United States

Securities and Exchange Commission
Washington, D.C. 20549

Form 8-K

Current Report

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of report: April 28, 2004

REALTY INCOME CORPORATION
(Exact name of registrant as specified in its charter)

220 West Crest Street, Escondido, California 92025-1707
(Address of principal executive offices) (Zip Code)

(760) 741-2111
(Registrant’s telephone number, including area code)

None
(former name or former address, if changed since last report)

 

 

Items 5 and 12.  Other Events; Disclosure of Results of Operations and Financial                                                              Condition

On April 28, 2004, we disclosed the following information in a press release, which sets forth our results of operation for the quarter ended March 31, 2004 and certain information regarding our property portfolio.

 

REALTY INCOME CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

March 31, 2004 and December 31, 2003

(dollars in thousands, except per share data)

		2004			2003
ASSETS		(Unaudited)
Real estate, at cost:
Land		$	598,901		$	557,288
Buildings and improvements		1,033,627			975,894
		1,632,528			1,533,182
Less accumulated depreciation and amortization		(279,814		)	(272,647		)
Net real estate held for investment		1,352,714			1,260,535
Real estate held for sale, net		41,727			60,110
Net real estate		1,394,441			1,320,645
Cash and cash equivalents		5,550			4,837
Accounts receivable		3,216			3,950
Goodwill, net		17,206			17,206
Other assets		12,921			13,619
Total assets		$	1,433,334		$	1,360,257
LIABILITIES AND STOCKHOLDERS’ EQUITY
Distributions payable		$	7,972		$	7,582
Accounts payable and accrued expenses		10,521			11,479
Other liabilities		6,183			7,030
Line of credit payable		33,200			26,400
Notes payable		480,000			480,000
Total liabilities		537,876			532,491
Stockholders’ equity:
Preferred stock and paid in capital, par value $1.00 per share, 20,000,000 shares authorized, 4,125,700 shares issued and outstanding		99,368			99,368
Common stock and paid in capital, par value $1.00 per share, 100,000,000 shares authorized, 39,611,507 and 37,909,086 shares issued and outstanding in 2004 and 2003, respectively		1,037,491			969,030
Distributions in excess of net income		(241,401		)	(240,632		)
Total stockholders’ equity		895,458			827,766
Total liabilities and stockholders’ equity		$	1,433,334		$	1,360,257

 

2

 

REALTY INCOME CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

 

For the three months ended March 31, 2004 and 2003

(dollars in thousands, except per share data)

(unaudited)

		2004			2003
REVENUE
Rental		$	42,934		$	34,705
Gain on sales of real estate acquired for resale		4,109			276
Other		463			90
		47,506			35,071
EXPENSES
Interest		8,710			5,964
Depreciation and amortization		9,789			7,875
General and administrative		3,286			2,747
Property		779			614
Income taxes		1,620			166
		24,184			17,366
Income from continuing operations		23,322			17,705
Income from discontinued operations		1,529			329
Net income		24,851			18,034
Preferred stock dividends		(2,428		)	(2,428		)
Net income available to common stockholders		$	22,423		$	15,606
Basic and diluted amounts per common share:
Income from continuing operations		$	0.55		$	0.44
Net income		$	0.59		$	0.45

 

3

 

FUNDS FROM OPERATIONS (FFO)

AVAILABLE TO COMMON STOCKHOLDERS

 

Funds from operations, or FFO, for the first quarter of 2004 increased by $7.3 million, or 31.1%, to $30.8 million as compared to $23.5 million in the first quarter of 2003. The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable accounting principles generally accepted in the United States of America (“GAAP”) measure) to FFO.  Also presented is information regarding distributions paid to common stockholders and the diluted weighted average number of shares outstanding for the first three months of 2004 and 2003 (dollars in thousands):

 

For the three months ended March 31,		2004			2003
Net income available to common stockholders		$	22,423		$	15,606
Depreciation and amortization:
Continuing operations		9,789			7,875
Discontinued operations		27			218
Depreciation of furniture, fixtures and equipment		(29		)	(30		)
Gain on sales of investment properties, discontinued operations		(1,450		)	(166		)
Total FFO		$	30,760		$	23,503
Distributions paid to common stockholders		$	22,802		$	20,450
FFO in excess of distributions to Common stockholders		$	7,958		$	3,053
Diluted weighted average number of shares outstanding		38,160,639			35,005,985

 

We define FFO, a non-GAAP measure, consistent with the National Association of Real Estate Investment Trust’s definition, 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 sales of investment property and extraordinary items.

 

We consider FFO to be an appropriate supplemental measure of a Real Estate Investment Trust’s (REIT’s) operating performance as it is based on a net income analysis of property portfolio performance that excludes non-cash items such as depreciation. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time. Since real estate values historically rise and fall with market conditions, presentations of operating results for a REIT, using historical accounting for depreciation, could be less informative. The use of FFO is recommended by the REIT industry as a supplemental performance measure. In addition, FFO is used as a measure of our compliance with the financial covenants of our credit facility.

 

Presentation of this information is intended to assist the reader in comparing the operating 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. Furthermore, FFO is not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income as an indication of Realty Income’s performance. In addition, FFO should not be considered as an alternative to reviewing our cash flows from operating, investing and financing activities as a measure of liquidity, of our ability to make cash distributions or of our ability to pay interest payments.

 

4

 

CONTRIBUTION BY CREST NET TO FUNDS FROM OPERATIONS

 

Our subsidiary, Crest Net Lease, Inc., or Crest Net, generated $3.3 million in FFO for Realty Income in the first quarter of 2004 and $85,000 in the first quarter of 2003. As a result of the increase in Crest Net’s inventory during the last quarter of 2003, Crest Net’s contributions to our FFO was significantly higher in the first quarter of 2004 as compared to the same quarter in 2003. The future contribution, if any, to our FFO by Crest Net will depend on the timing and the number of property acquisitions and sales it achieves, if any, in a given period. The following is a calculation of the contribution by Crest Net to Realty Income’s FFO for the three months ended March 31, 2004 and 2003 (dollars in thousands):

For the three months ended March 31,		2004			2003
Gain on sales of real estate acquired for resale		$	4,109		$	276
Rent and other revenue		1,001			95
Interest expense		(229		)	(77		)
General and administrative expenses		(124		)	(172		)
Property expenses		(8		)	(6		)
Income taxes		(1,467		)	(31		)
FFO contributed by Crest Net		$	3,282		$	85

 

The SEC, in a comment letter to us regarding our Annual Report on Form 10-K for the year ended December 31, 2003, has indicated that properties held for sale and sold by Crest Net should possibly be classified as discontinued operations in our consolidated financial statements. We have not classified and do not currently classify these properties as discontinued operations. If properties acquired by Crest Net were classified as discontinued operations, then some of the amounts in the following line items in our consolidated statements of income would, to the extent they reflect Crest Net’s operating results, be reclassified to discontinued operations: rental revenue, gain on sales of real estate acquired for resale, other revenue, general and administrative expenses, property expenses and income taxes. These adjustments, if applied to our statements of income since Crest Net was formed in 2000, would have resulted in a decrease in our reported total revenues and total and per share income from continuing operations and an increase in our income from discontinued operations.  However, our total and per share FFO and net income available to common stockholders would not be affected if we are required to reclassify the activities of Crest Net as discontinued operations. We believe that our current presentation of Crest Net’s properties is appropriate and we are discussing this issue with the SEC. However, we cannot assure you that we will not be required to revise past or future financial statements to reflect this possible reclassification.

 

5

 

PROPERTY PORTFOLIO INFORMATION

 

The following table sets forth certain information regarding our properties classified according to the business of the respective tenants, expressed as a percentage of our total rental revenue:

		Percentage of Rental Revenue (1)
				For the Years Ended December 31,
28 Industries		For the Quarter Ended March 31, 2004		2003		2002		2001		2000		1999		1998
Apparel stores		1.9	%	2.1	%	2.3	%	2.4	%	2.4	%	3.8	%	4.1	%
Automotive collision services		0.7		0.3		—		—		—		—		—
Automotive parts		4.0		4.5		4.9		5.7		6.0		6.3		6.1
Automotive services		7.6		8.3		7.0		5.7		5.8		6.6		7.5
Automotive tire services		8.1		3.1		2.7		2.6		2.3		2.3		1.7
Book stores		0.4		0.4		0.4		0.4		0.5		0.5		0.6
Business services		0.1		0.1		0.1		0.1		0.1		0.1		*
Child care		15.5		17.8		20.8		23.9		24.7		25.3		29.2
Consumer electronics		2.6		3.0		3.3		4.0		4.9		4.4		5.4
Convenience stores		17.0		13.3		9.1		8.4		8.4		7.2		6.1
Crafts and novelties		0.5		0.6		0.4		0.4		0.4		0.4		*
Drug stores		0.1		0.2		0.2		0.2		0.2		0.2		0.1
Entertainment		2.3		2.6		2.3		1.8		2.0		1.2		—
Equipment rental services		0.3		0.2		—		—		—		—		—
General merchandise		0.4		0.5		0.5		0.6		0.6		0.6		*
Grocery stores		0.8		0.4		0.5		0.6		0.6		0.5		*
Health and fitness		3.9		3.8		3.8		3.6		2.4		0.6		0.1
Home furnishings		4.2		4.9		5.4		6.0		5.8		6.5		7.8
Home improvement		1.0		1.1		1.2		1.3		2.0		3.6		*
Office supplies		1.7		1.9		2.1		2.2		2.3		2.6		3.0
Pet supplies and services		1.4		1.7		1.7		1.6		1.5		1.1		0.6
Private education		1.1		1.2		1.3		1.5		1.4		1.2		0.9
Restaurants		10.1		11.8		13.5		12.2		12.3		13.3		16.2
Shoe stores		0.4		0.9		0.8		0.7		0.8		1.1		0.8
Sporting goods		3.5		3.8		4.1		0.9		—		—		—
Theaters		3.6		4.1		3.9		4.3		2.7		0.6		—
Travel plazas		0.4		0.3		—		—		—		—		—
Video rental		3.0		3.3		3.3		3.7		3.9		4.3		3.8
Other		3.4		3.8		4.4		5.2		6.0		5.7		6.0
Totals		100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

* Less than 0.1%

(1)   Includes rental revenue for all properties owned by Realty Income at the end of each period presented (including revenue from properties reclassified to discontinued operations) and excludes properties owned by our subsidiary, Crest Net.

 

6

 

Of the 1,510 properties in the portfolio at March 31, 2004, 1,505 were single-tenant properties with the remaining properties being multi-tenant properties.  At March 31, 2004, 1,483 of the 1,505 single-tenant properties, or 98.5%, were net leased with a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 11.9 years.

 

The following table sets forth certain information regarding the timing of the initial lease term expirations (excluding rights to extend a lease at the option of the tenant) on our 1,483 net-leased, single-tenant retail properties at March 31, 2004 (dollars in thousands):

 

Years		Number of Leases Expiring(1)		Rental Revenue for the Quarter Ended March 31, 2004 (2)			Percentage of Rental Revenue (2)
2004		111		$	2,372		5.9	%
2005		75		1,395			3.4
2006		91		2,046			5.1
2007		118		2,152			5.3
2008		98		2,095			5.2
2009		46		1,023			2.5
2010		38		850			2.1
2011		40		1,409			3.5
2012		45		1,385			3.4
2013		76		3,367			8.3
2014		38		1,656			4.1
2015		39		1,061			2.6
2016		14		383			0.9
2017		19		1,496			3.7
2018		22		571			1.4
2019		75		2,500			6.2
2020		52		1,061			2.6
2021		130		3,724			9.2
2022		96		2,584			6.4
2023		232		6,174			15.2
2024		16		225			0.6
2026		2		93			0.2
2028		2		54			0.1
2033		3		324			0.8
2034		2		208			0.5
2037		3		338			0.8
Totals		1,483		$	40,546		100.0	%

(1)  Excludes properties owned by our subsidiary, Crest Net.  The lease expirations for properties under construction are based on the estimated date of completion of those properties.

(2)   Includes rental revenue of $57 from properties reclassified to discontinued operations and excludes revenue of $1,444 from four multi-tenant properties and from 23 vacant and unleased properties (one of which is a multi-tenant property) at March 31, 2004 and revenue of $1,001 from properties owned by our subsidiary, Crest Net.

 

7

 

The following table sets forth certain state-by-state information regarding Realty Income’s property portfolio as of March 31, 2004 (dollars in thousands):

 

State		Number of Properties (1)		Percent Leased		Approximate Leasable Square Feet (1)		Rental Revenue For the Quarter Ended March 31, 2004 (2)			Percentage of Rental Revenue (3)
Alabama		17		100	%	145,600		$	355		0.8	%
Alaska		2		100		128,500		251			0.6
Arizona		69		99		332,600		1,021			2.4
Arkansas		8		100		48,800		172			0.4
California		61		100		1,057,100		3,894			9.3
Colorado		44		98		314,600		991			2.4
Connecticut		16		100		245,600		926			2.2
Delaware		16		100		29,100		338			0.8
Florida		125		98		1,261,300		4,185			10.0
Georgia		100		99		612,500		2,412			5.7
Idaho		11		100		52,000		195			0.4
Illinois		44		95		358,600		1,261			3.0
Indiana		27		96		150,100		553			1.3
Iowa		9		100		57,600		173			0.4
Kansas		22		91		201,300		560			1.3
Kentucky		13		100		43,600		284			0.7
Louisiana		13		100		62,500		197			0.5
Maryland		24		100		207,600		1,109			2.6
Massachusetts		37		100		203,100		1,000			2.4
Michigan		13		100		81,600		297			0.7
Minnesota		20		95		235,400		501			1.2
Mississippi		23		91		179,400		412			1.0
Missouri		33		100		228,100		697			1.7
Montana		2		100		30,000		77			0.2
Nebraska		10		100		91,200		305			0.7
Nevada		10		100		100,700		415			1.0
New Hampshire		9		100		55,200		277			0.7
New Jersey		25		100		132,100		1,059			2.5
New Mexico		6		100		48,800		93			0.2
New York		26		100		270,600		1,384			3.3
North Carolina		48		100		241,500		1,131			2.7
North Dakota		1		100		22,000		19			*
Ohio		75		100		504,900		1,864			4.4
Oklahoma		17		100		94,300		361			0.9
Oregon		18		100		259,900		564			1.3
Pennsylvania		68		100		380,500		1,819			4.3
Rhode Island		1		100		3,500		29			0.1
South Carolina		53		98		158,100		995			2.4
South Dakota		1		100		6,500		24			0.1
Tennessee		98		100		462,400		2,168			5.2
Texas		173		96		1,634,100		4,278			10.2
Utah		6		100		35,100		120			0.3
Vermont		1		100		2,500		22			0.1
Virginia		55		100		412,600		2,058			4.9
Washington		38		100		250,900		701			1.7
West Virginia		2		100		16,800		40			0.1
Wisconsin		16		88		162,300		343			0.8
Wyoming		4		100		20,100		60			0.1
Totals/Average		1,510		99	%	11,633,200		$	41,990		100.0	%

* Less than 0.1%

(1)  Excludes properties owned by our subsidiary, Crest Net.

(2)  Includes rental revenue for all properties owned by Realty Income at March 31, 2004 (including revenue from properties reclassified to discontinued operations of $57) and excludes revenue of $1,001 from properties owned by Crest Net.

(3)  For the quarter ended March 31, 2004.

 

8

 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Dated: May 4, 2004	REALTY INCOME CORPORATION
	By:	/s/Gregory J. Fahey
		Gregory J. Fahey
		Vice President, Controller

 

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