XML 67 R12.htm IDEA: XBRL DOCUMENT

Investments in Real Estate

12 Months Ended

Dec. 31, 2012

5. Investments in Real Estate

We acquire the land, buildings and improvements that are necessary for the successful operations of commercial enterprises.

A. 2012 and 2011 Acquisitions

During 2012, Realty Income invested $1.16 billion in real estate, acquiring 423 properties, and properties under development, with an initial weighted average contractual lease rate of 7.2%. The initial weighted average contractual lease rate is computed by dividing the estimated aggregate base rent for the first year of each lease by the estimated total cost of the properties. The 423 properties, and properties under development, are located in 37 states, will contain over 10.5 million leasable square feet, and are 100% leased with an average lease term of 14.6 years. The tenants of the 423 properties acquired operate in 23 industries: aerospace, apparel stores, automotive collision services, automotive parts, consumer appliances, consumer goods, convenience stores, crafts and novelties, diversified industrial, dollar stores, drug stores, equipment services, food processing, health and fitness, insurance, machinery, motor vehicle dealerships, packaging, paper, restaurants - quick service, theaters, transportation services, and wholesale clubs. None of the investments in these properties caused any one tenant to be 10% or more of our total assets at December 31, 2012. Acquisition transaction costs of $2.4 million were recorded to general and administrative expense on our consolidated statement of income for 2012.

These 2012 aggregate acquisitions were allocated as follows: $284.5 million to land, $770.0 million to buildings and improvements, $107.2 million to intangible assets, $34.9 million to other assets, net, and $32.5 million to intangible and assumed liabilities, which includes mortgage premiums of $10.0 million. The majority of our 2012 acquisitions were cash purchases, except for eight transactions that included the assumption of $110.5 million of mortgages payable. There was no contingent consideration associated with these acquisitions.

The properties acquired during 2012 generated total revenues of $23.9 million and income from continuing operations of $9.8 million.

The purchase price allocation for $106.4 million of the $1.16 billion invested by us in 2012 is based on a preliminary measurement of fair value that is subject to change. The allocation for these properties represents our current best estimate of fair value and we expect to finalize the valuations and complete the purchase price allocation in the first quarter of 2013.

In comparison, during 2011, Realty Income invested $1.02 billion in new real estate, including 164 new properties, and properties under development, with an initial weighted average contractual lease rate of 7.8%. These 164 new properties, and properties under development, are located in 26 states, contain over 6.2 million leasable square feet, and are 100% leased with an average lease term of 13.4 years. The tenants of the 164 properties acquired operate in 16 industries: aerospace, automotive collision services, beverages, drug store, equipment services, financial services, food processing, grocery stores, health and fitness, packaging, paper, restaurants – quick service, telecommunications, theaters, transportation services, and wholesale club.

Acquisition transaction costs of $1.5 million were recorded to general and administrative expense on our consolidated statement of income for 2011.

The 2011 aggregate acquisitions were allocated as follows: $239.3 million to land, $645.0 million to buildings and improvements, $137.0 million to intangible assets and $5.1 million to intangible and assumed liabilities, which includes mortgage premiums of $820,000. The majority of our 2011 acquisitions were cash purchases, except for one that also included the assumption of $8.8 million in notes receivable and four that also included the assumption of $67.4 million of mortgages payable. There was no contingent consideration associated with these acquisitions.

In 2012, we capitalized costs of $6.6 million on existing properties in our portfolio, consisting of $1.62 million for re-leasing costs and $4.93 million for building and tenant improvements. In 2011, we capitalized costs of $4.2 million on existing properties in our portfolio, consisting of $1.7 million for re-leasing costs and $2.5 million for building improvements.

B. Unaudited Pro Forma Information

The following pro forma total revenue and income from continuing operations, for 2012 and 2011, assumes all of our 2012 property acquisitions, and our acquisition of ARCT in January 2013, occurred on January 1, 2011 (in millions). This pro forma supplemental information does not include the impact of any synergies or lower borrowing costs that we have or may achieve as a result of the acquisitions or any strategies that management has or may consider in order to continue to efficiently manage our operations. Additionally, this information does not purport to be indicative of what our operating results would have been had the acquisitions occurred on January 1, 2011, and may not be indicative of future operating results. For purposes of calculating these pro-forma amounts, we assumed that the following transaction occurred on January 1, 2011: (1) the issuance of our $350 million of 2% notes due January 2018 and our $450 million of 3.25% notes due in October 2022, and (2) payment of the estimated merger-related costs of $19 million related to our acquisition of ARCT. Other than these items specified above, no material, non-recurring pro-forma adjustments were included in the calculation of this information.

			Income from
			continuing
	Total revenue		operations
Supplemental pro forma for the year ended December 31, 2012	$	717.9	$	188.2
Supplemental pro forma for the year ended December 31, 2011	$	669.3	$	156.4

C. Properties With Existing Leases

Of the $1.16 billion Realty Income invested in 2012, approximately $552.5 million was used to acquire 129 properties with existing leases. Associated with these 129 properties, we recorded $98.6 million as the intangible value of the in-place leases, $8.5 million as the intangible value of above-market leases and $21.1 million as the intangible value of below-market leases. Of the $1.02 billion we invested in 2011, approximately $592.1 million was used to acquire 94 properties with existing leases. Associated with these 94 properties, we recorded $109.9 million as the intangible value of the in-place leases, $27.1 million as the intangible value of above-market leases and $3.5 million as the intangible value of below-market leases.

The value of the in-place and above-market leases is recorded to other assets, net, on our consolidated balance sheet, and the value of the below-market leases is recorded to other liabilities, net, on our consolidated balance sheet. The value of the in-place leases is amortized as depreciation and amortization expense. The amount amortized to expense for 2012 was $15.6 million, for 2011 was $8.3 million and for 2010 was $1.4 million. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be recorded to revenue or expense as appropriate.

The value of the above-market and below-market leases is amortized as rental revenue on our consolidated statements of income. All of these amounts are amortized over the expected lives of the respective leases. The amounts amortized as a net (decrease) increase to rental income for capitalized above-market and below-market leases for 2012 was $(1.8) million, for 2011 was $(1.1) million and for 2010 was $154,000.

D. Crest

During 2012, Crest invested $890,000 in one property in the restaurant – casual industry, while Crest did not invest in any properties during 2011. At December 31, 2012, Crest owned four properties for $3.9 million, of which $3.0 million was classified as held for investment. At December 31, 2011, Crest owned three properties for $3.0 million. Additionally, Crest also held notes receivable of $18.9 million at December 31, 2012 and $19.0 million at December 31, 2011.