UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q ========= [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2000, or ================= [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 COMMISSION FILE NUMBER 1-13318 ============================== REALTY INCOME CORPORATION ========================= (Exact name of registrant as specified in its charter) MARYLAND ======== (State or other jurisdiction of incorporation or organization) 33-0580106 ========== (I.R.S. Employer Identification No.) 220 WEST CREST STREET, ESCONDIDO, CALIFORNIA 92025 =================================================== (Address of principal executive offices) (760) 741-2111 ============== (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] There were 26,656,819 shares of common stock outstanding as of August 11, 2000. REALTY INCOME CORPORATION Form 10-Q June 30, 2000 Table of Contents ----------------- <TABLE> PART I. FINANCIAL INFORMATION Page ============================== ---- <S> <C> <C> Item 1: Financial Statements Consolidated Balance Sheets........................ 3 Consolidated Statements of Income.................. 5 Consolidated Statements of Cash Flows.............. 6 Notes to Consolidated Financial Statements......... 8 Item 2: Management's Discussion and Analysis Of Financial Condition and Results Of Operations...... 13 Item 3: Quantitative and Qualitative Disclosures About Market Risk........................................ 33 PART II. OTHER INFORMATION ========================== Item 4: Submission of Matters to a Vote of Security Holders................................... 34 Item 6: Exhibits and Reports on Form 8-K................... 35 SIGNATURE................................................... 37 EXHIBIT INDEX............................................... 37 </TABLE> Page 2 PART I. FINANCIAL INFORMATION ============================== ITEM 1. FINANCIAL STATEMENTS REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets =========================== As of June 30, 2000 and December 31, 1999 (dollars in thousands, except per share data) <TABLE> 2000 1999 (Unaudited) =========== ========= <S> <C> <C> ASSETS Real estate, at cost: Land $ 340,875 $ 338,489 Buildings and improvements 690,771 678,763 --------- --------- 1,031,646 1,017,252 Less accumulated depreciation and amortization (191,831) (179,421) --------- --------- Net real estate held for investment 839,815 837,831 Real estate held for sale, net 49,812 29,262 --------- --------- Net real estate 889,627 867,093 Cash and cash equivalents 2,449 773 Accounts receivable 3,048 3,407 Goodwill, net 18,591 19,053 Other assets 14,677 15,078 --------- --------- Total assets $ 928,392 $ 905,404 ========= ========= Continued on next page Page 3 (continued) REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets =========================== As of June 30, 2000 and December 31, 1999 (dollars in thousands, except per share data) 2000 1999 (Unaudited) =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Distributions payable $ 4,865 $ 4,828 Accounts payable and accrued expenses 4,845 12,792 Other liabilities 3,526 3,753 Lines of credit payable 162,300 119,200 Notes payable 230,000 230,000 --------- --------- Total liabilities 405,536 370,573 --------- --------- Stockholders' equity Preferred stock and paid in capital, par value $1.00 per share, 20,000,000 shares authorized, 4,125,700 and 4,140,000 shares issued and outstanding in 2000 and 1999, respectively 99,368 99,679 Common stock and paid in capital, par value $1.00 per share, 100,000,000 shares authorized, 26,656,870 and 26,822,164 shares issued and outstanding in 2000 and 1999, respectively 633,083 636,611 Distributions in excess of net income (209,595) (201,459) --------- --------- Total stockholders' equity 522,856 534,831 --------- --------- Total liabilities and stockholders' equity $ 928,392 $ 905,404 ========= ========= </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements. Page 4 REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Statements of Income ================================= For the three and six months ended June 30, 2000 and 1999 (dollars in thousands, except per share amounts) (Unaudited) <TABLE> Three Three Six Six Months Months Months Months Ended Ended Ended Ended 6/30/00 6/30/99 6/30/00 6/30/99 ======== ======== ======== ======== <S> <C> <C> <C> <C> REVENUE Rental $ 28,349 $ 24,864 $ 56,679 $ 48,812 Interest and other 92 38 117 76 -------- -------- -------- -------- 28,441 24,902 56,796 48,888 -------- -------- -------- -------- EXPENSES Interest 7,471 6,045 14,629 11,925 Depreciation and amortization 6,844 6,237 13,592 12,327 General and administrative 1,735 1,755 3,419 3,401 Property 466 437 981 878 -------- -------- -------- -------- 16,516 14,474 32,621 28,531 -------- -------- -------- -------- Income from operations 11,925 10,428 24,175 20,357 Gain on sales of properties 938 -- 1,600 -- -------- -------- -------- -------- Net income 12,863 10,428 25,775 20,357 Preferred stock dividends (2,428) (629) (4,856) (629) -------- -------- -------- -------- Net income available to common stockholders $ 10,435 $ 9,799 $ 20,919 $ 19,728 ======== ======== ======== ======== Basic and diluted net income per common share $ 0.39 $ 0.37 $ 0.78 $ 0.74 ======== ======== ======== ======== </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements. 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REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Statements Of Cash Flows ===================================== For the six months ended June 30, 2000 and 1999 (dollars in thousands) (Unaudited) <TABLE> 2000 1999 ========= ========= <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 25,775 $ 20,357 Adjustments to net income: Depreciation and amortization 13,592 12,327 Gain on sales of properties (1,600) -- Change in assets and liabilities: Accounts receivable and other assets 1,114 1,497 Accounts payable, accrued expenses and other liabilities 304 385 --------- --------- Net cash provided by operating activities 39,185 34,566 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of properties 3,540 -- Acquisition of and additions to properties (45,962) (84,936) Increase in other assets (150) -- Payment of other liabilities -- (1,713) --------- --------- Net cash used in investing activities (42,572) (86,649) --------- --------- Continued on next page Page 6 (continued) REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Statements Of Cash Flows ===================================== For the six months ended June 30, 2000 and 1999 (dollars in thousands) (Unaudited) 2000 1999 ========= ========= CASH FLOWS FROM FINANCING ACTIVITIES Borrowings from lines of credit 83,700 114,300 Payments under lines of credit (40,600) (105,800) Distributions to common stockholders (29,018) (27,560) Distributions to preferred stockholders (4,856) (629) Proceeds from stock offerings, net of offering costs of $2,441 in 1999 and $35 in 2000 (35) 66,558 Purchase of common stock (3,852) -- Purchase of preferred stock (276) -- Proceeds from notes issued, net costs of $501 -- 19,499 --------- --------- Net cash provided by financing activities 5,063 66,368 --------- --------- Net increase in cash and cash equivalents 1,676 14,285 Cash and cash equivalents, beginning of period 773 2,533 --------- --------- Cash and cash equivalents, end of period $ 2,449 $ 16,818 ========= ========= </TABLE> For supplemental disclosures, see note 8. The accompanying notes to consolidated financial statements are an integral part of these statements. Page 7
REALTY INCOME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements ========================================== June 30, 2000 (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. Readers of this quarterly report should refer to our audited financial statements for the year ended December 31, 1999, which are included in our 1999 Annual Report on Form 10-K, as certain disclosures which would substantially duplicate those contained in such audited financial statements have been omitted from this report. 2. Property Acquisitions During the first six months of 2000, we invested $16.8 million in three new retail properties and properties under development. These three properties are located in two states and will contain approximately 52,700 leasable square feet and are 100% leased, with an average initial lease term of 13.2 years. During the first six months of 2000, Crest Net Lease, a subsidiary of Realty Income, invested $20.5 million in seven new retail properties. These seven properties are held for sale. During the first six months of 1999, we invested $88.9 million in 66 new retail properties and properties under development. These 66 properties are located in 23 states and contain approximately 623,100 leasable square feet and are 100% leased, with an average initial lease term of 15.7 years. 3. Investment in Subsidiary In January 2000, we formed Crest Net Lease, Inc., of which we own 95% of the common stock, all of which is non-voting, and certain members of management own 5% of the common stock, all of which is voting stock. Crest Net Lease was created to actively buy and sell properties, primarily to buyers using tax-deferred exchanges, under Section 1031 of the Internal Revenue Code of 1986, as amended. During the first six months of 2000, we invested $8.6 million in Crest Net Lease common stock. In February 2000, we entered into a $25 million, revolving credit facility with Crest Net Lease. As of June 30, 2000, our outstanding loans to Crest Net Lease were $12.3 million. Page 8
3. Investment in Subsidiary (continued) The financial statements of Crest Net Lease have been consolidated. All inter company transactions, including the investment and loans referred to above, have been eliminated in the consolidation method of accounting. 4. 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 six months ended June 30, 2000 and 1999. As of June 30, 2000, a distribution of $0.1825 per common share was declared (and was paid on July 17, 2000). <TABLE> Month 2000 1999 -------- -------- -------- <S> <C> <C> January $ 0.18000 $ 0.1700 February 0.18000 0.1700 March 0.18000 0.1700 April 0.18125 0.1725 May 0.18125 0.1725 June 0.18125 0.1725 -------- -------- -------- Total $ 1.08375 $ 1.0275 ======== ======== ======== </TABLE> B. In May 1999, we issued 9 3/8% Class B preferred stock. During the first six months of 2000, we paid two quarterly distributions of $0.5859 per share to our 9 3/8% Class B preferred stockholders. During the second quarter of 1999, we paid one quarterly distribution of $0.2279 per share to these stockholders. C. In July 1999, we issued 9 1/2% Class C preferred stock. During the first six months of 2000, we paid six monthly distributions of $0.1979 per share to our 9 1/2% Class B preferred stockholders. 5. Gain on Sales of Properties For the six months ended June 30, 2000, we sold six properties (one automotive parts store, two automotive service locations, one convenience store and two restaurants) for $3.5 million and recognized a gain of $1.6 million. For the six months ended June 30, 1999, no properties were sold. For the three months ended June 30, 2000, we sold five properties (one automotive parts store, two automotive service locations, one convenience store and one restaurant) for $2.1 million and recognized a gain of $938,000. Page 9 6. Net Income per 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 six months ended June 30, 2000 and 1999: <TABLE> Three Three Months Months Ended Ended 6/30/00 6/30/99 ---------- ---------- <S> <C> <C> Weighted average shares used for the basic net income per share computation 26,703,319 26,822,370 Incremental shares from the assumed exercise of stock options 14,673 4,968 ---------- ---------- Adjusted weighted average shares used for diluted net income per share computation 26,717,992 26,827,338 =========== ========== Six Six Months Months Ended Ended 6/30/00 6/30/99 ---------- ---------- Weighted average shares used for the basic net income per share computation 26,759,355 26,822,376 Incremental shares from the assumed exercise of stock options 9,488 3,915 ---------- ---------- Adjusted weighted average shares used for diluted net income per share computation 26,768,843 26,826,291 ========== ========== </TABLE> Page 10
6. Net Income per Share (continued) For the three months ended June 30, 2000 and 1999, stock options of 447,552 and 168,047, respectively, were anti-dilutive and have been excluded from the incremental shares from the assumed conversion of stock options. For the six months ended June 30, 2000 and 1999, stock options of 447,552 and 186,181, respectively, were anti-dilutive and have been excluded from the incremental shares from the assumed conversion of stock options. 7. Purchases of Realty Income Securities In January 2000, our Board of Directors authorized the purchase of up to $10 million of our outstanding common and preferred shares and senior debt securities during the next 12 months. During the first six months of 2000, we purchased 181,000 shares of our common stock at an average price of $21.28 and 14,300 shares of our Class B preferred stock at an average price of $19.27, for a total investment of $4.1 million. 8. Supplemental Disclosure of Cash Flow Information Interest paid during the first six months of 2000 and 1999 was $13.6 million and $10.4 million, respectively. In the first six months of 2000 and 1999, interest of $724,000 and $638,000, respectively, was capitalized to properties under development. For the three months ended June 30, 2000 and 1999, interest of $367,000 and $344,000, respectively, was so capitalized. The following non-cash investing and financing activities are included in the accompanying consolidated financial statements: In the first six months of 1999, the investment in properties resulted in an increase in buildings and other liabilities of $4.2 million. 9. 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 nine reportable segments based upon the business the tenants are in. All of the properties have been acquired separately and are incorporated into one of the applicable segments. Revenue is the only component of segment profit and loss we measure. Since our revenue is primarily from net leases, expenditures for additions to long-lived assets were to acquire additional properties. Page 11
The following tables set forth certain information regarding the properties owned by us as of June 30, 2000 classified according to the business of the respective tenants (dollars in thousands): <TABLE> Three Three Six Six Months Months Months Months Ended Ended Ended Ended Revenue for the: 6/30/00 6/30/99 6/30/00 6/30/99 ------- ------- ------- ------- <S> <C> <C> <C> <C> Segment rental revenue: Automotive parts $ 2,339 $ 2,131 $ 4,778 $ 4,229 Automotive service 1,700 1,761 3,375 3,367 Child care 6,847 6,228 13,776 12,402 Consumer electronics 1,407 1,414 2,833 2,827 Convenience stores 2,466 1,519 4,925 2,886 Home furnishings 1,611 1,734 3,144 3,436 Home improvement 807 931 1,794 1,773 Restaurants 3,470 3,410 7,005 6,838 Video rental 1,128 1,115 2,258 2,187 Other non-reportable segments 6,574 4,621 12,791 8,867 Reconciling items 92 38 117 76 ------- ------- ------- ------- Total revenue $28,441 $24,902 $56,796 $48,888 ======= ======= ======= ======= </TABLE> <TABLE> Assets --------------------- June 30, December 31, As of: 2000 1999 -------- ------------ <S> <C> <C> Segment net real estate: Automotive parts $ 77,213 $ 77,075 Automotive service 48,708 50,499 Child care 153,470 156,617 Consumer electronics 47,915 48,593 Convenience stores 82,639 83,228 Home furnishings 67,981 64,408 Home improvement 38,992 39,507 Restaurants 84,846 86,903 Video rental 40,181 40,712 Other non-reportable segments 247,682 219,551 ------- ------- Total segment net real estate 889,627 867,093 Reconciling items 38,765 38,311 -------- -------- Total assets $928,392 $905,404 ======== ======== </TABLE> Page 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, among other things: - Our anticipated growth strategies; - Our intention to acquire additional properties; - Anticipated trends in our business, including trends in the market for long-term net leases of freestanding, single-tenant retail properties; and - Future expenditures for development projects. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. In particular, some of the factors that could cause actual results to differ materially are: - Our continued qualification as a real estate investment trust; - General business and economic conditions; - Competition; - Interest rates; - Accessibility of debt and equity capital markets; - Other risks inherent in the real estate business including tenant defaults, potential liability relating to environmental matters; and - Illiquidity of real estate investments. 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, 1999. 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. Page 13
GENERAL - ------- Realty Income Corporation, a Maryland corporation ("Realty Income", the "Company", "our" or "we") was organized to operate as an equity real estate investment trust ("REIT"). 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 June 30, 2000, we owned a diversified portfolio of 1,073 retail properties located in 45 states with over 8.6 million square feet of leasable space. Of the 1,073 properties in the portfolio, 1,066 are single-tenant retail properties with the remainder being multi-tenant properties. As of June 30, 2000, 1,050, or 98.5%, of the 1,066 single-tenant properties were leased with an average remaining lease term (excluding extension options) of approximately 8.4 years. In addition, as of June 30, 2000, our subsidiary Crest Net Lease owned seven retail properties located in five states with approximately 322,000 square feet of leaseable space. These seven properties, which are held for sale, are 100% leased with an average initial lease term of 19.3 years. 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 generally will seek to increase distributions to stockholders and FFO per share through both active portfolio management and the acquisition of additional properties. Our portfolio management focus includes: - Contractual rent increases on existing leases; - Rental increases at the termination of existing leases when market conditions permit; and - 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: - Freestanding, single-tenant, retail properties; - Properties leased to regional and national retail chains; and - 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. Page 14
Our net lease agreements generally: - Are for initial terms of 10 to 20 years; - Require the tenant to pay a minimum monthly rent and property operating expenses (taxes, insurance and maintenance); and - Provide for future rent increases (typically subject to ceilings) based on increases in the consumer price index, fixed increases or additional rent calculated as a percentage of the tenant's gross sales above a specified level. We believe that the long-term ownership of an actively managed, diversified portfolio of retail properties under long-term, net lease agreements produces consistent, predictable income. Under a net-lease agreement, the tenant agrees to pay a minimum monthly rent and property operating expenses (taxes, maintenance, and insurance) 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. We believe 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. Since 1970 and through December 31, 1999, we have acquired and leased back to regional and national retail chains 1,054 properties (including 36 properties that have been sold) and have collected in excess of 98% of the original contractual rent obligations on those properties. We believe that within this market we can achieve an attractive risk-adjusted return on the financing that we provide to retailers. RECENT DEVELOPMENTS - ------------------- ACQUISITION OF PROPERTIES DURING THE FIRST SIX MONTHS OF 2000. During the first six months of 2000, we acquired three additional properties (the "New Properties"). During the first six months of 2000, we invested $16.8 million in the New Properties, which includes investments of $11.0 million for properties under development. Estimated unfunded development costs on properties under construction at June 30, 2000 totaled $7.5 million. During the first six months of 2000, we paid $94,000 for releasing costs and $44,000 for building improvements on existing properties in our portfolio. The New Properties will contain approximately 52,700 leasable square feet and are 100% leased under net leases, with an average initial lease term of 13.2 years. The New Properties are pre-leased and under construction, pursuant to contracts under which the tenants have agreed to develop the properties (with development costs funded by Realty Income) and to begin paying rent when the premises open for business. Page 15
$25 MILLION UNSECURED REVOLVING CREDIT FACILITY. In February 2000, we entered into a $25 million, three-year, revolving credit facility with the Bank of Montreal, which expires in February 2003. This credit facility has been and is expected to be used for the acquisition of property and for making capital contributions to subsidiaries for the purpose of acquiring properties. INCREASE IN MONTHLY DISTRIBUTIONS TO COMMON SHAREHOLDERS. Monthly distributions were increased in January 2000 by $0.0025 to $0.18 per share and in April and July 2000 by $0.00125 to $0.18125 and $0.1825 per share, respectively. The increase in July was our 11th consecutive quarterly increase. We continue our policy of paying distributions monthly. During the first six months of 2000, we paid three distributions of $0.18 per share and three distributions of $0.18125 per share, totaling $1.08375 per share. During the first six months of 1999, we paid three distributions of $0.17 per share and three distributions of $0.1725 per share, totaling $1.0275 per share. In June and July 2000, we declared distributions of $0.1825 per share, which were paid on July 17, 2000 and payable on August 15, 2000, respectively. The monthly distribution of $0.1825 per share represents a current annualized distribution of $2.19 per share, and an annualized distribution yield of approximately 9.13% based on the last reported sale price of the Company's Common Stock on the NYSE of $24.00 on August 10, 2000. Although we expect to continue our policy of paying monthly distributions, there can be no assurance that the current level of distributions will be maintained by the Company, that will we continue our pattern of increasing distributions per share, or as to the actual distribution yield for any future period. STOCK AND SENIOR DEBT REPURCHASE PROGRAM. In January 2000, our Board of Directors authorized the purchase of up to $10 million of our outstanding common and preferred shares and senior debt securities during the next 12 months. The purchases will be funded using available working capital that consists primarily of cash flow from operations. Through August 1, 2000, we purchased 181,000 shares of our common stock at an average price of $21.28 and 14,300 shares of our Class B preferred stock at an average price of $19.27, for a total investment of $4.1 million. FORMATION OF CREST NET LEASE. In January 2000, we formed Crest Net Lease, Inc., of which we own 95% of the common stock, all of which is non-voting, and certain members of management own 5% of the common stock, all of which is voting stock. Crest Net Lease was created to actively buy and sell properties, primarily to buyers using tax- deferred exchanges, under Section 1031 of the Internal Revenue Code of 1986, as amended. During the first six months of 2000, we invested $8.6 million in Crest Net Lease common stock. In February 2000, we entered into a $25 million, revolving credit facility with Crest Net Lease. As of June 30, 2000, our outstanding loans to Crest Net Lease were Page 16
$12.3 million. The financial statements of Crest Net Lease have been consolidated into Realty Income's financial statements. All material inter company transactions, including the investment and loans referred to above, have been eliminated in the consolidation method of accounting. During the first six months of 2000, Crest Net invested $20.5 million in seven retail properties. These seven properties are located in five states and contain approximately 322,000 leasable square feet and are 100% leased, with an average initial lease term of 19.3 years. These seven properties are held for sale and are anticipated to be sold within the next six months. The following is a summary of Crest Net Lease's balance sheet as of June 30, 2000 (dollars in thousands): <TABLE> <S> <C> Real estate held for sale $ 20,510 Other assets 1,143 -------- Total assets $ 21,653 ======== Liabilities $ 12,768 Stockholders' equity 8,885 -------- Total liabilities and stockholders' equity $ 21,653 ======== </TABLE> The following is a summary of Crest Net Lease's statement of net losses for the quarter and six months ended June 30, 2000 (dollars in thousands): <TABLE> Three Six months months ended ended 6/30/00 6/30/00 ------- ------- <S> <C> <C> Rent & other revenue $ 35 $ 36 Expenses 77 152 ------- ------- Net loss $ (42) $ (116) ======= ======= </TABLE> Page 17
OTHER INFORMATION - ----------------- Realty Income's common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "O", our central index key ("CIK") number is 726728 and cusip number is 756109-104. Realty Income's 8.25% Monthly Income Senior Notes, due 2008, are listed on the NYSE under the symbol "OUI". The cusip number of these Monthly Income Senior Notes is 756109-203. Realty Income's 9 3/8% Class B cumulative redeemable preferred stock are listed on the New York Stock Exchange ("NYSE") under the symbol "OprB". The cusip number of the Class B Preferred is 756109-302. Realty Income's 9 1/2% Class C cumulative redeemable preferred stock is listed on the NYSE under the symbol "OprC". The cusip number of the Class C Preferred is 756109-500. Realty Income has 45 employees as of August 10, 2000. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Cash and Cash Equivalents Realty Income is organized for the purpose of operating as an equity REIT which acquires and leases properties and distributes to stockholders, in the form of monthly cash distributions, a substantial portion of its net cash flow generated from leases on its retail properties. We intend to retain an appropriate amount of cash as working capital. At June 30, 2000, we had cash and cash equivalents totaling $2.4 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. Page 18
Capital Funding We have a $200 million, three-year revolving, unsecured acquisition credit facility that expires in December 2002 and 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 offers us other interest rate options. As of August 11, 2000, borrowing capacity of $64.3 million was available to us under the $200 million credit facility and $600,000 was available under the $25 million credit facility. At that time, the outstanding balances on the $200 million credit facility was $135.7 million with an effective interest rate of 7.87% and the outstanding balances on the $25 million credit facility was $24.4 million with an effective interest rate of 7.90%. 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. We expect to meet our long-term capital needs for the acquisition of properties through the issuance of public or private debt or equity. In June 1999, we filed a universal shelf registration statement with the Securities and Exchange Commission covering up to $400 million in value of common stock, preferred stock and debt securities. Through June 30, 2000, $34.5 million in value of common stock, preferred stock and debt securities has been issued under the universal shelf registration statement. We believe that we are best served by a conservative capital structure, with a majority of our capital consisting of equity. As of August 10, 2000, our total outstanding credit facility borrowings and outstanding notes were $390.1 million or approximately 34.4% of our total capitalization of $1.1 billion (defined as shares of our common stock outstanding multiplied by the last reported sales price of the common stock on the NYSE on August 10, 2000 of $24.00 per share plus the liquidation value of the Class B Preferred Stock, the Class C Preferred Stock, the outstanding borrowings on the credit facilities and outstanding notes at August 10, 2000). Historically, we have met our long-term capital needs through the issuance of common stock, preferred stock and investment grade long- term unsecured debt. We believe that the Company is best served by having the majority of our future issuances of securities be in the form of common stock. We will issue common stock when we believe that the share price of our common stock is at a level that allows for the proceeds of any offering to be invested on an accretive basis into additional properties or to pay down any short-term borrowings on our credit facilities. We do not presently view our price per share as attractive for additional issuances of common stock. We do not anticipate issuing additional shares of common stock until we determine the common stock price has risen to acceptable levels. In addition, we seek to maintain a conservative debt level on our balance Page 19
sheet, which should result in conservative interest and fixed charge coverage ratios. We do not anticipate issuing significant amounts of additional debt until additional equity can also be issued to offset the increase in debt. If the share price levels do not increase and we do not issue additional equity or debt, we will reduce our level of property acquisitions. Under these circumstances, we intend to achieve our growth objectives by investing cash flow in excess of distributions in additional retail properties and purchases of our outstanding securities. In addition, we intend to strategically sell properties that have appreciated in value and invest the proceeds in new properties that will generate rental revenue in excess of those generated by the properties that were sold. We received investment grade corporate credit ratings on our senior unsecured debt from Duff & Phelps Rating Company, Moody's Investor Service, Inc., and Standard & Poor's Rating Group in December 1996. Currently, Duff & Phelps has assigned a rating of BBB, Moody's has assigned a rating of Baa3, and Standard & Poor's has assigned a rating of BBB- to our senior debt. 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. Duff & Phelps Rating Company 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 We pay monthly distributions to our common stockholders. We paid cash distributions to our common stockholders of $29.0 million and $27.6 million during the first six months of 2000 and 1999, respectively. We pay distributions quarterly to our Class B Preferred stockholders. We paid cash distributions to our Class B Preferred stockholders of $3.2 million and $629,000 during the first six months of 2000 and 1999, respectively. We pay distributions monthly to our Class C Preferred stockholders. We paid cash distributions to our Class C Preferred stockholders of $1.6 million during the first six months of 2000. No distributions were paid to our Class C Preferred stockholders during the first six months of 1999. FUNDS FROM OPERATIONS ("FFO") - ----------------------------- For the second quarter of 2000, FFO increased by $292,000 or 1.8% to $16.3 million versus $16.0 million during the second quarter of 1999. 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 second quarter of 2000 and 1999 (dollars in thousands): Page 20 <TABLE> Three months ended June 30, ---------------------------- 2000 1999 -------- -------- <S> <C> <C> Net income available to common stockholders $ 10,435 $ 9,799 Plus depreciation and amortization 6,844 6,237 Less: Depreciation of furniture, fixtures and equipment (35) (22) Gain on sales of properties (938) -- -------- -------- Total funds from operations $ 16,306 $ 16,014 ========== ========== Distributions paid to common stockholders $ 14,534 $ 13,881 FFO in excess of distributions to common stockholders $ 1,772 $ 2,133 Diluted weighted average number of common shares outstanding 26,717,992 26,827,338 </TABLE> For the first six months of 2000, FFO increased by $831,000 or 2.6% to $32.8 million versus $32.0 million during the same period of 1999. 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 six months of 2000 and 1999 (dollars in thousands): <TABLE> Six months ended June 30, --------------------------- 2000 1999 -------- -------- <S> <C> <C> Net income available to common stockholders $ 20,919 $ 19,728 Plus depreciation and amortization 13,592 12,327 Less: Depreciation of furniture, fixtures and equipment (68) (43) Gain on sale of property (1,600) -- -------- -------- Total funds from operations $ 32,843 $ 32,012 ======== ======== Page 21 Six months ended June 30, --------------------------- 2000 1999 -------- -------- <S> <C> <C> Distributions paid to common stockholders $ 29,018 $ 27,560 FFO in excess of distributions to common stockholders $ 3,825 $ 4,452 Diluted weighted average number of common shares outstanding 26,768,843 26,826,291 </TABLE> We consider FFO to be an appropriate measure of the performance of an equity REIT. Financial analysts use FFO in evaluating REITs and FFO can be one measure of a REIT's ability to make cash distribution payments. Presentation of this information provides the reader with an additional measure to compare the performance of different REITs, although it should be noted that not all REITs calculate FFO the same way so comparisons with other REITs may not be meaningful. 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 property and (ii) extraordinary and "unusual" items. 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 or to cash flows from operating, investing, and financing activities as a measure of liquidity or ability to make cash distributions or to pay debt service. RESULTS OF OPERATIONS - --------------------- The following is a comparison of our results of operations for the three and six months ended June 30, 2000 to the three and six months ended June 30, 1999. Rental revenue was $28.3 million for the second quarter of 2000 versus $24.9 million for the comparable quarter of 1999, an increase of 13.7% or $3.4 million. The increase in rental revenue was primarily due to the acquisition of 110 properties during 1999. These properties generated revenue of $4.0 million in the second quarter of 2000 compared to $1.0 million in the second quarter of 1999, an increase of $3.0 million. Included in rental revenue for the second quarter of 2000 is $28,000 from properties owned by Crest Net Lease, that are held for sale. Page 22
Rental revenue was $56.7 million for the first six months of 2000 versus $48.8 million for the comparable period of 1999, an increase of 16.2% or $7.9 million. The increase in rental revenue was primarily due to the acquisition of 110 properties during 1999. These properties generated revenue of $7.7 million in the first six months of 2000 compared to $1.2 million in the second quarter of 1999, an increase of $6.5 million. Included in rental revenue for 2000 is $28,000 from properties owned by Crest Net Lease, that are held for sale. Of the 1,073 properties in the portfolio as of June 30, 2000, 1,066 are single-tenant properties with the remaining properties being multi-tenant properties. Of the 1,066 single-tenant properties, 1,050, or 98.5%, were net leased with an average remaining lease term (excluding extension options) of approximately 8.4 years. Of our 1,050 leased single-tenant properties, 1,042 or 99.2% were under leases that provide for increases in rents through: - Base rent increases tied to a consumer price index with adjustment ceilings; - Overage rent based on a percentage of the tenants' gross sales; or - Fixed increases. Some leases contain more than one of these clauses. Percentage rent, which is included in rental revenue, was $77,000 and $106,000 during the second quarter of 2000 and 1999, respectively. Percentage rent was $383,000 and $320,000 during the first six months of 2000 and 1999, respectively. Same store rents generated on 918 leased properties owned during all of both the second quarter of 2000 and 1999 increased by 0.9%, to $23.0 million from $22.8 million. Same store rents generated on the same 918 leased properties owned during all of both the first six months of 2000 and 1999 increased by 1.3%, to $46.3 million from $45.7 million. Approximately 54% of our annualized rental revenue is attributable to properties that were acquired over the last four and a half years. A majority of the leases on these acquisitions provide for rent increases after the fifth year of the lease. We anticipate rental increases on some of these acquisitions to start in the second half of the year 2000. At June 30, 2000, 1,057 or 98.5% of the 1,073 properties in the portfolio were under lease agreements with third party tenants. At June 30, 2000, we had 16 properties that were not under lease, as compared to 17 at December 31, 1999 and eight at June 30, 1999. Of the 16 properties not leased at June 30, 2000, we are in escrow to sell two properties and have issued letters of intent to sell two properties and lease four other properties. We anticipate these eight properties to be leased or sold during the third or fourth quarter of 2000; although we cannot assure you that all of these properties can be sold or leased within this period. Page 23 Our portfolio of quality retail real estate owned under 10-20 year net leases continues to perform well and provide dependable lease revenue supporting the payment of monthly dividends. As of June 30, 2000, our property portfolio of 1,073 properties was 98.5% leased with only 16 properties available for lease. During the first half of 2000 we successfully resolved a situation involving the vacancy of nine of our properties leased to Econo Lube 'N Tune. This situation had nominal impact on operating results during the first and second quarters of 2000. During the third and fourth quarter of 2000, Realty Income anticipates that it will have 11 properties come available for re-lease resulting from the nonperformance of one of our other tenants. We anticipate a successful resolution of this situation during the third and fourth quarter of this year. We anticipate a net impact of less than 1/2 of 1% on lease revenue for 2000 once the situation has been resolved. The following is a summary of the five components of interest expense for the second quarter of 2000 and 1999 (dollars in thousands): <TABLE> Three months ended June 30, 2000 1999 Net Change ------- ------- ---------- <S> <C> <C> <C> Interest on outstanding loans and notes $ 7,253 $ 5,928 $ 1,325 Amortization of settlements on treasury lock agreements 189 189 - Credit facility commitment fees 128 65 63 Amortization of credit facility origination costs and deferred bond financing costs 268 207 61 Interest capitalized (367) (344) ( 23) -------- -------- -------- Interest expense $ 7,471 $ 6,045 $ 1,426 ======== ======== ======== </TABLE> Credit facility and notes outstanding (dollars in thousands) - ------------------------------------------------------------ <TABLE> Three months ended June 30, 2000 1999 Net Change ------- ------- --------- <S> <C> <C> <C> Average outstanding balances $372,509 $321,660 $ 50,849 Average interest rates 7.83% 7.39% </TABLE> Page 24
Interest on outstanding loans and notes was $1.4 million higher in the second quarter of 2000 than in 1999 primarily due to an increase of $50.8 million in the average outstanding balances and an increase of 44 basis points in our average interest rate. During the first six months of 2000 LIBOR has increased, which has increased the interest rates on our credit facilities and our cost of short-term borrowings. It is possible that economic conditions may lead to further increases in LIBOR. The following is a summary of the five components of interest expense for the first six months of 2000 and 1999 (dollars in thousands): <TABLE> Six months ended June 30, 2000 1999 Net Change ------- ------- ---------- <S> <C> <C> <C> Interest on outstanding loans and notes $ 14,192 $ 11,643 $ 2,549 Amortization of settlements on treasury lock agreements 378 378 - Credit facility commitment fees 251 129 122 Amortization of credit facility origination costs and deferred bond financing costs 532 413 119 Interest capitalized (724) (638) (86) -------- -------- -------- Interest expense $ 14,629 $ 11,925 $ 2,704 ======== ======== ======== </TABLE> Credit facility and notes outstanding (dollars in thousands) - ------------------------------------------------------------ <TABLE> Six months ended June 30, 2000 1999 Net Change ------- ------- ---------- <S> <C> <C> <C> Average outstanding balances $365,517 $314,118 $ 49,201 Average interest rates 7.81% 7.48% </TABLE> Interest on outstanding loans and notes was $2.7 million higher during the first six months of 2000 than in 1999 due to an increase of $49.2 million in the average outstanding balances and an increase of 33 basis points in our average interest rate. Depreciation and amortization was $6.8 million in the second quarter of 2000 versus $6.2 million in the second quarter of 1999. Depreciation and amortization was $13.6 million in the first six months of 2000 versus $12.3 million in the first six months of 1999. The increase in 2000 was primarily due to depreciation of the 110 properties acquired during 1999. Page 25
General and administrative expenses decreased by $20,000 to $1.74 million in the second quarter of 2000 versus $1.76 million in the second quarter of 1999. General and administrative expenses as a percentage of revenue decreased to 6.1% in the second quarter of 2000 as compared to 7.0% in 1999. Included in general and administrative expenses are $51,000 of expenses attributable to Crest Net Lease. General and administrative expenses increased by $18,000 to $3.42 million in the first six months of 2000 versus $3.40 million in the first six months of 1999. General and administrative expenses as a percentage of revenue decreased to 6.0% in the first six months of 2000 as compared to 7.0% in 1999. 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 June 30, 2000, 16 properties were available for lease, as compared to 17 at December 31, 1999 and eight at June 30, 1999. Property expenses were $466,000 in the second quarter of 2000 and $437,000 in 1999. The $29,000 increase in property expenses is primarily attributable to costs associated with properties available for lease. We anticipate property expenses to increase as we acquire additional properties. Property expenses were $981,000 in the first six months of 2000 and $878,000 in the first six months of 1999. The $103,000 increase in property expenses is attributable to costs associated with properties available for lease. During the second quarter of 2000, we sold five properties (one automotive parts store, two automotive service locations, one convenience store and one restaurant) for a total of $2.1 million and recognized a gain of $938,000. No properties were sold in the second quarter of 1999. During the first six months of 2000, we sold six properties (one automotive parts store, two automotive service locations, one convenience store and two restaurants) for a total of $3.5 million and recognized a gain of $1.6 million. No properties were sold in the first six months of 1999. Page 26
As part of our active portfolio management program, we sell selected properties on an ongoing basis in order to optimize performance and return and improve the quality of our portfolio. This is accomplished by selling assets when we believe the reinvestment of the sales proceeds will generate higher returns or to enhance the credit quality of our real estate portfolio. As of June 30, 2000, we held for sale real estate with a carrying amount of $49.8 million. Additionally, we anticipate selling properties from our portfolio that have not yet been specifically identified. We anticipate we will receive up to $100 million in proceeds from the sale of properties during the next 12 months. We intend to invest these proceeds into new property acquisitions. Preferred stock dividends paid were $2.4 million in the second quarter of 2000, as compared to $629,000 in the second quarter of 1999. Preferred stock dividends paid were $4.9 million in the first six months of 2000, as compared to $629,000 in the first six months of 1999. Our outstanding preferred stock was issued during the second and third quarters of 1999. As a result of the foregoing, in the second quarter of 2000 and 1999, our net income available to common stockholders increased $636,000 or 6.1% to $10.4 million versus $9.8 million in 1999. As a result of the foregoing, in the first six months of 2000 and 1999, our net income available to common stockholders increased $1.2 million or 6.1% to $20.9 million versus $19.7 million in 1999. PROPERTIES - ---------- As of June 30, 2000, we owned a diversified portfolio of 1,073 properties located in 45 states with over 8.6 million square feet of leasable space. Our portfolio of retail properties is leased to 74 retail chains doing business in 23 retail industries. At June 30, 2000, 1,050 or 97.9% of the 1,073 properties were 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 1,073 properties is approximately 8,100 square feet on approximately 58,700 square feet of land. Generally, buildings are single-story properties with adequate parking on site to accommodate peak retail traffic periods. The properties tend to be on major thoroughfares with relatively high traffic counts and adequate access, egress and proximity to a sufficient population base to constitute a suitable market or trade area for the retailer's business. Page 27
The following table sets forth certain information regarding our properties classified according to the business of the respective tenants (dollars in thousands): <TABLE> Annualized Percentage of Total Rent as of Rental Revenue for Number July 1, 2000(1)(2) the Year of ------------------- ------------------- Prop- erties Rental Percentage Industry (1) Revenue of Total 1999 1998 1997 - -------------------- ------ -------- ---------- ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> Apparel Stores 4 $ 2,799 2.4% 3.8% 4.1% 0.7% Automotive Parts 143 10,114 8.8 8.6 7.8 9.1 Automotive Service 102 6,781 5.9 6.6 7.5 6.4 Book Stores 1 450 0.4 0.5 0.6 0.5 Business Services 1 124 0.1 0.1 * -- Child Care 336 28,124 24.6 25.3 29.2 35.9 Consumer Electronics 37 5,699 5.0 4.4 5.4 6.5 Convenience Stores 103 9,815 8.6 7.2 6.1 5.5 Craft and Novelty 2 425 0.4 0.4 * -- Drug Stores 1 235 0.2 0.2 0.1 -- Entertainment 6 2,293 2.0 1.2 -- -- General Merchandise 11 687 0.6 0.6 * -- Grocery Stores 2 719 0.6 0.5 * -- Health and Fitness 7 3,950 3.4 0.6 0.1 -- Home Furnishings 35 6,614 5.8 6.5 7.8 5.6 Home Improvement 34 4,033 3.5 3.6 * -- Office Supplies 8 2,476 2.2 2.6 3.0 1.7 Pet Supplies and Services 8 1,631 1.4 1.1 0.6 0.2 Private Education 6 1,698 1.5 1.2 0.9 -- Restaurants 175 14,268 12.5 13.3 16.2 19.8 Shoe Stores 4 890 0.8 1.1 0.8 0.2 Theaters 2 2,406 2.1 0.6 -- -- Video Rental 35 4,510 3.9 4.3 3.8 0.6 Other 10 3,771 3.3 5.7 6.0 7.3 - -------------------- ------ -------- ------ ------ ------ ------ Totals 1,073 $114,512 100.0% 100.0% 100.0% 100.0% ==================== ====== ======== ====== ====== ====== ====== </TABLE> * Less than 0.1% [FN] (1) This table does not include seven properties owned by Crest Net Lease which are held for sale. Crest Net Lease is a subsidiary of Realty Income. (2) Annualized rental revenue is calculated by multiplying the monthly contractual base rent as of July 1, 2000 for each of the properties by 12 and adding the previous 12 month's historic Page 28
percentage rent, which totaled $1.7 million (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level.) For properties under construction, an estimated contractual base rent is used based upon the estimated total costs of each property. </FN> Of the 1,073 properties in the portfolio at June 30, 2000, 1,066 were single-tenant properties with the remaining properties being multi- tenant properties. As of June 30, 2000, 1,050 of the 1,066 single- tenant properties, or 98.5%, were net leased with an average remaining lease term (excluding extension options) of approximately 8.4 years. The following table sets forth certain information regarding the timing of the lease term expirations (excluding extension options) on our 1,050 net leased, single-tenant retail properties as of July 1, 2000 (dollars in thousands): <TABLE> Number of Percent of Leases Annualized Annualized Year Expiring (1) Rent (1) (2) Rent - ------ ------------ -------------- ---------- <S> <C> <C> <C> 2000 33 $ 1,762 1.6% 2001 49 4,042 3.6 2002 82 6,575 5.9 2003 72 5,953 5.3 2004 117 9,861 8.8 2005 82 6,151 5.5 2006 28 2,534 2.3 2007 95 6,557 5.9 2008 66 5,690 5.1 2009 30 3,374 3.0 2010 44 3,715 3.3 2011 35 5,330 4.7 2012 49 5,708 5.1 2013 88 14,427 12.9 2014 48 7,575 6.8 2015 34 3,815 3.4 2016 13 1,998 1.8 2017 11 4,130 3.7 2018 16 1,614 1.4 2019 51 8,758 7.8 2020 1 117 0.1 2024 2 605 0.5 2033 2 1,118 1.0 2034 2 570 0.5 - ------ ------- ---------- ------- Totals 1,050 $111,979 100.0% ====== ======= ========== ======= </TABLE> Page 29
[FN] (1) This table does not include seven multi-tenant properties and sixteen vacant, unleased single-tenant properties owned by the Company and seven properties owned by 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 July 1, 2000 for each of the properties by 12 and adding the previous 12 month's historic percentage rent, which totaled $1.7 million (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level). For the properties under construction, an estimated contractual base rent is used based upon the estimated total costs of each property. </FN> The following table sets forth certain state-by-state information regarding Realty Income's property portfolio as of July 1, 2000 (dollars in thousands). <TABLE> Approximate Percent of Number of Percent Leasable Annualized Annualized State Properties(1) Leased Square Feet Rent(1)(2) Rent - ---------- ------------- ------- ----------- ---------- ---------- <S> <C> <C> <C> <C> <C> Alabama 9 89% 63,300 $ 578 0.5% Arizona 31 100 211,700 3,105 2.7 Arkansas 5 100 36,700 614 0.5 California 58 98 1,024,100 11,076 9.7 Colorado 45 100 292,600 3,995 3.5 Connecticut 10 100 223,800 2,979 2.6 Delaware 1 100 5,400 72 0.1 Florida 87 99 982,100 12,997 11.4 Georgia 59 97 327,900 5,525 4.8 Idaho 11 100 52,000 767 0.7 Illinois 35 100 259,100 3,642 3.2 Indiana 29 100 170,400 2,200 1.9 Iowa 10 100 67,900 694 0.6 Kansas 23 100 240,500 2,613 2.3 Kentucky 13 100 43,500 1,105 1.0 Louisiana 5 100 39,600 506 0.4 Maryland 8 100 48,300 732 0.6 Massachusetts 8 100 57,500 1,091 1.0 Michigan 10 100 68,100 976 0.9 Minnesota 25 96 261,500 2,512 2.2 Mississippi 16 100 152,100 1,286 1.1 Missouri 33 100 204,700 2,563 2.2 Montana 2 100 30,000 288 0.3 Nebraska 10 90 98,400 1,067 0.9 Nevada 7 86 86,400 1,262 1.1 New Hampshire 1 100 6,400 130 0.1 (table continued next page) Page 30
(table continued) Approximate Percent of Number of Percent Leasable Annualized Annualized State Properties(1) Leased Square Feet Rent(1)(2) Rent - ---------- ------------- ------- ----------- ---------- ---------- New Jersey 4 75 45,400 589 0.5 New Mexico 5 100 46,000 336 0.3 New York 20 100 253,300 4,849 4.2 North Carolina 33 94 174,200 2,986 2.6 North Dakota 1 100 22,000 65 0.1 Ohio 67 100 341,200 5,423 4.7 Oklahoma 17 94 102,200 1,265 1.1 Oregon 17 100 92,400 1,229 1.1 Pennsylvania 23 100 168,400 2,310 2.0 South Carolina 48 98 147,000 3,987 3.5 South Dakota 2 100 12,600 172 0.2 Tennessee 25 96 221,300 2,652 2.3 Texas 155 99 1,289,500 13,946 12.2 Utah 8 100 51,700 705 0.6 Virginia 29 97 139,100 2,892 2.5 Washington 43 100 252,600 3,348 2.9 West Virginia 2 100 16,800 158 0.1 Wisconsin 19 100 232,300 2,959 2.6 Wyoming 4 100 20,100 266 0.2 - -------------- -------- ------- ----------- ---------- --------- Totals/Average 1,073 99% 8,682,100 $114,512 100.0% ============== ======== ======= =========== ========== ========= </TABLE> [FN] (1) This table does not include seven properties owned by Crest Net Lease which are held for sale. Crest Net Lease is a subsidiary of Realty Income. (2) Annualized rent is calculated by multiplying the monthly contractual base rent as of July 1, 2000 for each of the properties by 12 and adding the previous 12 month's historic percentage rent, which totaled $1.7 million (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level). For the properties under construction, an estimated contractual base rent is used based upon the estimated total costs of each property. </FN> The following table sets forth certain information regarding the properties owned by Realty Income as of July 1, 2000, classified according to the retail business types and the level of services they provide (dollars in thousands): Page 31
<TABLE> Percent of Number of Annualized Annualized Industry Properties (1) Rent (1)(2) Rent - -------- ------------- ------------ ---------- <S> <C> <C> <C> Tenants providing services - -------------------------- Automotive Service 101 $ 6,715 5.9% Child Care 336 28,124 24.6 Entertainment 6 2,293 2.0 Health and Fitness 7 3,950 3.4 Private Education 6 1,698 1.5 Theaters 2 2,406 2.1 Other 10 3,773 3.3 ---------- ---------- ---------- 468 48,959 42.8 ---------- ---------- ---------- Tenants selling goods and services - ---------------------------------- Automotive Parts (with installation) 64 5,505 4.8 Business Services 1 124 0.1 Convenience Stores 103 9,815 8.6 Home Improvement 21 2,655 2.3 Pet Supplies and Services 6 1,163 1.0 Restaurants 175 14,268 12.5 Video Rental 35 4,510 3.9 ---------- ---------- ---------- 405 38,040 33.2 ---------- ---------- ---------- Tenants selling goods - --------------------- Apparel Stores 4 2,799 2.4 Automotive Parts 80 4,675 4.0 Book Stores 1 450 0.4 Consumer Electronics 37 5,699 5.0 Craft and Novelty 2 425 0.4 Drug Stores 1 235 0.2 General Merchandise 11 687 0.6 Grocery Stores 2 719 0.6 Home Furnishings 35 6,614 5.8 Home Improvement 13 1,377 1.2 Office Supplies 8 2,476 2.2 Pet Supplies 2 467 0.4 Shoe Stores 4 890 0.8 ---------- ---------- ---------- 200 27,513 24.0 ---------- ---------- ---------- TOTALS 1,073 $ 114,512 100.0% ========== ========== ========== </TABLE> Page 32
[FN] (1) This table does not include seven properties owned by Crest Net Lease which are held for sale. Crest Net Lease is a subsidiary of Realty Income. (2) Annualized rent is calculated by multiplying the monthly contractual base rent as of July 1, 2000 for each of the properties by 12 and adding the previous 12 month's historic percentage rent, which totaled $1.7 million (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level). For the properties under construction, an estimated contractual base rent is used based upon the estimated total costs of each property. </FN> 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, and/or fixed increases. We expect that inflation will cause these lease provisions to result in increases in rent over time. However, during times when inflation is greater than increases in rent as provided for in the leases, rent increases may not keep up with the rate of inflation. Approximately 97.9% or 1,050 of the properties in the portfolio are leased to tenants under net leases in which the tenant is responsible for property costs and expenses. These features in the leases reduce 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. 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 debt 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 flows 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 June 30, 2000. We do not enter into any transactions for speculative or trading purposes. Page 33
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). <TABLE> Expected Maturity Data ----------------------- There- Fair 2002 2003 after Total Value (2) ---- ---- ------ ------ --------- <S> <C> <C> <C> <C> <C> Fixed rate debt -- -- $230.0(1) $230.0 $200.3 Average interest rate -- -- 7.99% 7.99% Variable rate debt $153.2 $9.1 -- $162.3 $162.3 Average interest rate 7.88% 7.87% -- 7.88% </TABLE> [FN] (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 June 30, 2000 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. </FN> The table incorporates only those exposures that exist as of June 30, 2000, 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. PART II. OTHER INFORMATION - --------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders of Realty Income Corporation was held on May 3, 2000, at which three directors were elected to the board of directors. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management's solicitations. Page 34 All of management's nominees for directors as listed in the proxy statement were elected with the following vote: <TABLE> Authority Year Term Shares to vote Expires Voted For withheld --------- ---------- --------- <S> <C> <C> <C> William E. Clark 2003 21,578,838 338,654 Thomas A. Lewis 2003 21,693,316 224,176 Kathleen Allen, Ph.D. 2003 21,637,745 279,747 </TABLE> 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 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). 3.3 Bylaws of the Company (filed as Appendix C to the Company's 1997 Proxy Statement 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). Page 35 Exhibit No. Description =========== =========== 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). 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 an 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). 27 Financial Data Schedule, filed herein B. No reports on Form 8-K were filed by registrant during the quarter for which this report is filed. Page 36 SIGNATURE ========== Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REALTY INCOME CORPORATION (Signature and Title) /s/ GARY M. MALINO Date: August 11, 2000 ------------------------------------- Gary M. Malino Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) EXHIBIT INDEX Exhibit No. Description =========== =========== 27 Financial Data Schedule Page 37