567 3,556 10,370 10,561 Theaters 1,302 670 3,907 1,873 Video rental 1,115 1,128 3,359 3,386 Other non-reportable segments 5,603 5,866 16,232 16,501 Reconciling items: Gain on sales of real estate acquired for resale 284 558 2,373 558 Interest and other 409 147 729 264 - --------------------------------------------------------------------------------------------------------------------- Total revenue $ 31,007 $ 29,885 $ 92,498 $ 86,681 =====================================================================================================================
12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------------------ FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. When used in this quarterly report, the words estimated, anticipated and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks, uncertainties, and assumptions about Realty Income Corporation, including, but not limited to: o Our anticipated growth strategies; o Our intention to acquire additional properties; o Our intention to sell properties; o Anticipated trends in our business, including trends in the market for long-term net leases of freestanding, single-tenant retail properties; o Future expenditures for development projects; and o Profitability of our subsidiary, Crest Net Lease. 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: o Our continued qualification as a real estate investment trust; o General business and economic conditions; o Competition; o Interest rates; o Accessibility of debt and equity capital markets; o Other risks inherent in the real estate business including tenant defaults, potential liability relating to environmental matters and illiquidity of real estate investments; and o Acts of terrorism and war. Additional factors that may cause risks and uncertainties include those discussed in the sections entitled "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date that this quarterly report was filed with the Securities and Exchange Commission. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this quarterly report or to reflect the occurrence of unanticipated events. In light of these risks and uncertainties, the forward-looking events discussed in this quarterly report might not occur. 13 THE COMPANY Realty Income Corporation, "The Monthly Dividend Company", a Maryland corporation ("Realty Income", the "Company", "our" or "we") was organized to operate as an equity real estate investment trust ("REIT"). Our primary business objective is to generate dependable monthly distributions from a consistent and predictable level of funds from operations ("FFO") per share. Additionally, we seek to increase distributions to common stockholders and FFO per share through both active portfolio management and the acquisition of additional properties. We are a fully integrated, self-administered real estate company with in-house acquisition, leasing, legal, retail and real estate research, portfolio management and capital markets expertise. As of September 30, 2001, we owned a diversified portfolio: o Of 1,082 retail properties located in 46 states; o With approximately 9.0 million square feet of leasable space; o Leased to 74 different retail chains; and o Doing business in 23 separate retail industries. Of the 1,082 properties in the portfolio, 1,077 are single-tenant retail properties with the remainder being multi-tenant properties. As of September 30, 2001, 1,060, or 98.0%, of the 1,082 retail properties were leased with 22 properties available for lease. As of September 30, 2001, our subsidiary, Crest Net Lease, owned 20 additional retail properties located in 11 states that will contain approximately 107,700 square feet of leasable space. These 20 properties are 100% leased and are held for sale. Our portfolio management focus includes: o Contractual rent increases on existing leases; o Rental increases at the termination of existing leases when market conditions permit; and o The active management of our property portfolio, including selective sales of properties. Our acquisition of additional properties adheres to a focused strategy of acquiring primarily: o Freestanding, single-tenant, retail properties; o Properties leased to regional and national retail chains; and o Properties under long-term, net-lease agreements. We typically acquire, then lease back, retail store locations from chain store operators, providing capital to the operators for continued expansion and other corporate purposes. Our acquisitions and investment activities are concentrated in well-defined target markets and focus generally on middle-market retailers providing goods and services that satisfy basic consumer needs. 14 Our net-lease agreements generally: o Are for initial terms of 10 to 20 years; o Require the tenant to pay a minimum monthly rent and property operating expenses (taxes, insurance and maintenance); and o Provide for future rent increases (typically subject to ceilings) based on increases in the consumer price index, fixed increases or additional rent calculated as a percentage of the tenant's gross sales above a specified level. We believe long-term ownership of an actively managed, diversified portfolio of retail properties under long-term, net-lease agreements produces consistent, predictable income. Also that long-term leases, coupled with the tenant's responsibility for property expenses, generally produce a more predictable income stream than many other types of real estate portfolios, while continuing to offer the potential for growth in rental income. From 1970 and through December 31, 2000, we have acquired and leased back to regional and national retail chains 1,067 properties (including 51 properties that have been sold) and have collected approximately 98% of the original contractual rent obligations on those properties. We principally provide sale-leaseback financing primarily to less than investment grade retail chains. We believe that within this market we can achieve an attractive risk-adjusted return on the financing that we provide to retailers. RECENT DEVELOPMENTS ISSUANCE OF COMMON STOCK. In May 2001, we issued 2,950,000 shares of common stock at a price of $27.80 per share. The net proceeds of $77.5 million were used to repay borrowings under our $200 million acquisition credit facility and for other general corporate purposes. In October 2001, we issued 2,600,000 shares of common stock at a price of $28.50 per share. In early November 2001, 300,000 additional shares were issued when the underwriters exercised their over-allotment option. The net proceeds of $78.1 million were used to repay borrowings under our $200 million acquisition credit facility and for other general corporate purposes. PROPERTY DISPOSITIONS. During the first nine months of 2001, we sold 23 properties for $29.7 million and recognized a gain on sales of $8.9 million. The 23 properties consisted of nine restaurants, four child day care properties, three home improvement stores, two automotive parts stores, two automotive service locations, one home furnishings store, one consumer electronics store and one private education property. The proceeds from the sale of these properties were used to repay outstanding indebtedness on our $200 million credit facility and were invested in new properties. The objective of our disposition program is to sell properties when we believe the reinvestment of the net sales proceeds can generate higher returns, enhance the credit quality of our real estate portfolio and/or increase the average lease term. 15 ACQUISITION OF PROPERTIES DURING THE FIRST NINE MONTHS OF 2001. During the first nine months of 2001, we invested $41.1 million in 37 new retail properties and properties under development with an initial weighted average contractual capitalization rate of 11.1%. The new properties are 100% leased with an initial average lease length of 20.3 years and will contain approximately 227,800 leasable square feet. During the first nine months of 2001, we capitalized $273,000 for re-leasing costs and $392,000 for building improvements on existing properties in our portfolio. CREDIT FACILITY EXTENSION. In April 2001, the expiration date on $180 million of our $200 million acquisition credit facility was extended one year to December 2003. The remaining $20 million is scheduled to expire in December 2002. INCREASE IN MONTHLY DISTRIBUTIONS TO COMMON SHAREHOLDERS. Monthly distributions per share were increased $0.00125 in January 2001 to $0.185, in April 2001 to $0.18625, in July 2001 to $0.1875 and in October 2001 to $0.18875. The increase in October was our 16th consecutive quarterly increase. We continue our 32-year policy of paying distributions monthly. During the first nine months of 2001, we paid three distributions of $0.185 per share, three distributions of $0.18625 and three distributions of $0.1875, totaling $1.67625 per share. In September and October 2001, we declared distributions of $0.18875 per share, which were paid on October 15, 2001 and payable on November 15, 2001, respectively. The monthly distribution of $0.18875 per share represents a current annualized distribution of $2.265 per share, and an annualized distribution yield of approximately 7.9% based on the last reported sale price of the Company's Common Stock on the NYSE of $28.65 on November 12, 2001. Although we expect to continue our policy of paying monthly distributions, we cannot guarantee that the current level of distributions will be maintained by the Company, that we will continue our pattern of increasing distributions per share, or what the actual distribution yield will be for any future period. CREST NET LEASE. During the first nine months of 2001, Crest Net Lease sold six properties from its inventory for $18.8 million and we recorded a gain on sales of $2.4 million. Crest Net Lease also invested $18.7 million in 19 new retail properties and properties under development. At the end of the third quarter, Crest Net Lease carried an inventory of $25.4 million, which is included in real estate held for sale on our balance sheet. The contribution, if any, to our FFO by Crest Net Lease will depend on the timing and the number of property sales achieved, if any, in any given quarter. During the first nine months of 2001, Crest Net Lease generated $1.6 million in funds from operations for us. In order to comply with the Internal Revenue Code of 1986, as amended (the "Code") in force at the inception of Crest Net Lease, 5% of the common stock of Crest Net Lease, which represented 100% of the voting stock, was not owned by the Company. Effective for 2001, the Code was modified to allow a REIT to own 100% of the voting stock of a corporation that elects and qualifies with the REIT to be treated as a taxable REIT subsidiary. As a result of the change in the Code, in May 2001 we acquired the 5% of Crest Net Lease's common stock owned by certain members of our management and the management of Crest Net Lease for $507,000. The acquisition of the 5% of common stock was accounted for under the purchase method of accounting. The disinterested members of our board of directors approved this transaction. Crest Net Lease originally issued this stock for $450,000. Realty Income also received rights to the undistributed earnings on the stock, which totaled $81,200. After this transaction, Realty Income owns 100% of Crest Net Lease's stock. 16 SHARE REPURCHASE ACTIVITY. We regularly review our investment options to determine the best use of our capital. In January 2000, our Board of Directors authorized the purchase of up to $10 million of our outstanding common stock, preferred shares and senior debt securities. From time to time during the first nine months of 2001, we concluded our share price justified repurchasing shares since this provided the highest return on our investment capital. During the nine months ended September 30, 2001, we invested $169,000 to repurchase 6,800 shares of our common stock at an average price of $24.82 per share. From January 2000 through September 2001, we invested $6.4 million in our common stock at an average price of $21.94 per share and $276,000 in our Class B preferred stock at an average price of $19.27 per share, for a total investment of $6.7 million. OTHER INFORMATION Realty Income's common stock is listed on the New York Stock Exchange ("NYSE") under the ticker symbol "O", our central index key ("CIK") number is 726728 and cusip number is 756109-104. Realty Income's 9 3/8% Class B cumulative redeemable preferred stock is listed on the NYSE under the ticker symbol "OprB" and its cusip number is 756109-302. Realty Income's 9 1/2% Class C cumulative redeemable preferred stock is listed on the NYSE under the ticker symbol "OprC" and its cusip number is 756109-500. Realty Income's 8.25% Monthly Income Senior Notes, due 2008, are listed on the NYSE under the ticker symbol "OUI". The cusip number of these notes is 756109-203. Realty Income had 53 employees as of November 12, 2001. LIQUIDITY AND CAPITAL RESOURCES CASH RESERVES. Realty Income is organized for the purpose of operating as an equity REIT that acquires and leases properties and distributes to stockholders, in the form of monthly cash distributions, a substantial portion of its net cash flow generated from leases on its retail properties. We intend to retain an appropriate amount of cash as working capital. At September 30, 2001, we had cash and cash equivalents totaling $11.6 million. We believe that our cash and cash equivalents on hand, cash provided from operating activities and borrowing capacity are sufficient to meet our liquidity needs for the foreseeable future. We intend, however, to use additional sources of capital to fund property acquisitions and to repay our credit facilities. 17 CAPITAL FUNDING. We have a $200 million, three-year revolving, unsecured acquisition credit facility, of which $180 million expires in December 2003 and $20 million expires in December 2002. We also have a $25 million, three-year revolving, unsecured credit facility that expires in February 2003. The credit facilities currently bear interest at 1.225% over the London Interbank Offered Rate, or LIBOR, and offer us other interest rate options. As of November 12, 2001, borrowing capacity of $177.0 million was available on our credit facilities. At that time, the outstanding balance on the credit facilities was $48.0 million with an effective interest rate of 3.6%. These credit facilities have been and are expected to be used to acquire additional retail properties leased to national and regional retail chains under long-term lease agreements. Any additional borrowings will increase our exposure to interest rate risk. In May 2001, we issued 2,950,000 shares of common stock at a price of $27.80 per share. The net proceeds of $77.5 million were used to repay borrowings under our $200 million acquisition credit facility and for other general corporate purposes. In October 2001, we issued 2,600,000 shares of common stock at a price of $28.50 per share. In early November 2001, 300,000 additional shares were issued when the underwriters exercised their over-allotment option. The net proceeds of $78.1 million were used to repay borrowings under our $200 million acquisition credit facility and for other general corporate purposes. In June 1999, we filed a universal shelf registration statement with the Securities and Exchange Commission covering up to $409.2 million in value of common stock, preferred stock and debt securities. Through November 12, 2001, we have issued $199.2 million of common stock, preferred stock and debt securities under the universal shelf registration statement. A balance of $210.0 million is available under our universal shelf registration statement. We believe that our stockholders are best served by a conservative capital structure. As of November 12, 2001, our total outstanding credit facility borrowings and outstanding notes were $278.0 million or approximately 21.1% of our total market capitalization of $1.32 billion. We define our total market capitalization as the: o Shares of our common stock outstanding multiplied by the last reported sales price of the common stock on the NYSE on November 12, 2001 of $28.65 per share; o Plus the liquidation value of the Class B Preferred Stock; o Plus the liquidation value of the Class C Preferred Stock; and plus o The outstanding borrowings on the credit facilities and outstanding notes at November 12, 2001. Historically, we have met our long-term capital needs through the issuance of common stock, preferred stock and investment grade, long-term, unsecured notes. We believe that the Company should have the majority of its future issuances of securities be in the form of common stock. However, we may issue additional preferred stock or notes from time to time. We will issue common stock when we believe that our share price is at a level that allows for the proceeds of any offering to be invested on an accretive basis into additional properties. In addition, we may issue common stock to pay down our notes or credit facilities. We seek to maintain a conservative debt level on our balance sheet, which should result in solid interest and fixed charge coverage ratios. 18 We currently are assigned investment grade corporate credit ratings on our senior unsecured notes from Fitch IBCA Duff & Phelps, Moody's Investor Service, Inc., and Standard & Poor's Rating Group. Currently, Fitch IBCA Duff & Phelps has assigned a rating of BBB, Moody's has assigned a rating of Baa3, and Standard & Poor's has assigned a rating of BBB- to our senior notes. These ratings could change based upon, among other things, our results of operations and financial condition. We have also received credit ratings from the same rating agencies on our preferred stock. Fitch IBCA Duff & Phelps has assigned a rating of BBB-, Moody's Investor Service, Inc. has assigned a rating of "Ba1", and Standard & Poor's Rating Group has assigned a rating of BB+. These ratings could change based upon, among other things, our results of operations and financial condition. DISTRIBUTIONS. Distributions are paid to our common stockholders and Class C Preferred stockholders on a monthly basis and paid to our Class B Preferred stockholders on a quarterly basis if, as and when declared by our Board of Directors. The Class B Preferred stockholders receive cumulative distributions at a rate of 9.375% per annum on the $25 per share liquidation preference (equivalent to $2.3436 per annum per share). The Class C Preferred stockholders receive cumulative distributions at a rate of 9.5% per annum on the $25 per share liquidation preference (equivalent to $2.3748 per annum per share). The October 2001 distribution of $0.18875 per common share represents a current annualized distribution of $2.265 per share, and an annualized distribution yield of approximately 7.9% based on the last reported sale price of $28.65 of our common stock, on the NYSE on November 12, 2001. In order to maintain our tax status as a REIT for federal income tax purposes, we are generally required to distribute dividends to our stockholders aggregating annually at least 90% (95% prior to 2001) of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains). In 2000, our distributions totaled approximately 119.0% of our REIT taxable income. We intend to continue to make distributions to our stockholders that are sufficient to meet this requirement. Future distributions by us will be at the discretion of our Board of Directors and will depend on, among other things, our results of operations, financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Code, our debt service requirements and other factors as the Board of Directors may deem relevant. In addition, our credit facilities contain financial covenants that could limit the amount of distributions payable by us in the event of a deterioration in the results of operations or financial condition of the Company, 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 facilities. 19 FUNDS FROM OPERATIONS ("FFO") For the third quarter of 2001, FFO increased by $3.1 million or 18.7% to $19.7 million versus $16.6 million during the third quarter of 2000. The following is a reconciliation of net income available to common stockholders to FFO, and information regarding distributions paid and diluted weighted average number of common shares outstanding for the third quarter of 2001 and 2000 (dollars in thousands): Three months ended September 30, 2001 2000 --------------------------------------------------------------------------------------------------------- Net income available to common stockholders $ 14,758 $ 9,923 Plus: Depreciation and amortization 7,234 6,913 Provision for impairment losses on properties held for sale 520 -- Less: Depreciation of furniture, fixtures and equipment (29) (31) Gain on sales of investment properties (2,806) (231) --------------------------------------------------------------------------------------------------------- Total funds from operations $ 19,677 $ 16,574 ========================================================================================================= Distributions paid to common stockholders $ 16,716 $ 14,594 FFO in excess of distributions to common stockholders $ 2,961 $ 1,980 Diluted weighted average number of common shares outstanding 29,804,308 26,671,473
For the first nine months of 2001, FFO increased by $6.1 million or 12.3% to $55.5 million versus $49.4 million during the first nine months of 2000. The following is a reconciliation of net income available to common stockholders to FFO, and information regarding distributions paid and diluted weighted average number of common shares outstanding for the first nine months of 2001 and 2000 (dollars in thousands): 20 Nine months ended September 30, 2001 2000 --------------------------------------------------------------------------------------------------------- Net income available to common stockholders $ 41,851 $ 30,842 Plus: Depreciation and amortization 21,602 20,505 Provision for impairment losses on properties held for sale 1,050 -- Less: Depreciation of furniture, fixtures and equipment (85) (99) Gain on sales of investment properties (8,921) (1,831) --------------------------------------------------------------------------------------------------------- Total funds from operations $ 55,497 $ 49,417 ========================================================================================================= Distributions paid to common stockholders $ 46,905 $ 43,612 FFO in excess of distributions to common stockholders $ 8,592 $ 5,805 Diluted weighted average number of common shares outstanding 28,303,628 26,736,160
We define FFO as net income available to common stockholders, plus depreciation and amortization of assets uniquely significant to the real estate industry, reduced by gains and increased by losses on (i) sales of investment property and provisions for impairment and (ii) extraordinary items. The following is a reconciliation of FFO to adjusted FFO for the three months ended September 30, 2001 and 2000. The adjustments are for non-cash items and capitalized expenditures on existing properties in our portfolio (dollars in thousands): Three months ended September 30, 2001 2000 --------------------------------------------------------------------------------------------------------- Funds from operations $ 19,677 $ 16,574 Plus: Amortization of settlements on treasury lock agreements 189 189 Amortization of deferred financing costs 273 269 Amortization of stock compensation 83 53 Straight line rent 7 -- Less: Capitalized leasing costs and commissions (48) (88) Capitalized building improvements (146) (43) Straight line rent -- (84) --------------------------------------------------------------------------------------------------------- Total adjusted funds from operations $ 20,035 $ 16,870 =========================================================================================================
21 The following is a reconciliation of FFO to adjusted FFO for the nine months ended September 30, 2001 and 2000. The adjustments are for non-cash items and capitalized expenditures on existing properties in our portfolio (dollars in thousands): Nine months ended June 30, 2001 2000 --------------------------------------------------------------------------------------------------------- Funds from operations $ 55,497 $ 49,417 Plus: Amortization of settlements on treasury lock agreements 567 567 Amortization of deferred financing costs 830 801 Amortization of stock compensation 228 141 Less: Capitalized leasing costs and commissions (273) (183) Capitalized building improvements (392) (86) Straight line rent (116) (278) --------------------------------------------------------------------------------------------------------- Total adjusted funds from operations $ 56,341 $ 50,379 =========================================================================================================
We consider FFO and adjusted FFO to be appropriate measures of the performance of equity REITs. Financial analysts use FFO and adjusted FFO in evaluating REITs and FFO and adjusted FFO can be a way to measure a REIT's ability to make cash distribution payments. Presentation of this information allows the reader to compare the performance of different REITs, although it should be noted that not all REITs calculate FFO and adjusted FFO the same way so comparisons with other REITs may not be meaningful. FFO and adjusted FFO is not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income as an indication of Realty Income's performance. In addition, FFO and adjusted 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 our ability to pay interest payments. RESULTS OF OPERATIONS THE FOLLOWING IS A COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000. REVENUE Rental revenue was $30.3 million for the third quarter of 2001 versus $29.2 million for the comparable quarter of 2000, an increase of 3.8% or $1.1 million. The increase in rental revenue was primarily due to the acquisition of properties during 2000 and the first nine months of 2001. Included in rental revenue for the third quarter of 2001 and 2000 is $506,000 and $514,000, respectively, from properties owned by Crest Net Lease. Properties owned by Crest Net Lease are held for sale. 22 Rental revenue was $89.4 million for the first nine months of 2001 versus $85.9 million for the comparable period of 2000, an increase of 4.1% or $3.5 million. The increase in rental revenue was primarily due to the acquisition of properties during 2000 and the first nine months of 2001. Included in rental revenue for 2001 and 2000 is $1.3 million and $542,000, respectively, from properties owned by Crest Net Lease. Of the 1,082 properties in the portfolio as of September 30, 2001, 1,077 are single-tenant properties with the remaining properties being multi-tenant properties. Of the 1,077 single-tenant properties, 1,055, or 98.0%, were net leased with a weighted average remaining lease term (excluding extension options) of approximately 9.8 years. Weighted average lease term is based upon base rent as of September 30, 2001. Of our 1,055 leased single-tenant properties, 1,045 or 99.1% were under leases that provide for increases in rents through: o Base rent increases tied to a consumer price index with adjustment ceilings; o Overage rent based on a percentage of the tenants' gross sales; or o Fixed increases. Some leases contain more than one of these clauses. Percentage rent, which is included in rental revenue during the third quarter of 2001 and 2000, was $335,000 and $275,000, respectively. Percentage rent, which is included in rental revenue during the first nine months of 2001 and 2000, was $541,000 and $658,000, respectively. Same store rents generated on 986 properties leased during all of both the third quarters of 2001 and 2000 increased by 1.7%, to $26.43 million from $25.98 million. Same store rents generated on the same 986 properties leased during all of both the first nine months of 2001 and 2000 increased by 2.0%, to $78.59 million from $77.04 million. Many of our leases call for rent increases every five years. Over the previous 48 months we have acquired approximately $483.6 million in new properties that represent approximately 44% of our total portfolio, excluding properties held for sale. Many of these properties are due to generate their initial rent increases during 2002 to 2004. As such, we believe our same store rent growth is likely to increase with the onset of rent increases from the newer properties over the next few years. Our portfolio of retail real estate owned under net leases continues to perform well and provide dependable lease revenue supporting the payment of monthly dividends. As of September 30, 2001, our portfolio of 1,082 retail properties was 98.0% leased with 22 properties available for lease. Of the 22 properties not leased at September 30, 2001, transactions to lease or sell 11 properties were underway or completed as of November 12, 2001. We anticipate these transactions to be completed during the fourth quarter of 2001 and first quarter of 2002; although we cannot guarantee that all of these properties can be sold or leased within this period. 23 During the third quarter of 2001, Crest Net Lease sold one property for $3.3 million and we recognized a gain on the sale on real estate acquired for sale of $284,000, before income taxes. During the first nine months of 2001, Crest Net Lease sold six properties for $18.8 million and we recognized a gain on the sale on real estate acquired for sale of $2.4 million, before income taxes. During the third quarter and first nine months of 2000, Crest Net Lease sold one property for $3.5 million and we recognized a gain on the sale of real estate acquired for sale of $558,000, before income taxes. As of September 30, 2001, Crest Net Lease had $25.4 million invested in 20 properties, which are held for sale. It is Crest Net Lease's intent to carry an average inventory of between $20 to $25 million in real estate on an ongoing basis. Crest Net generates an earnings spread on the differential between the lease payments it receives and the cost of capital used to acquire the properties. It is our belief that at this level of inventory, these earnings will more than cover the ongoing operating expenses of Crest Net. EXPENSES The following is a summary of the five components of interest expense for the three months ended September 30, 2001 and 2000 (dollars in thousands): Three months ended September 30, 2001 2000 Net Change ---------------------------------------------------------------------------------------------------------------------- Interest on outstanding loans and notes $ 5,578 $ 7,864 $ (2,286) Amortization of settlements on treasury lock agreements 189 189 -- Credit facility commitment fees 128 128 -- Amortization of credit facility origination costs and deferred bond financing costs 273 269 4 Interest capitalized (88) (266) 178 ---------------------------------------------------------------------------------------------------------------------- Interest expense $ 6,080 $ 8,184 $ (2,104) ====================================================================================================================== Credit facility and notes outstanding (dollars in thousands) Three months ended September 30, 2001 2000 Net Change ---------------------------------------------------------------------------------------------------------------------- $309,793 $ 395,242 $ (85,449) Average outstanding balances Average interest rates 7.14% 7.92% (0.78)%
Interest on outstanding loans and notes decreased by $2.3 million in the third quarter of 2001 as compared to the third quarter of 2000. The decrease was due to a decrease of $85.4 million in the average outstanding balances and lower average interest rates. During the first nine months of 2001, the Federal Reserve decreased the federal funds rate eight times by a total of 350 basis points. In both October and November, the Federal Reserve decreased the federal funds rate by 50 basis points. Correspondingly, the average borrowing rate on our credit facilities has declined during the same period. As of September 30, 2001, the average interest rate on our credit facility borrowings of $97.5 million was 4.42%, the average interest rates on our notes payable of $230 million was 7.99%, and the average interest rate on our combined outstanding credit facilities and notes of $327.5 million was 6.93%. 24 The following is a summary of the five components of interest expense for the first nine months of 2001 and 2000 (dollars in thousands): Nine months ended September 30, 2001 2000 Net Change ---------------------------------------------------------------------------------------------------------------------- Interest on outstanding loans and notes $ 19,220 $ 22,056 $ (2,836) Amortization of settlements on treasury lock agreements 567 567 -- Credit facility commitment fees 385 380 5 Amortization of credit facility origination costs and deferred bond financing costs 830 801 29 Interest capitalized (276) (991) 715 ---------------------------------------------------------------------------------------------------------------------- Interest expense $ 20,726 $ 22,813 $ (2,087) ====================================================================================================================== Credit facility and notes outstanding 2001 2000 Net Change (dollars in thousands) Nine months ended September 30, ------------------------------------------------------------------------------------------------------------------------- $338,899 $375,379 $ (36,480) Average outstanding balances Average interest rates 7.58% 7.85% (0.27)%
Interest on outstanding loans and notes was $2.8 million lower in the first nine months of 2001 as compared to the first nine months of 2000. The decrease was primarily due to a decrease of $36.5 million in the average outstanding balances and lower average interest rates. Our debt service coverage ratio for the nine months ended September 30, 2001 and 2000 was 4.1 times and 3.5 times, respectively. Debt service coverage ratio is calculated as follows: earnings (income from operations) before interest, taxes, provisions for impairment losses on depreciable real estate, and depreciation and amortization (EBITDA) divided by interest expense. Our EBITDA for the nine months ended September 30, 2001 and 2000 was $84.9 million and $80.2 million, respectively. This information should not be considered as an alternative to any measure of performance as promulgated under GAAP. Our calculation of EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited. Depreciation and amortization was $7.2 million in the third quarter of 2001 versus $6.9 million in the third quarter of 2000. Depreciation and amortization was $21.6 million in the first nine months of 2001 versus $20.5 million in the first nine months of 2000. The increase in 2001 was primarily due to the acquisition of properties during 2000 and 2001. General and administrative expenses increased by $191,000 to $1.9 million in the third quarter of 2001 versus $1.7 million in the third quarter of 2000. Included in general and administrative expenses for 2001 and 2000 are $67,000 and $86,000, respectively, of expenses attributable to Crest Net Lease. Excluding the Crest Net expenses, general and administrative expenses as a percentage of revenue were 6.0% in the third quarter of 2001 as compared to 5.5% in the comparable quarter of 2000. General and administrative expenses, excluding expenses attributable to Crest Net, increased primarily due to increases in the costs of living, which includes increases in payroll costs. 25 General and administrative expenses increased by $823,000 to $5.8 million in the first nine months of 2001 versus $5.0 million in the first nine months of 2000. Included in general and administrative expenses for 2001 and 2000 are $399,000 and $213,000, respectively, of expenses attributable to Crest Net Lease. Excluding the Crest Net expenses, general and administrative expenses as a percentage of revenue were 5.9% in the first nine months of 2001 as compared to 5.5% in the comparable period of 2000. General and administrative expenses, excluding expenses attributable to Crest Net, increased primarily due to increases in the costs of living, which includes increases in payroll costs. 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 September 30, 2001, 22 properties were available for lease, as compared to 25 at December 31, 2000 and 29 at September 30, 2000. Property expenses were $585,000 in the third quarter of 2001 and $536,000 in the third quarter of 2000. The $49,000 increase in property expenses is primarily attributable to an increase in portfolio property insurance and costs associated with properties available for lease. Property expenses were $1.8 million in the first nine months of 2001 and $1.5 million in the first nine months of 2000. The $256,000 increase in property expenses is primarily attributable to an increase in portfolio property insurance and costs associated with properties available for lease. Other expenses increased $405,000 to $814,000 in the third quarter of 2001 versus $409,000 in the third quarter of 2000. The increase in 2001 is attributable to provisions for impairment on depreciable real estate of $520,000, which was partially offset by a decrease in Crest Net Lease income taxes of $84,000. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. 26 The following is a summary of our other expenses for the three months ended September 30, 2001 and 2000 (dollars in thousands): Three months ended September 30, 2001 2000 Net Change - ---------------------------------------------------------------------------------------------------------------------- Realty Income's state and local income taxes $ 109 $140 $ (31) Crest Net Lease's income taxes 185 269 (84) Provisions for impairment on depreciable real estate 520 -- 520 - ---------------------------------------------------------------------------------------------------------------------- Other expense $ 814 $ 409 $ 405 ======================================================================================================================
Other expenses increased $1.8 million to $2.4 million in the first nine months of 2001 versus $554,000 in the first nine months of 2000. The increase in 2001 is primarily attributable to an increase in Crest Net Lease income taxes of $776,000 and $1.1 million of provisions for impairment on depreciable real estate. The following is a summary of our other expenses for the first nine months of 2001 and 2000 (dollars in thousands): Nine months ended September 30, 2001 2000 Net Change - ---------------------------------------------------------------------------------------------------------------------- Realty Income's state and local income taxes $ 344 $ 361 $ (17) Crest Net Lease's income taxes 969 193 776 Provisions for impairment on depreciable real estate 1,050 -- 1,050 - ---------------------------------------------------------------------------------------------------------------------- Other expense $ 2,363 $ 554 $ 1,809 ======================================================================================================================
During the third quarter of 2001, we sold 10 investment properties for a total of $10.0 million and recognized a gain of $2.8 million. During the third quarter of 2000, we sold three investment properties for $2.2 million and recognized a gain of $231,000. During the first nine months of 2001, we sold 23 investment properties for a total of $29.7 million and recognized a gain of $8.9 million. During the first nine months of 2000, we sold nine investment properties for $5.8 million and recognized a gain of $1.8 million. We have an active portfolio management program that incorporates the sale of properties when we believe the reinvestment of the net sales proceeds can generate higher returns, enhance the credit quality of our real estate portfolio or increase the average lease term. As of September 30, 2001, we classified real estate with a carrying amount of $31.2 million as held for sale. Additionally, we anticipate selling properties from our investment portfolio, which have not yet been specifically identified. We anticipate we will receive up to $50 million in proceeds from the sale of properties during the next 12 months. We intend to invest these proceeds into new properties. We declared preferred stock dividends of $2.4 million during the third quarters of both 2001 and 2000. We declared preferred stock dividends of $7.3 million during the first nine months of both 2001 and 2000. 27 NET INCOME Net income available to common stockholders was $14.8 million and $9.9 million, respectively in the third quarter of 2001 and 2000, an increase of $4.9 million or 49.5%. Net income available to common stockholders was $41.9 million and $30.8 million, respectively for the first nine months of 2001 and 2000, an increase of $11.1 million or 36.0%. The calculation to determine net income available to common stockholders includes gains and losses from the sale of investment properties. The amount of gains and losses vary 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 property sales during the first nine months of 2001 was $8.9 million. This was $7.1 million more than the gain recognized from property sales during the first nine months of 2000. PROPERTIES As of September 30, 2001, we owned a diversified portfolio of 1,082 properties located in 46 states with approximately 9.0 million square feet of leasable space. In addition to our real estate portfolio, our subsidiary Crest Net Lease owned 20 properties. Our portfolio of retail properties is leased to 74 retail chains doing business in 23 separate retail industries. At September 30, 2001, 1,055 or 97.5% of the 1,082 properties were leased under net-lease agreements. Net leases typically require the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance plus, typically, future rent increases (generally subject to ceilings) based on increases in the consumer price index, fixed increases or additional rent calculated as a percentage of the tenant's gross sales above a specified level. Our net-leased retail properties are primarily leased to regional and national retail chain store operators. The average leasable retail space of the 1,082 properties is approximately 8,300 square feet on approximately 60,600 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, adequate access and proximity to a sufficient population base to constitute a suitable market or trade area for the retailer's business. 28 The following table sets forth rental revenue from our properties classified according to the business of the respective tenants, expressed as a percentage of our total rental revenue. Percentage of Annualized Rent Percentage of Historical Rental Revenue as of For the Years Ended December 31(1), September 30, --------------------------------------------------------------------- Industry 2001(1)(2) 2000 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- Apparel Stores 2.5% 2.4% 3.8% 4.1% 0.7% --% --% Automotive Parts 8.2 8.3 8.6 7.8 9.1 10.5 11.4 Automotive Service 5.6 5.8 6.6 7.5 6.4 4.8 3.7 Book Stores 0.5 0.5 0.5 0.6 0.5 -- -- Business Services 0.1 0.1 0.1 * -- -- -- Child Care 23.9 24.7 25.3 29.2 35.9 42.0 45.6 Consumer Electronics 3.8 4.9 4.4 5.4 6.5 0.9 -- Convenience Stores 8.3 8.4 7.2 6.1 5.5 4.6 2.4 Craft and Novelty 0.4 0.4 0.4 * -- -- -- Drug Stores 0.2 0.2 0.2 0.1 -- -- -- Entertainment 1.9 2.0 1.2 -- -- -- -- General Merchandise 0.6 0.6 0.6 * -- -- -- Grocery Stores 0.6 0.6 0.5 * -- -- -- Health and Fitness 4.5 2.4 0.6 0.1 -- -- -- Home Furnishings 5.9 5.8 6.5 7.8 5.6 4.4 2.9 Home Improvement 1.3 2.0 3.6 * -- -- -- Office Supplies 2.1 2.3 2.6 3.0 1.7 -- -- Pet Supplies and Services 1.4 1.5 1.1 0.6 0.2 -- -- Private Education 1.4 1.4 1.2 0.9 -- -- -- Restaurants 13.2 12.3 13.3 16.2 19.8 24.4 24.7 Shoe Stores 0.7 0.8 1.1 0.8 0.2 -- -- Theaters 4.2 2.7 0.6 -- -- -- -- Video Rental 3.6 3.9 4.3 3.8 0.6 -- -- Other 5.1 6.0 5.7 6.0 7.3 8.4 9.3 - ---------------------------------------------------------------------------------------------------------------------------- Totals 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ============================================================================================================================ * Less than 0.1% (1) This table does not include properties owned by our subsidiary Crest Net Lease. (2) Annualized rent is calculated by multiplying the monthly contractual base rent as of September 30, 2001 for each of the properties by 12 and adding the previous 12 month's historic percentage rent, which totaled $1.9 million (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level). For the properties under construction, an estimated contractual base rent is used based upon the estimated total costs of each property.
Of the 1,082 properties in the portfolio at September 30, 2001, 1,077 were single-tenant properties with the remaining properties being multi-tenant properties. As of September 30, 2001, 1,055 of the 1,077 single-tenant properties, or 98.0%, were net leased with a weighted average remaining lease term (excluding extension options) of approximately 9.8 years. 29 The following table sets forth certain information regarding the timing of the lease term expirations (excluding extension options) on our 1,055 net-leased, single-tenant retail properties as of September 30, 2001 (dollars in thousands): Number of Annualized Percent of Year Leases Expiring(1) Rent(1)(2) Annualized Rent - ---------------------------------------------------------------------------------------------------------------- 2001 16 $ 1,343 1.1% 2002 83 6,818 5.8 2003 77 6,554 5.6 2004 118 10,148 8.7 2005 84 6,519 5.6 2006 71 6,587 5.6 2007 93 6,416 5.5 2008 66 5,901 5.1 2009 28 2,483 2.1 2010 45 3,888 3.3 2011 36 5,292 4.5 2012 48 5,681 4.8 2013 69 12,130 10.3 2014 35 6,287 5.4 2015 37 4,465 3.8 2016 14 1,492 1.3 2017 11 4,454 3.8 2018 16 1,626 1.4 2019 50 8,731 7.4 2020 9 2,920 2.5 2021 42 5,328 4.5 2023 1 159 0.1 2026 2 372 0.3 2033 2 1,118 1.0 2034 2 570 0.5 - ---------------------------------------------------------------------------------------------------------------- Totals 1,055 $ 117,282 100.0% ================================================================================================================ (1) This table does not include five multi-tenant properties and 22 vacant, unleased single-tenant properties owned by the Company and properties owned by our subsidiary Crest Net Lease. The lease expirations for properties under construction are based on the estimated date of completion of such properties. (2) Annualized rent is calculated by multiplying the monthly contractual base rent as of September 30, 2001 for each of the properties by 12 and adding the previous 12 month's historic percentage rent, which totaled $1.9 million (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level). For the properties under construction, an estimated contractual base rent is used based upon the estimated total costs of each property.
30 The following table sets forth certain state-by-state information regarding Realty Income's property portfolio as of September 30, 2001 (dollars in thousands). Approximate Number of Percent Leasable Annualized Percent of State Properties(1) Leased Square Feet Rent(1)(2) Annualized Rent - ------------------------------------------------------------------------------------------------------------------ Alabama 15 100% 142,600 $ 1,412 1.2% Alaska 1 100 69,100 285 0.2 Arizona 30 100 225,500 3,677 3.0 Arkansas 8 100 48,800 890 0.7 California 53 100 950,400 13,392 10.9 Colorado 43 100 264,300 3,945 3.2 Connecticut 10 100 223,800 3,147 2.6 Delaware 1 100 5,400 72 0.1 Florida 88 91 1,002,800 13,002 10.6 Georgia 62 98 444,400 6,240 5.1 Idaho 11 100 52,000 765 0.6 Illinois 36 100 262,600 3,874 3.2 Indiana 29 97 170,400 2,219 1.8 Iowa 10 100 67,900 702 0.6 Kansas 21 100 190,000 2,205 1.8 Kentucky 13 100 43,500 1,128 0.9 Louisiana 7 100 47,100 681 0.6 Maryland 8 100 48,300 754 0.6 Massachusetts 8 100 53,900 1,115 0.9 Michigan 10 100 68,100 992 0.8 Minnesota 24 96 254,200 2,473 2.0 Mississippi 21 100 171,000 1,733 1.4 Missouri 34 100 206,400 2,796 2.3 Montana 2 100 30,000 287 0.2 Nebraska 9 100 87,100 1,141 0.9 Nevada 6 100 81,300 1,298 1.1 New Hampshire 1 100 6,400 136 0.1 New Jersey 4 100 45,400 796 0.6 New Mexico 5 80 46,000 183 0.1 New York 20 100 253,300 5,037 4.1 North Carolina 33 100 170,200 3,204 2.6 North Dakota 1 100 22,000 65 0.1 Ohio 66 100 377,000 5,686 4.6 Oklahoma 20 95 112,700 1,572 1.3 Oregon 18 100 206,000 2,017 1.6 Pennsylvania 23 100 168,300 2,302 1.9 South Carolina 47 100 142,000 4,023 3.3 South Dakota 2 100 12,600 175 0.1 Tennessee 29 97 237,800 3,149 2.6 Texas 153 95 1,175,700 13,263 10.8 Utah 7 100 45,400 638 0.5 Virginia 29 100 259,100 4,638 3.8 Washington 40 100 261,800 3,207 2.6 West Virginia 2 100 16,800 160 0.1 Wisconsin 18 100 167,700 2,067 1.7 Wyoming 4 100 20,100 264 0.2 - ------------------------------------------------------------------------------------------------------------------ Totals/Average 1,082 98% 8,957,200 $ 122,807 100.0% ================================================================================================================== (1) This table does not include properties owned by our subsidiary Crest Net Lease. (2) Annualized rent is calculated by multiplying the monthly contractual base rent as of September 30, 2001 for each of the properties by 12 and adding the previous 12 month's historic percentage rent, which totaled $1.9 million (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level). For the properties under construction, an estimated contractual base rent is used based upon the estimated total costs of each property.
31 The following table sets forth certain information regarding the properties owned by Realty Income as of September 30, 2001, classified according to the retail business types and the level of services they provide (dollars in thousands): Number of Annualized Percent of Industry Properties(1) Rent(1)(2) Annualized Rent - ---------------------------------------------------------------------------------------------------------------------- TENANTS PROVIDING SERVICES Automotive Service 99 $ 6,942 5.7% Child Care 329 29,360 23.9 Entertainment 8 2,360 1.9 Health and Fitness 9 5,469 4.5 Private Education 5 1,738 1.4 Theaters 10 5,209 4.2 Other 9 6,226 5.1 -------------------------------------------------------------------------------- 469 57,304 46.7 -------------------------------------------------------------------------------- TENANTS SELLING GOODS AND SERVICES Automotive Parts (with installation) 63 5,634 4.6 Business Services 1 124 0.1 Convenience Stores 105 10,222 8.3 Home Improvement 2 187 0.2 Pet Supplies and Services 6 1,241 1.0 Restaurants 193 16,178 13.2 Video Rental 35 4,471 3.6 -------------------------------------------------------------------------------- 405 38,057 31.0 -------------------------------------------------------------------------------- TENANTS SELLING GOODS Apparel Stores 5 3,103 2.5 Automotive Parts 76 4,461 3.6 Book Stores 2 602 0.5 Consumer Electronics 36 4,639 3.8 Craft and Novelty 2 502 0.4 Drug Stores 1 235 0.2 General Merchandise 11 687 0.6 Grocery Stores 2 726 0.6 Home Furnishings 38 7,232 5.9 Home Improvement 21 1,377 1.1 Office Supplies 8 2,525 2.0 Pet Supplies 2 467 0.4 Shoe Stores 4 890 0.7 -------------------------------------------------------------------------------- 208 27,446 22.3 - ---------------------------------------------------------------------------------------------------------------------- TOTALS 1,082 $ 122,807 100.0% ====================================================================================================================== (1) This table does not include properties owned by our subsidiary Crest Net Lease. (2) Annualized rent is calculated by multiplying the monthly contractual base rent as of September 30, 2001 for each of the properties by 12 and adding the previous 12 month's historic percentage rent, which totaled $1.9 million (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level). For the properties under construction, an estimated contractual base rent is used based upon the estimated total costs of each property.
32 IMPACT OF INFLATION Tenant leases generally provide for limited increases in rent as a result of increases in the tenant's sales volumes, increases in the consumer price index or fixed increases. We expect that inflation will cause these lease provisions to result in increases in rent over time. During times when inflation is greater than increases in rent as provided for in the leases, rent increases may not keep up with the rate of inflation. Approximately 97.5%, or 1,055, of the 1,082 properties in the portfolio are leased to tenants under net leases in which the tenant is responsible for property costs and expenses. These features in the leases reduce our exposure to rising property expenses due to inflation. Inflation and increased costs may have an adverse impact on the tenants if increases in the tenant's operating expenses exceed increases in revenue. IMPACT OF ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statement No. 141, Business Combinations. Statement No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The Company is required to adopt the provisions of Statement No. 141 immediately. The adoption of Statement No. 141 will not have a material effect on our financial position, results of operations or liquidity. In June 2001, the Financial Accounting Standards Board issued Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement No. 142. Statement No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company is required to adopt Statement No. 142 effective January 1, 2002. As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $17.2 million. The Company does not have any intangible assets or unamortized negative goodwill. Amortization expense related to goodwill was $924,000 and $693,000 for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively. We have not yet determined the impact of Statement No. 142 on our financial position, results of operations or liquidity. 33 In August 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement No. 144 will supersede FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Statement No. 144 requires long-lived assets to be disposed of to be measured at the lower of carrying amount or fair value less cost to sell. The Company is required to adopt Statement No. 144 effective January 1, 2002. We have not yet determined the impact of Statement No. 144 on our financial position, results of operations or liquidity. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- We are exposed to interest rate changes primarily as a result of our credit facilities and long-term 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 our objectives we borrow our long-term debt primarily at fixed rates and may selectively enter into derivative financial instruments such as interest rate lock agreements, interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We are not a party to any derivative financial instruments at September 30, 2001. We do not enter into any transactions for speculative or trading purposes. Our interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts, weighted average interest rates, fair values and other terms required by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes (dollars in table in millions). Expected Maturity Data ------------------------------------------------------- 2002 2003 Thereafter Total Fair Value(2) ---- ---- ---------- ----- ------------- Fixed rate debt -- -- $ 230.0(1) $ 230.0 $ 229.8 Average interest rate -- -- 7.99% 7.99% Variable rate debt -- $97.5 -- $ 97.5 $ 97.5 Average interest rate -- 4.42% -- 4.42% (1) $110 million matures in 2007, $100 million matures in 2008 and $20 million matures in 2009. (2) We base the fair value of the fixed rate debt at September 30, 2001 on the closing market price or indicative price per each note. The fair value of the variable rate debt approximates its carrying value because its terms are similar to those available in the market place.
The table incorporates only those exposures that exist as of September 30, 2001, 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. 34 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). 3.3 Articles Supplementary of the Class A Junior Participating Preferred Stock of Realty Income Corporation (filed as exhibit A of exhibit 1 to Realty Income's registration statement on Form 8-A, dated June 26, 1998, and incorporated herein by reference). 3.4 Articles Supplementary to the Articles of Incorporation of Realty Income Corporation classifying and designating the Class B Preferred Stock (filed as exhibit 4.1 to the Company's Form 8-K dated May 24, 1999 and incorporated herein by reference). 3.5 Articles Supplementary to the Articles of Incorporation of Realty Income Corporation classifying and designating the Class C Preferred Stock (filed as exhibit 4.1 to the Company's Form 8-K dated July 29, 1999 and incorporated herein by reference). 4.1 Pricing Committee Resolutions and Form of 7.75% Notes due 2007 (filed as Exhibit 4.2 to the Company's Form 8-K dated May 5, 1997 and incorporated herein by reference). 4.2 Indenture dated as of May 6, 1997 between the Company and The Bank of New York (filed as Exhibit 4.1 to the Company's Form 8-K dated May 5, 1997 and incorporated herein by reference). 4.3 First Supplemental Indenture dated as of May 28, 1997, between the Company and The Bank of New York (filed as Exhibit 4.3 to the Company's Form 8-B and incorporated herein by reference). 35 EXHIBIT NO. DESCRIPTION - ----------- ----------- 4.4 Rights Agreement, dated as of June 25, 1998, between Realty Income Corporation and The Bank of New York (filed as an exhibit 1 to the Company's registration statement on Form 8-A, dated June 26, 1998, and incorporated herein by reference). 4.5 Pricing Committee Resolutions (filed as an exhibit 4.2 to Realty Income's Form 8-K, dated October 27, 1998 and incorporated herein by reference). 4.6 Form of 8.25% Notes due 2008 (filed as exhibit 4.3 to Realty Income's Form 8-K, dated October 27, 1998 and incorporated herein by reference). 4.7 Indenture dated as of October 28, 1998 between Realty Income and The Bank of New York (filed as exhibit 4.1 to Realty Income's Form 8-K, dated October 27, 1998 and incorporated herein by reference). 4.8 Pricing Committee Resolutions and Form of 8% Notes due 2009 (filed as exhibit 4.2 to Realty Income's Form 8-K, dated January 21, 1999 and incorporated herein by reference). B. No reports on Form 8-K were filed by the registrant during the quarter for which this report is filed. On October 22, 2001, we filed a Form 8-K in connection with the issuance of up to 2,990,000 shares of the Company's common stock. 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/ GREGORY J. FAHEY -------------------------------------------- Date: November 13, 2001 Gregory J. Fahey, Vice President, Controller (Principal Accounting Officer) EXHIBIT INDEX Exhibit No. Description - -------- ----------- -- None 36 -----END PRIVACY-ENHANCED MESSAGE-----