(Note: WORD for DOS; Courier 12; 1" margins) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 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, 1996, 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) DELAWARE ======== (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) (619) 741-2111 ============== (Registrant's telephone number) Indicate by checkmark 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 [ ] Number of shares outstanding of common stock as of November 13, 1996: Common Stock, $1.00 par value; 22,976,237 Page 1
REALTY INCOME CORPORATION Form 10-Q September 30, 1996 Table of Contents ----------------- PART I. FINANCIAL INFORMATION Pages ============================== ----- Item 1: Financial Statements Consolidated Balance Sheets........................ 3-4 Consolidated Statements of Income.................. 5-6 Consolidated Statements of Cash Flows.............. 7-8 Notes to Consolidated Financial Statements......... 9-14 Item 2: Management's Discussion And Analysis Of Financial Condition And Results Of Operations......15-32 PART II. OTHER INFORMATION ========================== Item 6: Exhibits and Reports on Form 8-K...................32-33 SIGNATURE................................................... 34 EXHIBIT INDEX............................................... 35 EXHIBITS....................................................36-64 Page 2
PART I. FINANCIAL INFORMATION ============================== ITEM 1. FINANCIAL STATEMENTS REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets =========================== September 30, 1996 And December 31, 1995 (dollars in thousands, except per share data) 1996 1995 (Unaudited) =========== ========= ASSETS Real Estate, at Cost: Land $ 154,824 $ 147,789 Buildings and Improvements 375,254 367,637 --------- --------- 530,078 515,426 Less - Accumulated Depreciation and Amortization (134,854) (126,062) --------- --------- Net Real Estate, at Cost 395,224 389,364 Cash and Cash Equivalents 1,444 1,650 Accounts Receivable 728 1,638 Due from Affiliates 493 493 Other Assets 1,671 1,927 Goodwill 21,880 22,567 --------- --------- TOTAL ASSETS $ 421,440 $ 417,639 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Distributions Payable $ 3,561 $ 12,407 Accounts Payable and Accrued Expenses 460 673 Other Liabilities 4,723 4,541 Line of Credit Payable 36,600 6,000 Notes Payable -- 12,597 --------- --------- TOTAL LIABILITIES 45,344 36,218 --------- --------- Continued on next page Page 3
(continued) REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets =========================== September 30, 1996 And December 31, 1995 (dollars in thousands, except per share data) 1996 1995 (Unaudited) =========== ========= Stockholders' Equity Preferred Stock, Par Value $1.00 Per Share, 5,000,000 Shares Authorized, No Shares Issued or Outstanding -- -- Common Stock, Par Value $1.00 Per Share, 40,000,000 Shares Authorized, 22,976,237 Shares Issued and Outstanding 22,976 22,976 Capital in Excess of Par Value 515,931 516,119 Accumulated Distributions in Excess of Net Income (162,811) (157,674) --------- --------- TOTAL STOCKHOLDERS' EQUITY 376,096 381,421 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 421,440 $ 417,639 ========= ========= 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 Nine Months Ended September 30, 1996 And 1995 (dollars in thousands, except per share data) (Unaudited) Three Three Nine Nine Months Months Months Months Ended Ended Ended Ended 9/30/96 9/30/95 9/30/96 9/30/95 ========== ========== ========== ========== REVENUE Rental $ 13,777 $ 13,023 $ 41,106 $ 37,001 Interest 27 48 77 204 Other 36 31 71 68 ---------- ---------- ---------- ---------- 13,840 13,102 41,254 37,273 ---------- ---------- ---------- ---------- EXPENSES Depreciation and Amorti- zation 4,052 3,863 12,175 10,793 General and Adminis- trative 1,272 916 3,870 1,913 Advisor Fees -- 753 -- 3,661 Property 397 413 1,256 1,137 Interest 497 1,016 1,502 1,910 Provision for Impairment Losses -- -- 323 -- ---------- ---------- ---------- ---------- 6,218 6,961 19,126 19,414 ---------- ---------- ---------- ---------- Income from Operations 7,622 6,141 22,128 17,859 Net Gain (Loss) on Sales of Properties 268 (21) 1,226 56 ---------- ---------- ---------- ---------- NET INCOME $ 7,890 $ 6,120 $ 23,354 $ 17,915 ========== ========== ========== ========== Continued on next page Page 5
(continued) REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Statements Of Income ================================= For The Three And Nine Months Ended September 30, 1996 And 1995 (dollars in thousands, except per share data) (Unaudited) Three Three Nine Nine Months Months Months Months Ended Ended Ended Ended 9/30/96 9/30/95 9/30/96 9/30/95 ========== ========== ========== ========== Net Income Per Share $ 0.34 $ 0.31 $ 1.02 $ 0.91 ========== ========== ========== ========== Weighted Average Number of Shares Outstanding 22,977,501 19,949,843 22,976,974 19,653,479 ========== ========== ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Page 6
REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Statements Of Cash Flows ===================================== For The Nine Months Ended September 30, 1996 And 1995 (dollars in thousands) (Unaudited) 1996 1995 ========= ========= CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 23,354 $ 17,915 Adjustments to Net Income: Depreciation and Amortization 12,175 10,793 Provision for Impairment Losses 323 -- Net Gain on Sales of Properties (1,226) (56) Change in Assets and Liabilities (net of the Merger with R.I.C. Advisor, Inc.): Accounts Receivable and Other Assets 1,060 (772) Due to Advisor -- (32) Accounts Payable, Accrued Expenses and Other Liabilities (31) 520 --------- --------- Net Cash Provided by Operating Activities 35,655 28,368 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from Sales of Properties 3,645 463 Acquisition of and Additions to Properties (19,984) (56,107) --------- --------- Net Cash Used in Investing Activities (16,339) (55,644) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of Distributions (37,337) (26,813) Proceeds from Line of Credit 33,300 44,600 Payment of Line of Credit (2,700) -- Payment of Notes Payable (12,597) -- Stock Offering Costs (188) -- Cash Acquired from Advisor Merger -- 647 --------- --------- Net Cash Provided By (Used in) Financing Activities (19,522) 18,434 --------- --------- Continued on next page Page 7
(continued) REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Statements Of Cash Flows ===================================== For The Nine Months Ended September 30, 1996 And 1995 (dollars in thousands) (Unaudited) 1996 1995 ========= ========= Net Decrease in Cash and Cash Equivalents (206) (8,842) Cash and Cash Equivalents, Beginning of Period 1,650 11,673 --------- --------- Cash and Cash Equivalents, End of Period $ 1,444 $ 2,831 ========= ========= For supplemental disclosure of cash flow information, see Note 8. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Page 8
REALTY INCOME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements ========================================== September 30, 1996 (Unaudited) 1. Management Statement and General - ------------------------------------ The financial statements of Realty Income Corporation ("Realty Income" or the "Company") were prepared from the books and records of the Company without audit or verification and in the opinion of management include all adjustments (consisting of only normal recurring accruals) necessary to present a fair statement of results for the interim periods presented. Readers of this quarterly report should refer to the audited financial statements of the Company for the year ended December 31, 1995, which are included in the Company's 1995 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. During the first quarter of 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and of Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 provides guidance for the recognition and measurement of impairment of long-lived assets, including goodwill, related both to assets to be held and used and assets to be disposed of. Under SFAS 121, a provision for impairment loss is recognized for assets to be held and used if estimated future cash flows (undiscounted and without interest charges) over a long-term holding period, plus estimated disposition proceeds (undiscounted) are less than current book value. In addition, for assets to be disposed of, a provision for impairment loss is recognized for the amount by which the current book value of the asset to be disposed of exceeds its fair value less cost to sell. During the first quarter of 1996, the Company recorded provision for impairment losses of $323,000 related to two properties to be disposed of. No provision was recognized in 1995. Certain of the 1995 balances have been reclassified to conform to 1996 presentation. The reclassifications had no effect on stockholders' equity or net income. Page 9
2. Credit Facility - ------------------- The Company has a $130 million, three-year, revolving, unsecured acquisition credit facility that expires in November 1998. As of September 30, 1996 and December 31, 1995, the outstanding balance on the credit facility was $36.6 million and $6.0 million, respectively, with an effective interest rate of approximately 6.88% and 7.19%, respectively. A commitment fee of 0.15%, per annum, accrues on the average amount of the unused available credit commitment. The fee can increase up to 0.35% if the Company reaches certain debt levels. The credit facility is subject to various leverage and interest coverage ratio limitations, all of which the Company is and has been in compliance with. For the nine months ended September 30, 1996 and 1995, interest of $91,000 and $187,000, respectively, was capitalized on properties under construction. For the three months ended September 30, 1996 and 1995, interest of $51,000 and $29,000, respectively, was so capitalized. 3. Notes Payable - ----------------- The Company redeemed, at par, the $12.6 million principal amount of variable rate senior notes due 2001 on March 29, 1996. Interest incurred on the notes for the nine months ended September 30, 1996 and 1995 was $217,000 and $758,000, respectively. Interest incurred on the notes for the three months ended September 30, 1996 and 1995 was $0 and $239,000, respectively. 4. Properties - -------------- At September 30, 1996, the Company owned a diversified portfolio of 700 properties in 42 states. Of the Company's properties, 691 are single tenant properties with the remaining properties being multi-tenant properties. At September 30, 1996, eight properties were vacant and available for lease. One of the vacant properties was sold in October 1996 at a nominal gain. Page 10
4. Properties (continued) - -------------------------- Twenty retail properties in 11 states were acquired during the first nine months of 1996 at an aggregate cost of approximately $22.8 million (including the estimated unfunded development costs on nine properties under construction totaling $4.0 million). Total Invested through Tenant Industry City/State 09/30/96 ====================== =========== ================= =========== 1ST QUARTER - ----------- Carver's Restaurant Glendale AZ $ 1,521,000 Econo Lube N' Tune Auto Service Chula Vista CA 723,000 Econo Lube N' Tune Auto Service Broomfield CO 601,000 Econo Lube N' Tune Auto Service Dallas TX 527,000 Econo Lube N' Tune Auto Service Lewisville TX 525,000 2ND QUARTER - ----------- Dairy Mart (1) Convenience Mt. Washington KY 491,000 Dairy Mart (1) Convenience Tipp City OH 361,000 Econo Lube N' Tune Auto Service Arvada CO 501,000 Jiffy Lube Auto Service Centerville OH 656,000 3RD QUARTER - ----------- Best Buy Consumer Electronics Thousand Oaks CA 8,830,000 Dairy Mart (1) Convenience Streetsboro OH 405,000 Dairy Mart (1) Convenience Wadsworth OH 271,000 Econo Lube N' Tune (1) Auto Service Arvada CO 245,000 Econo Lube N' Tune (1) Auto Service Virginia Beach VA 288,000 Econo Lube N' Tune (1) Auto Service Bremerton WA 344,000 Jiffy Lube (1) Auto Service Beavercreek OH 206,000 Jiffy Lube (1) Auto Service Huber Heights OH 286,000 Speedy Brake & Muffler Auto Service Hartford CT 731,000 Speedy Brake & Muffler Auto Service Indianapolis IN 660,000 Speedy Brake & Muffler Auto Service Milwaukee WI 628,000 ----------- Properties acquired in 1996 18,800,000 Funding in 1996 of buildings under construction on land acquired in 1995 1,025,000 Page 11
4. Properties (continued) - -------------------------- (continued) Total Invested through Tenant Industry City/State 09/30/96 ====================== =========== ================= =========== Capitalized Expenditures Relating to Existing Properties 9,000 Acquisition of the outstanding Class A Units of R.I.C. Trade Center, Ltd., Silverton Business Center, Ltd. and Empire Business Center, Ltd. (after this purchase, the Company owned 100% of these partnerships) 150,000 ----------- TOTAL $19,984,000 =========== (1) The Company acquired these properties, which are under construction, as undeveloped land and is funding construction and other costs relating to the development of the properties by the prospective tenants. The prospective tenants have entered into leases with the Company covering these properties. 5. Net Gain on Sales of Properties - ----------------------------------- For the nine months ended September 30, 1996, the Company sold one multi-tenant property, four restaurant properties and received compensation for granting an easement totaling $3.6 million and recognized a gain of $1.2 million. For the nine months ended September 30, 1995, the Company sold one child care property and one multi-tenant property for $463,000 and recognized a net gain of $56,000. For the three months ended September 30, 1996, the Company sold one multi-tenant property and two restaurant properties for $1.4 million and recognized a gain of $268,000. For the three months ended September 30, 1995, the Company sold one multi- tenant property for $148,000 and recognized a loss of $21,000. Page 12
6. Related Party Transactions - ------------------------------ A. Advisory Agreement Prior to August 17, 1995, the Company was an advised real estate investment trust pursuant to an advisory agreement under which R.I.C. Advisor, Inc. (the "Advisor") advised the Company with respect to its investments and assumed day-to-day management of the Company. On August 17, 1995, the Advisor was merged into the Company (the "Merger") and the advisory agreement was terminated. B. Acquisition of R.I.C. Advisor, Inc. As consideration in the Merger, the Company issued 990,704 shares of common stock valued at approximately $21.2 million. The following unaudited pro forma summary presents information as if the Merger had occurred at the beginning of 1995. The pro forma information is provided for informational purposes only. It is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the combined companies. For the Nine Months Ended September 30, 1995 Pro Forma ----------- Revenue $37,483,000 Net Income $16,495,000 Net Income Per Share $ 0.81 7. Distributions Paid And Payable - ---------------------------------- During the nine months ended September 30, 1996, the Company paid a special distribution of $0.23 per share and nine monthly distributions of $0.155 per share. The distributions for the nine months totaled $1.625 per share. As of September 30, 1996, distributions of $0.155 per share were declared and payable on October 15, 1996 to stockholders of record on October 1, 1996. Page 13
8. Supplemental Disclosure of Cash Flow Information - ---------------------------------------------------- Interest paid, net of interest capitalized, during the first nine months of 1996 and 1995 was $1,214,000 and $1,563,000, respectively. The following non-cash investing and financing activities are included in the accompanying financial statements: The merger of the Advisor into the Company on August 17, 1995 resulted in the following: Increase in: Other Assets $ (1,143,000) Goodwill (21,184,000) Common Stock retired after the merger (1,230,000) Increases/(Decrease) in: Other Liabilities 3,029,000 Due to Advisor (2,000) Common Stock 991,000 Capital in Excess of Par Value 20,186,000 ------------ Cash Acquired from Advisor Merger $ 647,000 ============ After the merger, shares acquired by the Company in the merger were retired resulting in the following decreases: Common Stock $ (58,000) Capital in Excess of Par Value (1,172,000) ------------ Total $ (1,230,000) ============ In 1995, Other Assets of $1,526,000 were reclassified to Goodwill. Page 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General ======= Realty Income Corporation ("Realty Income" or the "Company") is a fully integrated and self-managed real estate company with in-house acquisition, leasing, legal, financial underwriting, portfolio management and capital markets expertise. The seven senior officers of the Company have each participated in the management of the Company's properties and operations for between six and 27 years. Realty Income has elected to be taxed as a real estate investment trust ("REIT"). As of September 30, 1996, Realty Income owned a diversified portfolio of 700 properties in 42 states consisting of over 4.7 million square feet of leasable space. Realty Income typically acquires, then leases back, retail store locations from retail chain store operators, providing capital to the operators for continued expansion and other purposes. The Company concentrates its investments in single- tenant, retail properties leased to national and regional retail chains under long-term, triple-net lease agreements. Triple-net leases typically require the tenant to be responsible for substantially all property operating costs including property taxes, insurance, maintenance and structural repairs. Management believes that long-term leases, coupled with tenants assuming responsibility for property expenses under the triple-net lease structure, generally produce a more predictable income stream than many other types of real estate portfolios. The Company's primary business objective is to generate a consistent and predictable level of funds from operations ("FFO") per share and provide distributions to stockholders. Additionally, the Company generally will seek to increase FFO per share and provide distributions to stockholders through both internal and external growth, while also seeking to lower the ratio of distributions to stockholders as a percentage of FFO in order to allow internal cash flow to be used to fund additional acquisitions and for other corporate purposes. The Company pursues internal growth through (i) contractual rent increases on existing leases; (ii) rental increases at the termination of existing leases when market conditions permit; and (iii) the active management of the Company's property portfolio, including selective sales of properties. The Company generally pursues external growth through the acquisition of additional properties under long-term, triple-net lease agreements with initial contractual base rent which, at the time of acquisition, is in excess of the Company's estimated cost of capital. Page 15
Prior to August 17, 1995, the Company's day-to-day affairs were managed by R.I.C. Advisor, Inc. (the "Advisor") which provided advice and assistance regarding acquisitions of properties by the Company and performed the day-to-day management of the Company's properties and business. On August 17, 1995, the Advisor was merged with and into Realty Income (the "Merger"). As part of the Merger the advisory agreement between the Company and the Advisor was terminated. In July 1996, the Company expanded its board of directors to seven members. The new directors are Richard J. VanDerhoff, President and Chief Operating Officer of the Company, and Willard H. Smith, formerly a Managing Director, Equity Capital Markets Division, of Merrill Lynch & Co from 1983 until his recent retirement in August 1995. In October 1996, the Company changed transfer agents from Chase Mellon Shareholder Services to The Bank of New York. The Company's common stock is listed on the New York Stock Exchange under the symbol "O." Liquidity and Capital Resources =============================== Cash Reserves ------------- Realty Income was organized for the purpose of operating as an equity REIT which distributes to stockholders, in the form of monthly cash distributions, a substantial portion of its net cash flow generated from lease revenue. The Company intends to retain an appropriate amount of cash as working capital reserves. At September 30, 1996, the Company had cash and cash equivalents totaling $1.4 million. Management believes that the Company's cash on hand, cash provided from operating activities and borrowing capacity are sufficient to meet its liquidity needs for the foreseeable future. Capital Funding --------------- Realty Income has a $130 million three-year, revolving, unsecured acquisition credit facility that expires in November 1998. The credit facility currently bears interest at 1.25% over the London Interbank Offered Rate ("LIBOR") and offers the Company other interest rate options. As of October 31, 1996, $93.4 million of borrowing capacity was available to the Company under the acquisition credit facility. At that time, the Page 16
outstanding balance was $36.6 million. This credit facility was used to payoff senior notes, and has been and is expected to be used to acquire additional retail properties leased to national and regional retail chains under long term lease agreements. Borrowings to fund additional properties will increase the Company's exposure to interest rate risk. On March 29, 1996, senior notes totaling $12.6 million were redeemed at par. Proceeds from borrowings under the acquisition credit facility were used to redeem the notes. Realty Income expects to meet its long-term capital needs for the acquisition of properties through the issuance of public or private debt or equity. In August 1995, the Company filed a universal shelf registration statement with the Securities and Exchange Commission covering up to $200 million in value of common stock, preferred stock or debt securities. In the fourth quarter of 1995, the Company issued 2,540,000 shares of common stock at a price of $19.625 per share. The net proceeds of $46.4 million from the stock offering were used to repay borrowings under the acquisition credit facility. These borrowings were used to acquire properties in 1995. The Company is not currently involved in any negotiations and has not entered into any arrangements relating to any additional securities issuances. Property Acquisitions --------------------- During the first nine months of 1996, Realty Income purchased 20 retail properties in 11 states for $22.8 million (including the estimated unfunded development costs on nine properties under construction totaling $4.0 million). These 20 properties will contain approximately 129,800 leasable square feet and are 100% leased under triple-net leases, with an average initial lease term of 16.5 years. The weighted average annual unleveraged return on the cost of the 20 properties is estimated to be 10.7%, computed as estimated contractual net operating income (which in the case of a triple-net leased property is equal to the base rent or, in the case of properties under construction, the estimated base rent under the lease) for the first year divided by the total acquisition and estimated development costs. No assurance can be given that the actual return on the cost of the 20 properties acquired in 1996 will not differ from the foregoing percentage. In 1996, the Company also invested $923,000 in four development properties originally acquired in 1995. These four development properties have been completed and the tenants are Page 17
paying rent. Final construction costs of $358,000 are expected to be funded on two of these properties in the fourth quarter of 1996. Land adjacent to an existing property in the portfolio was acquired for $102,000 and leased to the Company's adjacent tenant. During 1996, the Company also invested $9,000 in existing properties and purchased the outstanding Class A units in R.I.C. Trade Center, Ltd., Silverton Business Center, Ltd. and Empire Business Center, Ltd. for an aggregate of $150,000. After this purchase, Realty Income owned 100% of these partnerships, which were then dissolved. These partnerships owned three mixed-use light industrial business parks in San Diego, CA. From December 1994 through September 1996, Realty Income acquired 82 retail properties (the "New Properties") for an aggregate cost of approximately $92.9 million (including the estimated unfunded development costs on nine properties totaling $4.4 million). The New Properties are located in 20 states, contain approximately 790,600 leasable square feet and are 100% leased under triple-net leases, with an average initial lease term of 16.5 years. The weighted average annual unleveraged return on the cost of the New Properties is estimated to be 11.2%. No assurance can be given that the actual return on the cost of the New Properties will not differ from the foregoing percentage. Of the New Properties, 73 were occupied as of September 30, 1996 and the remaining nine were pre-leased and under construction pursuant to contracts under which the tenants have agreed to develop the properties (with development costs funded by the Company) and to begin paying rent when the premises open for business. All of the New Properties, including the properties under development, are leased with initial terms of 10 to 20 years. The New Properties were purchased with $18.1 million of cash on hand and $70.4 million from the acquisition credit facility (of which, $46.4 million was repaid from the net proceeds of the stock offering). The allocation of costs between land, and buildings and improvements on the 73 completed and occupied New Properties was 40.5% and 59.5%, respectively. Page 18
1996 ACQUISITION ACTIVITY THROUGH SEPTEMBER 30 Total Initial Approx. Lease Leasable Term Square Tenant Industry Location (Years) Feet ============== =========== ================= ======= ======== 1ST QUARTER Carver's Restaurant Glendale, AZ 19.8 8,100 Econo Lube N' Tune Auto Service Chula Vista, CA 15.0 2,800 Econo Lube N' Tune Auto Service Broomfield, CO 15.0 2,800 Econo Lube N' Tune Auto Service Dallas, TX 15.0 2,600 Econo Lube N' Tune Auto Service Lewisville, TX 15.0 2,700 2ND QUARTER Dairy Mart (1) Convenience Mt. Washington, KY 20.0 2,800 Dairy Mart (1) Convenience Tipp City, OH 15.0 3,800 Econo Lube N' Tune Auto Service Arvada, CO 15.0 2,800 Jiffy Lube Auto Service Centerville, OH 20.0 2,300 3RD QUARTER Best Buy Consumer Thousand Oaks, CA 20.0 59,200 Electronics Dairy Mart (1) Convenience Streetsboro, OH 15.0 3,800 Dairy Mart (1) Convenience Wadsworth, OH 15.0 2,700 Econo Lube N' Tune (1) Auto Service Arvada, CO 15.0 2,500 Econo Lube N' Tune (1) Auto Service Virginia Beach, VA 15.0 2,800 Econo Lube N' Tune (1) Auto Service Bremerton, WA 15.0 2,800 Jiffy Lube (1) Auto Service Beavercreek, OH 20.0 2,300 Jiffy Lube (1) Auto Service Huber Heights, OH 20.0 2,300 Speedy Brake & Muffler Auto Service Hartford, CT 15.0 10,000 Speedy Brake & Muffler Auto Service Indianapolis, IN 15.0 5,300 Speedy Brake & Muffler Auto Service Milwaukee, WI 15.0 5,400 ------- -------- Average/Total 16.5 129,800 ======= ======== Page 19
(1) The Company acquired these properties, which are under construction, as undeveloped land and is funding construction and other costs relating to the development of the properties by the prospective tenants. The prospective tenants have entered into leases with the Company covering these properties and are contractually obligated to complete construction on a timely basis and to pay construction cost overruns to the extent they exceed the construction budget by more than 5%. As of September 30, 1996, the total acquisition and estimated construction costs for the nine properties under development was $6.7 million, of which $4.0 million had not been funded. Distributions ------------- Cash distributions paid during the first nine months of 1996 totaled $37.3 million, including a special distribution of $5.3 million. Cash distributions paid during the comparable period in 1995 totaled $26.8 million. During the first nine months of 1996, the Company paid a special distribution of $0.23 per share and nine monthly distributions of $0.155 per share, totaling $1.625 per share. During the first nine months of 1995, the Company paid seven monthly distributions of $0.15 per share and increased its monthly distribution to $0.155 per share in August and September. The distributions for the first nine months of 1995 totaled $1.36 per share. In September and October 1996, the Company declared two distributions of $0.155 per share payable on October 15, 1996 and November 15, 1996, respectively. Funds from Operations ("FFO") ============================= FFO for the third quarter of 1996 was $11.7 million versus $10.0 million during the third quarter of 1995, an increase of $1.7 million or 16.6%. FFO for the nine months ended September 30, 1996 was $34.6 million versus $28.7 million during the comparable period in 1995, an increase of $5.9 million or 20.7%. Realty Income defines FFO as net income before gain (loss) on sales of properties, plus provision for impairment losses on properties held for sale, plus depreciation and amortization. In accordance with the recommendations of the National Association of Real Estate Investment Trusts ("NAREIT"), amortization of deferred financing costs are not added back to net income to calculate FFO. Amortization of financing costs are included in interest expense in the consolidated statements of income. Management considers FFO to be an appropriate measure of the performance of an equity REIT. FFO is used by financial analysts Page 20
in evaluating REITs and 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. FFO is not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income as an indication of the Company's performance or to cash flows from operating, investing, and financing activities as a measure of liquidity or ability to make cash distributions. Below is a reconciliation of net income to FFO for the quarter ended September 30, 1996 and 1995: 1996 1995 =========== =========== Net Income $ 7,890,000 $ 6,120,000 Plus Depreciation and Amortization 4,052,000 3,863,000 Plus Loss on Sales of Properties -- 21,000 Less Depreciation of Furniture, Fixtures and Equipment (14,000) (6,000) Less Gain on Sales of Properties (268,000) -- ----------- ----------- Total Funds From Operations $11,660,000 $ 9,998,000 =========== =========== For the quarter ended September 30, 1996 and 1995, FFO exceeded cash distributions by $976,000 and $738,000, respectively. Below is a reconciliation of net income to FFO for the nine months ended September 30, 1996 and 1995: 1996 1995 =========== =========== Net Income $23,354,000 $17,915,000 Plus Depreciation and Amortization 12,175,000 10,793,000 Plus Provision for Impairment Losses 323,000 -- Less Depreciation of Furniture, Fixtures and Equipment (40,000) (6,000) Less Net Gain on Sales of Properties (1,226,000) (56,000) ----------- ----------- Total Funds From Operations $34,586,000 $28,646,000 =========== =========== For the nine months ended September 30, 1996 and 1995, FFO exceeded cash distributions (excluding the non-recurring special distribution) by $2.5 million and $1.8 million, respectively. Page 21
Results of Operations ===================== The following is a comparison of the three and nine months ended September 30, 1996 to the three and nine months ended September 30, 1995. Rental revenue was $13.8 million for the quarter ended September 30, 1996 versus $13.0 million for the comparable quarter in 1995, an increase of $754,000. The increase in rental revenue was primarily due to the New Properties. In the quarter ended September 30, 1996 and 1995, the New Properties generated revenue of $2.1 million and $1.4 million, respectively, an increase of $669,000. Percentage rent, which is included in rental revenue, in the third quarter of 1996 and 1995 was $247,000 and $274,000, respectively. Rental revenue was $41.1 million for the nine months ended September 30, 1996 versus $37.0 million for the comparable nine months in 1995, an increase of $4.1 million. The increase in rental revenue was primarily due to the New Properties. In the nine months ended September 30, 1996 and 1995, the New Properties generated revenue of $6.0 million and $2.2 million, respectively, an increase of $3.8 million. Percentage rent for the nine months ended September 30, 1996 and 1995 was $567,000 and $599,000, respectively. At September 30, 1996, 658 or 96.1% of the Company's leases, on the 685 occupied single-tenant properties, provide for increases in rents through (i) base rent increases tied to a consumer price index with adjustment ceilings or (ii) overage rent based on a percentage of the tenants' gross sales. Some leases contain both types of clauses. Rental revenue generated on 621 properties owned during both the first nine months of 1995 and 1996 increased by $384,000 or 1.1%, from $34.7 million to $35.1 million. Rental revenue generated on 621 properties owned during both the third quarter of 1995 and 1996 increased by $103,000 or 0.9%, from $11.6 million to $11.7 million. When comparing 1996 to 1995, same store revenue increased at a slower pace during the third quarter than during the first nine months, due to an increase in unleased properties during 1996. Unleased properties are a factor in determining gross revenue generated and property costs incurred by the Company. At September 30, 1996, the Company had eight properties that were not under lease as compared to three properties at September 30, 1995. Four of the eight unleased properties at September 30, 1996 became available for lease during the second and third quarters of 1996. One of these properties was sold in October 1996 at a nominal gain. The remaining 692 properties were under lease agreements with third party tenants. Page 22
The following table represents Realty Income's rental revenue by industry for the nine months ended September 30, 1996 and 1995: September 30, 1996 September 30, 1995 ---------------------- ---------------------- Rental Percentage Rental Percentage Industry Revenue of Total Revenue of Total =================== =========== ========== =========== ========== Automotive Parts $ 3,322,000 8% $ 3,296,000 9% Automotive Service 2,774,000 7% 2,181,000 6% Child Care 17,413,000 42% 17,125,000 46% Consumer Electronics 10,000 0% -- --% Convenience Stores 1,959,000 5% 698,000 2% Home Furnishings 1,872,000 4% 847,000 2% Restaurant 10,186,000 25% 9,320,000 25% Other 3,570,000 9% 3,534,000 10% ----------- ---- ----------- ---- Total $41,106,000 100% $37,001,000 100% =========== ==== =========== ==== Interest revenue decreased by $21,000 in the third quarter of 1996 to $27,000 from $48,000 in 1995 and by $127,000 in the nine months ended September 30, 1996 to $77,000 from $204,000 in 1995. The decrease in interest for both periods was due to lower cash balances, which reflects the Company's desire to maintain an appropriate amount of cash as working capital reserves and invest excess available cash in properties. Depreciation and amortization was $4.1 million in the third quarter of 1996 verses $3.9 million for the comparable quarter in 1995 and $12.2 million for the nine months ended September 30, 1996 verses $10.8 million for the comparable nine months in 1995. The increase in 1996 was primarily due to the depreciation of the New Properties and amortization of goodwill recorded in connection with the Merger. Total advisor fees and general and administrative expenses decreased by $397,000 to $1.3 million in the third quarter of 1996 versus $1.7 million in 1995. General and administrative expenses were $1.3 million in the third quarter of 1996 versus $916,000 in 1995 and advisor fees of $753,000 in 1995. The $356,000 increase in general and administrative expenses was due to the Merger of the Advisor. Subsequent to the Merger, the Company commenced paying management, accounting systems, office facilities, professional and support personnel expenses (i.e. costs of being self-administered). Such costs were the responsibility of the Advisor through August 17, 1995, which received advisor fees of $753,000 in the third quarter of 1995. As part of the Merger, the advisory agreement was terminated. Page 23
Total advisor fees and general and administrative expenses decreased by $1.7 million to $3.9 million in the nine months ended September 30, 1996 versus $5.6 million in 1995. General and administrative expenses were $3.9 million in 1996 versus $1.9 million in 1995 and advisor fees of $3.7 million in 1995. The $2.0 million increase in general and administrative expenses was due to the Merger of the Advisor. Subsequent to the Merger, the Company commenced paying for management, accounting systems, office facilities, professional and support personnel expenses (i.e. costs of being self-administered). Such costs were the responsibility of the Advisor through August 17, 1995, which received advisor fees of $3.7 million in the first nine months of 1995. During the quarter ended September 30, 1996, the Company initiated a 401(k) plan. Costs of $32,000 associated with the plan are included in general and administrative expenses. Property expenses are broken down into costs associated with multi-tenant non-triple net lease properties, unleased single- tenant properties and general portfolio expenses. Costs related to the multi-tenant and unleased single-tenant properties include, but are not limited to, property taxes, maintenance, insurance, utilities, site checks, bad debt expense and legal fees. General portfolio costs include, but are not limited to, insurance, legal, site checks and title search fees. Costs incurred on the nine multi-tenant properties during the third quarter of 1996 and ten multi-tenant properties in the comparable period of 1995 totaled $271,000 and $297,000, respectively. The decrease was primarily due to a decrease in maintenance and utilities. During the second quarter of 1996 two of the multi-tenant locations became vacant, one of which was sold in October 1996. Costs incurred on the six unleased single- tenant properties in the third quarter of 1996 and three unleased single-tenant properties in the third quarter of 1995 were $58,000 and $27,000, respectively. The increase is due to property taxes, maintenance and utilities on the additional vacant properties. General portfolio costs in 1996 and 1995 totaled $68,000 and $89,000, respectively. The decrease in general portfolio costs is primarily due to a decrease in insurance costs. Costs incurred on the nine multi-tenant properties during the nine months ended September 30, 1996 and ten multi-tenant properties in the comparable period of 1995 totaled $830,000 and $790,000. The increase was primarily due to an increase in property taxes. Costs incurred on the six unleased single-tenant properties during the first nine months of 1996 and three unleased single-tenant properties in the comparable period of 1995 were $149,000 and $70,000. The increase is due to property Page 24
taxes, maintenance and utilities on the additional vacant properties. General portfolio costs in 1996 and 1995 totaled $277,000. Interest expense is made up of four components which include: (i) interest on outstanding loans and notes; (ii) commitment fees on the undrawn portion of the credit facility; (iii) amortization of the credit facility origination costs; which are offset by: (iv) interest capitalized on properties under development. Interest capitalized on properties under development is included in the cost of the completed property and amortized over the estimated useful life of the property. Interest expense for the third quarter of 1996 was $497,000 as compared to $1.0 million for 1995. Interest incurred in 1996 and 1995 was $454,000 and $936,000, respectively. Interest incurred was lower in 1996 than in 1995 due to a decrease in the average outstanding balance and lower interest rates on the acquisition credit facility and senior notes. During the third quarter of 1996, the average outstanding balance and interest rate were $26.1 million and 6.92% as compared to $49.8 million and 7.45% during the comparable period in 1995. Included in the interest incurred in 1996 and 1995 was capitalized interest totaling $51,000 and $30,000, respectively. Commitment fees in 1996 were $39,000 as compared to $24,000 in 1995. In 1996 and 1995, a commitment fee of 0.15% per annum was incurred on the undrawn portion of the credit facility. Commitment fees increased in 1996 because the borrowing capacity was increased to $130 million from $100 million in December 1995. Amortization of the credit facility origination fees were $55,000 in 1996 as compared to $86,000 in 1995. The amortized credit facility origination fees decreased in 1996 as compared to 1995, because in December 1995 the term of the credit facility was extended one year, which extended the period of time over which unamortized fees are amortized. Interest expense for the nine months ended September 30, 1996 was $1.5 million as compared to $1.9 million for 1995. Interest incurred in 1996 and 1995 was $1.3 million and $1.7 million, respectively. Interest incurred was lower in 1996 than in 1995 due to a decrease in the average outstanding balance and lower interest rates on the acquisition credit facility and senior notes. During the first nine months of 1996, the average outstanding balance and interest rate were $25.1 million and 6.96% as compared to $30.4 million and 7.69% during the comparable period in 1995. Included in the interest incurred in 1996 and 1995 was capitalized interest totaling $91,000 and $187,000, respectively. Commitment fees in 1996 were $124,000 as compared to $94,000 in 1995. In 1996 and 1995, a commitment fee of 0.15% per annum was incurred on the undrawn portion of the credit facility. Commitment fees increased in 1996 because the Page 25
borrowing capacity was increased to $130 million from $100 million in December 1995. Amortization of the credit facility origination fees were $164,000 in 1996 as compared to $254,000 in 1995. The amortized credit facility origination fees decreased in 1996 as compared to 1995, because in December 1995 the term of the credit facility was extended one year, which extended the period of time over which unamortized fees are amortized. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In the first quarter of 1996, a $323,000 charge was taken to reduce the net carrying value on two properties because they were held for sale. No charge was recorded for an impairment loss in 1995. The Company anticipates a small number of property sales will occur in the normal course of business. During the third quarter of 1996, the Company recorded a gain of $268,000 on the sale of one multi-tenant property and two restaurant properties. These sales generated cash proceeds of $1.4 million. During the comparable period of 1995, the Company sold one child care property for $148,000 and recognized a loss of $21,000. During the first nine months 1996, the Company recorded a gain of $1.2 million on the sale of one multi-tenant property, four restaurant properties and the granting of an easement on another property. During 1995, the Company recorded a net gain of $56,000 on the sale of one child care property and one multi- tenant property. During 1996 and 1995 cash proceeds generated from these sales were $3.6 million and $463,000, respectively. For the third quarter of 1996, the Company had net income of $7.9 million versus $6.1 million in 1995. The $1.8 million increase in net income is primarily due to an increase in rental revenue from New Properties of $669,000 and a decrease in interest, advisor fees, general and administrative expenses of $916,000, offset by an increase in depreciation and amortization expense. For the nine months ended September 30, 1996, the Company had net income of $23.4 million versus $17.9 million in 1995. The $5.5 million increase in net income is primarily due to an increase in rental revenue of $3.8 million on the New Properties and a net decrease in interest, advisor fees, general and administrative expenses of $2.1 million, offset by an increase in depreciation and amortization expense. Page 26
Properties ========== As of September 30, 1996, Realty Income owned a diversified portfolio of 700 properties in 42 states consisting of over 4.7 million square feet of leasable space. The following table sets forth certain geographic diversification information regarding these properties: Percent Total of Total Number Approx. Annual- of Leasable Annualized ized Proper- Percent Square Base Base State ties Leased Feet Rent (1) Rent ============== ======= ======= ========= =========== ======== Alabama 4 100% 20,300 $ 160,000 0.3% Arizona 28 93 189,200 2,335,000 4.1 California 52 96 973,200 10,068,000 17.8 Colorado 41 98 230,700 2,898,000 5.1 Connecticut 4 100 17,200 240,000 0.4 Florida 40 100 298,600 2,976,000 5.3 Georgia 36 100 177,500 2,363,000 4.2 Idaho 11 100 52,000 656,000 1.2 Illinois 22 100 153,400 1,845,000 3.3 Indiana 20 95 88,300 1,224,000 2.2 Iowa 6 100 32,600 348,000 0.6 Kansas 13 100 80,500 913,000 1.6 Kentucky 11 100 33,400 827,000 1.5 Louisiana 2 100 10,700 126,000 0.2 Maryland 6 100 34,900 504,000 0.9 Massachusetts 4 100 20,900 440,000 0.8 Michigan 5 100 26,900 347,000 0.6 Minnesota 17 100 118,400 1,699,000 3.0 Mississippi 3 100 17,300 176,000 0.3 Missouri 26 96 161,300 1,793,000 3.2 Montana 1 100 5,400 71,000 0.1 Nebraska 8 100 47,100 509,000 0.9 Nevada 5 100 29,100 350,000 0.6 New Hampshire 1 100 6,400 122,000 0.2 New Jersey 2 100 22,700 344,000 0.6 New Mexico 3 100 12,000 103,000 0.2 New York 4 100 24,300 469,000 0.8 North Carolina 18 100 77,100 1,154,000 2.1 Ohio 44 100 187,900 3,104,000 5.5 Oklahoma 9 100 60,200 542,000 1.0 Oregon 18 100 98,500 1,133,000 2.0 Pennsylvania 4 100 28,300 420,000 0.8 Page 27
(continued) Percent Total of Total Number Approx. Annual- of Leasable Annualized ized Proper- Percent Square Base Base State ties Leased Feet Rent (1) Rent ============== ======= ======= ========= =========== ======== South Carolina 19 95 82,000 1,027,000 1.8 South Dakota 1 100 6,100 79,000 0.1 Tennessee 8 100 56,400 791,000 1.4 Texas 124 99 819,400 8,561,000 15.2 Utah 7 100 45,400 588,000 1.0 Virginia 13 100 69,800 971,000 1.7 Washington 42 100 249,700 3,016,000 5.3 West Virginia 1 100 4,600 58,000 0.1 Wisconsin 11 100 60,500 733,000 1.3 Wyoming 6 100 32,100 410,000 0.7 ------- ------- --------- ----------- -------- Totals 700 99% 4,762,300 $56,493,000 100.0% ======= ======= ========= =========== ======== (1) Does not include percentage rents (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level), if any, that may be payable under leases covering certain of the properties. Annualized base rent is calculated by multiplying the monthly contractual base rent as of September 30, 1996 for each of the properties by 12. Realty Income's 700 properties consist of 148 after-market automotive retail locations, 319 child care centers, 1 consumer electronics store, 40 convenience stores, 4 home furnishings stores, 174 restaurant facilities, and 14 other properties. Of the 700 properties, 631 or 90% are leased to national or major regional retail chain operators; 44 or 6% are leased to franchisees of retail chain operators; 17 or 3% are leased to other tenant types; and 8 or 1% are available for lease. The following table sets forth certain information regarding the Company's properties as of September 30, 1996, classified according to the business of the respective tenants: Page 28
Approx. Realty Total Total Income Approx. Annual- Loca- Owned Leasable ized Industry tions Loca- Square Base Tenant Segment (1) tions Feet Rent (2) ============== ============ ======= ====== ========= =========== AUTOMOTIVE - ---------- Northern Automotive Parts 560 79 409,100 $ 4,190,000 Discount Tire Service 290 18 103,200 1,155,000 Econo Lube N' Tune Service 210 9 24,900 625,000 Jiffy Lube Service 1,210 27 63,900 1,669,000 Q Lube Service 460 4 7,600 180,000 R & S Strauss Service 110 2 31,200 431,000 Speedy Muffler King Service 1,030 7 40,900 531,000 Other Miscellaneous -- 2 6,500 90,000 ------ --------- ----------- TOTAL AFTER-MARKET AUTOMOTIVE 148 687,300 8,871,000 CHILD CARE - ---------- Children's World Learn- ing Centers Child Care 500 134 964,000 13,612,000 KinderCare Learning Centers Child Care 1,150 13 79,800 1,055,000 La Petite Academy Child Care 770 171 977,300 8,732,000 Other Child Care -- 1 4,200 -- ------ --------- ----------- TOTAL CHILD CARE 319 2,025,300 23,399,000 CONSUMER ELECTRONICS - -------------------- Best Buy Electronics 260 1 59,200 865,000 ------ --------- ----------- CONVENIENCE STORES - ------------------ 7-ELEVEN Convenience 15,000 3 9,700 235,000 Dairy Mart Convenience 870 22 66,600 1,509,000 The Pantry Convenience 390 14 34,400 1,333,000 Other Convenience -- 1 2,100 31,000 ------ --------- ----------- TOTAL CONVENIENCE STORES 40 112,800 3,108,000 Page 29
(continued) Approx. Realty Total Total Income Approx. Annual- Loca- Owned Leasable ized Industry tions Loca- Square Base Tenant Segment (1) tions Feet Rent (2) ========== ============ ======= ====== ========= =========== HOME FURNISHINGS - ---------------- Levitz Home Fur- nishings 130 4 376,400 2,496,000 ------ --------- ----------- RESTAURANTS - ----------- Don Pablo's Dinner House 50 7 60,700 597,000 Carver's Dinner House 90 3 26,600 495,000 Other Dinner House -- 13 107,900 1,060,000 Golden Corral Family 450 88 517,700 6,833,000 Sizzler Family 600 7 37,600 841,000 Other Family -- 4 23,900 157,000 Hardees Fast Food 3,870 3 10,300 144,000 Taco Bell Fast Food 4,620 24 54,100 1,501,000 Whataburger Fast Food 520 9 23,000 616,000 Other Fast Food -- 16 45,200 868,000 ------ --------- ----------- TOTAL RESTAURANTS 174 907,000 13,112,000 OTHER Miscellaneous 14 594,300 4,642,000 ------ --------- ----------- Total 700 4,762,300 $56,493,000 ====== ========= =========== (1) Approximate total number of retail locations in operation under this format (including both corporate owned and franchised locations), based on information provided to the Company by the respective tenants in the first quarter of 1996. (2) Does not include percentage rents (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level), if any, that may be payable under leases covering certain of the properties. Annualized base rent is calculated by multiplying the monthly contractual base rent as of September 30, 1996 for each of the properties by 12. Of the 700 properties owned at September 30, 1996, 691 are single-tenant with the remaining being multi-tenant properties. The average remaining lease term for all leases on the Company's properties, excluding the multi-tenant properties, is Page 30
approximately 8.8 years. The lease expirations for nine properties under construction are based on the estimated date of completion of such properties. The following table sets forth certain information regarding the timing of lease expirations on the Company's 685 triple-net leased, single tenant retail properties: Percent of Total Number of Annualized Annualized Year Leases Expiring Base Rent (2) Base Rent ======== =============== ============= ================= 1996 11 $ 396,000 0.8% 1997 15 588,000 1.1 1998 4 168,000 0.3 1999 20 898,000 1.7 2000 27 1,323,000 2.5 2001 50 3,802,000 7.2 2002 73 5,860,000 11.1 2003 68 5,161,000 9.8 2004 77 6,241,000 11.8 2005 87 6,037,000 11.4 2006 30 2,520,000 4.8 2007 78 4,425,000 8.4 2008 41 3,433,000 6.5 2009 11 717,000 1.4 2010 34 2,729,000 5.2 2011 24 1,929,000 3.7 2012 1 135,000 0.2 2013 0 -- -- 2014 2 265,000 0.5 2015 25 4,789,000 9.1 2016 6 1,261,000 2.4 2017 0 -- -- 2018 1 39,000 0.1 --------- ------------- -------- Total 685 (1) $52,716,000 100.0% ========= ============= ======== (1) The table does not include nine multi-tenant properties (two of which are vacant) and six vacant, unleased single-tenant properties owned by the Company. (2) Does not include percentage rents (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level), if any, that may be payable under leases covering certain of the properties. Annualized base rent is calculated by multiplying the monthly contractual base rent as of September 30, 1996 for each of the properties by 12. Page 31
Impact Of Inflation =================== Tenant leases generally provide for increases in rent as a result of increases in the tenant's sales volumes or increases in the consumer price index. Management expects that inflation will cause these lease provisions to result in increases in rent over time. However, inflation and increased costs may have an adverse impact on the tenants if increases in the tenant's operating expenses exceed increases in revenue. Approximately 98% of the properties are leased to tenants under triple-net leases in which the tenant is responsible for substantially all property costs and expenses. These features in the leases reduce the Company's exposure to rising expenses due to inflation. PART II. OTHER INFORMATION =========================== ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits: Exhibit No. Description =========== =========== 2.1 Agreement and Plan of Merger between Realty Income Corporation and R.I.C. Advisor, Inc. dated as of April 28, 1995 (incorporated by reference to Appendix A to the Company's definitive Proxy Statement filed September 30, 1995) 3.1 Amended and Restated Certificate of Incorporation of Realty Income Corporation (filed as Exhibit 3.1 to the Company's Form 10-Q for the quarter ended September 30, 1994 and incorporated herein by reference) 3.2 Amended and Restated Bylaws of Realty Income Corporation (filed as Exhibit 3.2 to the Company's 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference) 10.1 Revolving Credit Agreement (filed as Exhibit 99.2 to the Company's Form 8-K dated December 16, 1994 and incorporated herein by reference) 10.2 First Amendment to the Revolving Credit Agreement, filed herewith Page 32
10.3 Second Amendment to the Revolving Credit Agreement (filed as Exhibit 99.2 to the Company's Form 8-K dated December 19, 1995 and incorporated herein by reference) 10.4 Form of Indemnification Agreement to be entered into between the Company and the executive officers of the Company, filed herewith 10.5 Form of Management Incentive Plan, filed herewith 27 Financial Data Schedule (electronically filed with the Securities and Exchange Commission only) B. A report on Form 8-K dated July 15, 1996 was filed on July 22, 1996 reporting that Realty Income Corporation's board of directors was expanded to seven members. Page 33
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: November 13, 1996 ---------------------------------- Gary M. Malino, Vice President Chief Financial Officer (Principal Financial and Accounting Officer) Page 34
EXHIBIT INDEX Exhibit No. Description Page =========== =========== ---- 10.2 First Amendment to the Revolving Credit Agreement............................36-38 10.4 Form of Indemnification Agreement to be entered into between the Company and the executive officers of the Company...........39-51 10.5 Form of Management Incentive Plan...........52-63 27 Financial Data Schedule (electronically filed with the Securities and Exchange Commission only)............................ 64 Page 35