UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the Fiscal Year Ended December 31, 2009
Commission
File Number 1-13374
REALTY
INCOME CORPORATION
(Exact
name of registrant as specified in its charter)
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Maryland
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33-0580106
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(State
or Other Jurisdiction of
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(IRS
Employer
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Incorporation
or Organization)
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Identification
Number)
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600 La
Terraza Boulevard, Escondido, California 92025-3873
(Address
of Principal Executive Offices)
Registrant’s
telephone number, including area code: (760) 741-2111
Securities
registered pursuant to Section 12 (b) of the Act:
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Title
of Each Class
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Name
of Each Exchange
On Which
Registered
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Common
Stock, $1.00 Par Value
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New
York Stock Exchange
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Class
D Preferred Stock, $1.00 Par Value
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New
York Stock Exchange
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Class
E Preferred Stock, $1.00 Par Value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12 (g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES x NO
o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES o NO
x
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
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). YES
o NO
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer x Accelerated
filer o Non-accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES o NO
x
At June
30, 2009, the aggregate market value of the Registrant’s shares of common stock,
$1.00 par value, held by non-affiliates of the Registrant was $2.3 billion based
upon the last reported sale price of $21.92 per share on the New York Stock
Exchange on June 30, 2009, the last business day of the Registrant's most
recently completed second fiscal quarter.
At
February 8, 2010, the number of shares of common stock outstanding was
104,400,757, the number of shares of Class D preferred stock outstanding
was 5,100,000 and the number of shares of Class E preferred stock outstanding
was 8,800,000.
DOCUMENTS
INCORPORATED BY REFERENCE
Part
III, Items 10, 11, 12, 13 and 14 incorporate by reference certain specific
portions of the definitive Proxy Statement for Realty Income Corporation’s
Annual Meeting to be held on May 12, 2010, to be filed pursuant to
Regulation 14A. Only those portions of the proxy statement which are
specifically incorporated by reference herein shall constitute a part of this
annual report.
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Index
to Form 10-K
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PART
I
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Page
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Item
1:
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2
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3
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5
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6
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11
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16
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Item
1A:
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16
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Item
1B:
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25
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Item
2:
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25
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Item
3:
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25
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Item
4:
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25
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PART
II
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Item
5:
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25
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Item
6:
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26
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Item
7:
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27
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27
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31
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39
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40
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40
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Item
7A:
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40
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Item
8:
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42
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Item
9:
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66
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Item
9A:
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67
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Item
9B:
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68
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PART
III
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Item
10:
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68
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Item
11:
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68
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Item
12:
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68
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Item
13:
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68
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Item
14:
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68
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PART
IV
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Item
15:
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69
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72
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PART
I
Item
1: Business
Realty
Income Corporation, The Monthly Dividend Company®, is a
Maryland corporation organized to operate as an equity real estate investment
trust, or REIT. Our primary business objective is to generate dependable monthly
cash distributions from a consistent and predictable level of funds from
operations, or FFO, per share. Our monthly distributions are
supported by the cash flow from our portfolio of retail properties leased to
regional and national retail chains. We have in-house acquisition, leasing,
legal, credit research, real estate research, portfolio management and capital
markets expertise. Over the past 40 years, Realty Income and its predecessors
have been acquiring and owning freestanding retail properties that generate
rental revenue under long-term lease agreements (primarily 15 to 20
years).
In
addition, we seek to increase distributions to common stockholders and FFO per
share through both active portfolio management and the acquisition of additional
properties. Our portfolio management focus includes:
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Contractual
rent increases on existing leases;
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Rent
increases at the termination of existing leases, when market conditions
permit; and
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The
active management of our property portfolio, including re-leasing vacant
properties and selectively selling properties, thereby mitigating our
exposure to certain tenants and
markets.
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In
acquiring additional properties, we adhere to a focused strategy of primarily
acquiring properties that are:
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Freestanding,
single-tenant, retail locations;
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Leased
to regional and national retail chains;
and
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Leased
under long-term, net-lease
agreements.
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At
December 31, 2009, we owned a diversified portfolio:
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Of
2,339 retail properties;
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With
an occupancy rate of 96.8%, or 2,264 properties occupied and only 75
properties available for lease;
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Leased
to 118 different retail chains doing business in 30 separate retail
industries;
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Located
in 49 states;
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With
over 19.1 million square feet of leasable space;
and
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With
an average leasable retail space per property of approximately 8,200
square feet.
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Of the
2,339 properties in the portfolio, 2,328, or 99.5%, are single-tenant, retail
properties and the remaining 11 are multi-tenant, distribution and office
properties. At December 31, 2009, of the 2,328 single-tenant properties, 2,254
were leased with a weighted average remaining lease term (excluding extension
options) of approximately 11.2 years.
In
addition, at December 31, 2009, our wholly-owned taxable REIT subsidiary, Crest
Net Lease, Inc. ("Crest"), had an inventory of three properties valued at
$3.8 million, which are classified as held for sale. Crest was created to buy
and sell properties, primarily to individual investors who are involved in
tax-deferred exchanges under Section 1031 of the Internal Revenue Code of 1986,
as amended (the "Code"). In addition to the three properties, Crest also holds
notes receivable on properties previously sold of $22.2 million at
December
31, 2009.
We
typically acquire retail store properties under long-term leases with retail
chain store operators. These transactions generally provide capital to owners of
retail real estate and retail chains for expansion or other corporate purposes.
Our acquisition and investment activities are concentrated in well-defined
target markets and generally focus on retail chains providing goods and services
that satisfy basic consumer needs.
Our
net-lease agreements generally:
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Are
for initial terms of 15 to 20
years;
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Require
the tenant to pay minimum monthly rent and property operating expenses
(taxes, insurance and maintenance);
and
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Provide
for future rent increases based on increases in the consumer price index
(typically subject to ceilings), fixed increases, or additional rent
calculated as a percentage of the tenants’ gross sales above a specified
level.
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We
commenced operations as a REIT on August 15, 1994 through the merger of 25
public and private real estate limited partnerships. Each of the partnerships
was formed between 1970 and 1989 for the purpose of acquiring and managing
long-term, net-leased properties.
The
seven senior officers of Realty Income owned 1.1% of our outstanding common
stock with a market value of $28.9 million at February 8, 2010. The
directors and seven senior officers of Realty Income, as a group, owned 1.3% of
our outstanding common stock with a market value of $35.6 million at
February 8, 2010.
Our
common stock is listed on The New York Stock Exchange ("NYSE") under the ticker
symbol "O" with a cusip number of 756109-104. Our central index key number is
726728.
Our
Class D cumulative redeemable preferred stock is listed on the NYSE under the
ticker symbol "OprD" with a cusip number of 756109-609.
Our
Class E cumulative redeemable preferred stock is listed on the NYSE under the
ticker symbol "OprE" with a cusip number of 756109-708.
In
February 2010, we had 72 employees as compared to 69 employees in February
2009.
We
maintain an Internet website at www.realtyincome.com. On our website we make
available, free of charge, copies of our annual report on Form 10-K, quarterly
reports on Form 10-Q, Form 3s, Form 4s, Form 5s, current reports on
Form 8-K, and amendments to those reports, as soon as reasonably
practicable after we electronically file these reports with the Securities and
Exchange Commission, or SEC. None of the information on our website
is deemed to be part of this report.
Increases
in Monthly Distributions to Common Stockholders
We have
continued our 40-year policy of paying distributions monthly. Monthly
distributions per share increased in January 2010 by $0.0003125 to $0.143. The
increase in January 2010 was our 49th
consecutive quarterly increase and the 56th
increase in the amount of our dividend since our listing on the NYSE in 1994. In
2009, we paid three monthly cash distributions per share in the amount of
$0.14175, three in the amount of $0.1420625, three in the amount of $0.142375
and three in the amount of $0.1426875, totaling $1.706625. In December 2009 and
January 2010, we declared distributions of $0.143 per share, which were paid in
January 2010 and will be paid in February 2010, respectively.
The
monthly distribution of $0.143 per share represents a current annualized
distribution of $1.716 per share, and an annualized distribution yield of
approximately 6.7% based on the last reported sale price of our common stock on
the NYSE of $25.74 on February 8, 2010. Although we expect to continue our
policy of paying monthly distributions, we cannot guarantee that we will
maintain our current level of distributions, that we will continue our pattern
of increasing distributions per share, or what our actual distribution yield
will be in any future period.
Acquisitions
During 2009
During
2009, we invested $57.9 million in 16 new properties with an initial weighted
average contractual lease rate of 9.7%. These 16 properties are located in five
states, contain over 278,000 leasable square feet, and are 100% leased with an
average lease term of 17.9 years. The 16 new properties we acquired are
net-leased to four different retail chains. There were no acquisitions by Crest
in 2009.
We made
fewer portfolio acquisitions in 2008 and 2009 than in previous years because we
felt that preserving our capital resources and maintaining a high level of
liquidity until property prices adjusted and the general economy improved was
the prudent course of action. In late 2009, we felt that market conditions had
become more attractive for acquisitions, and we currently believe that there are
many retail chains, with solid operating concepts, that are in need of capital.
We believe that our solid financial position, strong balance sheet and access to
capital give us the ability to expand our acquisition activities in 2010 and
invest in new retail properties that have the potential to contribute to our
earnings.
The
initial weighted average contractual lease rate is computed as estimated
contractual net operating income (in a net-leased property that is equal to the
aggregate base cash flow or, in the case of properties under development, the
estimated aggregate base cash flow under the lease) for the first year of each
lease, divided by the estimated total cost of the properties. Since it is
possible that a tenant could default on the payment of contractual rent, we
cannot assure you that the actual return on the funds invested will remain at
the percentages listed above.
Investments
in Existing Properties
In
2009, we capitalized costs of $3.1 million on existing properties in our
portfolio, consisting of $1.2 million for re-leasing costs and $1.9 million for
building improvements.
Net
Income Available to Common Stockholders
Net
income available to common stockholders was $106.9 million in 2009 versus
$107.6 million in 2008, a decrease of $714,000. On a diluted per common
share basis, net income was $1.03 per share in 2009 as compared to $1.06 per
share in 2008.
The
calculation to determine net income available to common stockholders includes
gains from the sale of properties. The amount of gains varies from period to
period based on the timing of property sales and can significantly impact net
income available to common stockholders.
The
gain from the sale of properties during 2009 was $8.1 million, as compared to
$13.6 million during 2008.
Funds
from Operations (FFO)
In
2009, our FFO increased by $4.9 million, or 2.6%, to $190.4 million versus
$185.5 million in 2008. On a diluted per common share basis, FFO
was $1.84 in 2009 compared to $1.83 in 2008, an increase of $0.01, or
0.5%.
See our
discussion of FFO in the section entitled "Management’s Discussion and Analysis
of Financial Condition and Results of Operations" in this annual report, which
includes a reconciliation of net income available to common stockholders to
FFO.
Crest’s
Property Sales
During
2009, Crest sold two properties from its inventory for an aggregate of
$2.0 million, which resulted in no gain.
Crest’s
Property Inventory
Crest’s
had an inventory of three properties valued at $3.8 million at December 31,
2009, which is included in "real estate held for sale, net" on our consolidated
balance sheet at December 31, 2009.
Note
Redemption
Upon
their maturity in January 2009, we redeemed, using cash on hand, the $20 million
outstanding principal amount of our 8% Notes due 2009, or 2009 Notes. The 2009
Notes were redeemed at a redemption price equal to 100% of the principal amount,
plus accrued and unpaid interest. We have no debt maturities until March
2013.
Retirement
of Board Members
William
E. Clark, our previous non-executive chairman, retired from the Board of
Directors in February 2009. Mr.
Clark had served as our Chairman of the Board since the inception of Realty
Income. Our Corporate Governance and Nominating Committee recommended, and the
Board of Directors elected, Donald R. Cameron as our new non-executive
chairman.
Roger
P. Kuppinger and Willard H Smith Jr retired from the Board of Directors in May
2009, at which time Ronald L. Merriman succeeded Mr. Kuppinger as chairman of
the Audit Committee.
Distributions
are paid monthly to our common, Class D preferred and Class E preferred
stockholders if, and when, declared by our Board of Directors.
In
order to maintain our status as a REIT for federal income tax purposes, we
generally are required to distribute dividends to our stockholders aggregating
annually at least 90% of our REIT taxable income (determined without regard to
the dividends paid deduction and excluding net capital gains), and we are
subject to income tax to the extent we distribute less than 100% of our REIT
taxable income (including net capital gains). In 2009, our cash distributions
totaled $202.3 million, or approximately 130.5% of our estimated REIT
taxable income of $155.0 million. Our estimated REIT taxable income
reflects non-cash deductions for depreciation and amortization. Our estimated
REIT taxable income is presented to show our compliance with REIT distribution
requirements and is not a measure of our liquidity or performance.
We
intend to continue to make distributions to our stockholders that are sufficient
to meet this distribution requirement and that will reduce our exposure to
income taxes. Furthermore, we believe our funds from operations are more than
sufficient to support our current level of cash distributions to our
stockholders. Our 2009 cash distributions to common stockholders totaled
$178.0 million, representing 93.5% of our funds from operations available
to common stockholders of $190.4 million.
The
Class D preferred stockholders receive cumulative distributions at a rate of
7.375% per annum on the $25 per share liquidation preference (equivalent to
$1.84375 per annum per share). The Class E preferred stockholders receive
cumulative distributions at a rate of 6.75% per annum on the $25 per share
liquidation preference (equivalent to $1.6875 per annum per share). Dividends on
our Class D and Class E preferred stock are current.
Future
distributions will be at the discretion of our Board of Directors and will
depend on, among other things, our results of operations, FFO, cash flow from
operations, financial condition and capital requirements, the annual
distribution requirements under the REIT provisions of the Code, our debt
service requirements and any other factors the Board of Directors may deem
relevant. In addition, our credit facility contains financial covenants that
could limit the amount of distributions payable by us in the event of a
deterioration in our results of operations or financial condition, and which
prohibit the payment of distributions on the common or preferred stock in the
event that we fail to pay when due (subject to any applicable grace period) any
principal or interest on borrowings under our credit facility.
Distributions
of our current and accumulated earnings and profits for federal income tax
purposes generally will be taxable to stockholders as ordinary income, except to
the extent that we recognize capital gains and declare a capital gains dividend,
or that such amounts constitute "qualified dividend income" subject to a reduced
tax rate. The maximum tax rate of non-corporate taxpayers for "qualified
dividend income" has generally been reduced to 15% (until it “sunsets” or
reverts to the provisions of prior law, which under current law will occur with
respect to taxable years beginning after December 31, 2010). In general,
dividends payable by REITs are not eligible for the reduced tax rate on
corporate dividends, except to the extent the REIT’s dividends are attributable
to dividends received from taxable corporations (such as our taxable REIT
subsidiary, Crest), to income that was subject to tax at the corporate or REIT
level (for example, if we distribute taxable income that we retained and paid
tax on in the prior taxable year) or, as discussed above, dividends properly
designated by us as "capital gain dividends." Distributions in excess of
earnings and profits generally will be treated as a non-taxable reduction in the
stockholders' basis in their stock. Distributions above that basis, generally,
will be taxable as a capital gain to stockholders who hold their shares as a
capital asset. Approximately 24.1% of the distributions to our common
stockholders, made or deemed to have been made in 2009, were classified as a
return of capital for federal income tax purposes. We are unable to predict the
portion of future distributions that may be classified as a return of
capital.
Capital
Philosophy
Historically,
we have met our long-term capital needs through the issuance of common stock,
preferred stock and long-term unsecured notes and bonds. Over the long term, we
believe that common stock should be the majority of our capital structure.
However, we may issue additional preferred stock or debt securities from time to
time. We may issue common stock when we believe that our share price is at a
level that allows for the proceeds of any offering to be accretively invested
into additional properties. In addition, we may issue common stock to
permanently finance properties that were financed by our credit facility or debt
securities. However, we cannot assure you that we will have access to the
capital markets at times and at terms that are acceptable to us.
Conservative
Capital Structure
We
believe that our stockholders are best served by a conservative capital
structure. Therefore, we seek to maintain a conservative debt level on our
balance sheet and solid interest and fixed charge coverage ratios. At December
31, 2009, our total outstanding credit facility borrowings and outstanding notes
were $1.355 billion, or approximately 30.8% of our total market
capitalization of $4.40 billion.
We
define our total market capitalization at December 31, 2009 as the sum
of:
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Shares
of our common stock outstanding of 104,286,705 multiplied by the last
reported sales price of our common stock on the NYSE of $25.91 per share
on December 31, 2009, or $2.70
billion;
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Aggregate
liquidation value (par value of $25 per share) of the Class D preferred
stock of $127.5 million;
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Aggregate
liquidation value (par value of $25 per share) of the Class E preferred
stock of $220 million;
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Outstanding
notes of $1.35 billion; and
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Outstanding
borrowings of $4.6 million on our credit
facility.
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Investment
Philosophy
We
believe that owning an actively managed, diversified portfolio of retail
properties under long-term, net leases produces consistent and predictable
income. Net leases typically require the tenant to be responsible for monthly
rent and property operating expenses including property taxes, insurance and
maintenance. In addition, tenants are typically responsible for future rent
increases based on increases in the consumer price index (typically subject to
ceilings), fixed increases or additional rent calculated as a percentage of the
tenants' gross sales above a specified level. We believe that a portfolio of
properties under long-term leases, coupled with the tenant's responsibility for
property expenses, generally produces a more predictable income stream than many
other types of real estate portfolios, while continuing to offer the potential
for growth in rental income.
Investment
Strategy
When
identifying new properties for acquisition, our focus is generally on providing
capital to retail chain owners and operators by acquiring, then leasing back,
retail store locations. We categorize retail tenants as: 1) venture market,
2) middle market, and 3) upper market. Venture companies typically
offer a new retail concept in one geographic region of the country and operate
between five and 50 retail locations. Middle market retail chains typically have
50 to 500 retail locations, operations in more than one geographic region, have
been successful through one or more economic cycles, and have a proven,
replicable concept. The upper market retail chains typically consist of
companies with 500 or more locations, operating nationally, in a proven, mature
retail concept. Upper market retail chains generally have strong operating
histories and access to several sources of capital.
We
primarily focus on acquiring properties leased to middle market retail chains
that we believe are attractive for investment because:
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They
generally have overcome many of the operational and managerial obstacles
that can adversely affect venture
retailers;
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They
typically require capital to fund expansion but have more limited
financing options than upper market retail
chains;
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They
generally have provided us with attractive risk-adjusted returns over time
since their financial strength has, in many cases, tended to improve as
their businesses have matured;
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Their
relatively large size allows them to spread corporate expenses across a
greater number of stores; and
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Middle
market retailers typically have the critical mass to survive if a number
of locations are closed due to
underperformance.
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Historically,
our investment focus has primarily been on retail industries that have a service
component because we believe the lease revenue from these types of businesses is
more stable. Because of this investment focus, for the quarter ended December
31, 2009, approximately 84.3% of our rental revenue was derived from retailers
with a service component in their business. Furthermore, we believe these
service-oriented businesses would be difficult to duplicate over the Internet
and that our properties continue to perform well relative to competition from
Internet businesses.
Credit
Strategy
We
generally provide sale-leaseback financing to less than investment grade retail
chains. We typically acquire and lease back properties to regional and national
retail chains and believe that within this market we can achieve an attractive
risk-adjusted return on the financing we provide to retailers. Since 1970, our
overall weighted average occupancy rate at the end of each year has been 98.3%,
and our occupancy rate at the end of each year has never been below
96%.
We
believe the principal financial obligations of most retailers typically include
their bank and other debt, payment obligations to suppliers and real estate
lease obligations. Because we typically own the land and building in which a
tenant conducts its retail business, we believe the risk of default on a
retailers’ lease obligations is less than the retailers' unsecured general
obligations. It has been our experience that since retailers must retain their
profitable retail locations in order to survive, in the event of reorganization
they are less likely to reject a lease for a profitable location because this
would terminate their right to use the property. Thus, as the property owner, we
believe we will fare better than unsecured creditors of the same retailer in the
event of reorganization. If a property is rejected by the tenant during
reorganization, we own the property and can either lease it to a new tenant or
sell the property. In addition, we believe that the risk of default on the real
estate leases can be further mitigated by monitoring the performance of the
retailers' individual unit locations and considering whether to sell locations
that are weaker performers.
In
order to qualify for inclusion in our portfolio, new property acquisitions must
meet stringent investment and credit requirements. The properties must generate
attractive current yields and the tenant must meet our credit
profile. We have established a three-part analysis that examines each
potential investment based on:
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Industry,
company, market conditions and credit
profile;
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Store
profitability, if profitability data is available;
and
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Overall
real estate characteristics, including property value and comparative
rental rates.
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The
typical profile of companies whose properties have been approved for acquisition
are those with 50 or more retail locations. Generally the
properties:
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Are
located in highly visible areas;
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Have
easy access to major thoroughfares;
and
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Have
attractive demographics.
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Acquisition
Strategy
We seek
to invest in industries in which several, well-organized, regional and national
retail chains are capturing market share through service, quality control,
economies of scale, advertising and the selection of prime retail locations. We
execute our acquisition strategy by acting as a source of capital to regional
and national retail chain store owners and operators, doing business in a
variety of industries, by acquiring and leasing back retail store locations. We
undertake thorough research and analysis to identify what we consider to be
appropriate industries, tenants and property locations for investment. Our
research expertise is fundamental to uncovering net-lease opportunities in
markets where our real estate financing program adds value. In selecting real
estate for potential investment, we generally seek to acquire properties that
have the following characteristics:
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Freestanding,
commercially-zoned property with a single
tenant;
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Properties
that are important retail locations for regional and national retail
chains;
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|
Properties
that we deem to be profitable for the
retailers;
|
|
●
|
Properties
that are located within attractive demographic areas relative to the
business of our tenants, with high visibility and easy access to major
thoroughfares; and
|
|
●
|
Properties
that can be purchased with the simultaneous execution or assumption of
long-term, net-lease agreements, offering both current income and the
potential for rent increases.
|
Impact
of Real Estate and Credit Markets
In the
commercial retail real estate market throughout 2008 and 2009, property prices
generally continued to decline and lease rates rose. Likewise, the U.S. credit
markets have experienced significant price volatility, dislocations and
liquidity disruptions, which have impacted our access to and the cost of our
capital. We continue to monitor the commercial retail real estate and U.S.
credit markets carefully and, if required, will make decisions to adjust our
business strategy accordingly. See Item 1A entitled "Risk Factors" in this
annual report.
Portfolio
Management Strategy
The
active management of the property portfolio is an essential component of our
long-term strategy. We continually monitor our portfolio for any changes that
could affect the performance of the industries, tenants and locations in which
we have invested. We also regularly analyze our portfolio with a view toward
optimizing its returns and enhancing its credit quality. Our executives review
industry research, tenant research, property due diligence and significant
portfolio management activities. This monitoring typically includes regular
review and analysis of:
|
●
|
The
performance of various retail industries;
and
|
|
●
|
The
operation, management, business planning and financial condition of the
tenants.
|
We have
an active portfolio management program that incorporates the sale of assets when
we believe the reinvestment of the sale proceeds will:
|
●
|
generate
higher returns;
|
|
●
|
enhance
the credit quality of our real estate
portfolio;
|
|
●
|
extend
our average remaining lease term;
or
|
|
●
|
decrease
tenant or industry concentration.
|
At
December 31, 2009, we classified real estate with a carrying amount of
$8.3 million as held for sale on our balance sheet, which includes three
properties owned by Crest, valued at $3.8 million. Additionally, we anticipate
selling investment properties in our portfolio that have not yet been
specifically identified, from which we anticipate receiving between $10 million
and $35 million in proceeds during the next 12 months. We intend to invest these
proceeds into new property acquisitions, if there are attractive opportunities
available. However, we cannot guarantee that we will sell properties during the
next 12 months or be able to invest the proceeds from the sales of any
properties in new properties.
Universal
Shelf Registration
In
March 2009, we filed a shelf registration statement with the SEC, which is
effective for a term of three years, to replace our prior shelf registration
statement which was set to expire in April 2009. Our new shelf
registration statement expires in March 2012. In accordance with the
SEC rules, the amount of securities to be issued pursuant to this shelf
registration statement was not specified when it was filed and there is no
specific dollar limit. The securities covered by this registration statement
include common stock, preferred stock, debt securities, or any combination of
these securities. We may periodically offer one or more of these securities in
amounts, prices and on terms to be announced when and if the securities are
offered. The specifics of any future offerings, along with the use of proceeds
of any securities offered, will be described in detail in a prospectus
supplement, or other offering materials, at the time of any
offering.
$355
Million Acquisition Credit Facility
In May
2008, we entered into a $355 million revolving, unsecured credit facility which
replaced our previous $300 million acquisition credit facility. The term of our
credit facility is for three years, until May 2011, plus two, one-year extension
options. Under our credit facility, our investment grade credit ratings provide
for financing at the London Interbank Offered Rate, commonly referred to as
LIBOR, plus 100 basis points with a facility fee of 27.5 basis points, for
all-in drawn pricing of 127.5 basis points over LIBOR. We also have other
interest rate options available to us. At December 31, 2009, we had a borrowing
capacity of $350.4 million available on our credit facility and an outstanding
balance of $4.6 million at an effective interest rate of 1.23%.
We
expect to use our credit facility to acquire additional retail properties and
for other corporate purposes. Any additional borrowings will increase our
exposure to interest rate risk. We have the right to request an increase in the
borrowing capacity of the credit facility, up to $100 million, to a total
borrowing capacity of $455 million. Any increase in the borrowing
capacity is subject to approval by the banks participating in our credit
facility.
We
generally use our credit facility for the short-term financing of new property
acquisitions. Thereafter, when capital is available on acceptable terms, we
generally seek to refinance those borrowings with the net proceeds of long-term
or permanent financing, which may include the issuance of common stock,
preferred stock or debt securities. We cannot assure you, however, that we will
be able to obtain any such refinancing, or that market conditions prevailing at
the time of refinancing will enable us to issue equity or debt securities upon
acceptable terms.
Credit
Agency Ratings
We are
currently assigned investment grade corporate credit ratings on our senior
unsecured notes. Fitch Ratings has assigned a rating of BBB+, Moody’s Investors
Service has assigned a rating of Baa1 and Standard & Poor’s Ratings Group
has assigned a rating of BBB to our senior notes. All of these ratings have
"stable" outlooks.
We have
also been assigned credit ratings on our preferred stock. Fitch Ratings has
assigned a rating of BBB-, Moody’s has assigned a rating of Baa2 and Standard
& Poor’s has assigned a rating of BB+ to our preferred stock. All of these
ratings have "stable" outlooks.
The
credit ratings assigned to us could change based upon, among other things, our
results of operations and financial condition. These ratings are subject to
ongoing evaluation by credit rating agencies and we cannot assure you that our
ratings will not be changed or withdrawn by a rating agency in the future if, in
its judgment, circumstances warrant. Moreover, a rating is not a recommendation
to buy, sell or hold our debt securities, preferred stock or common
stock.
Mortgage
Debt
We have
no mortgage debt on any of our properties.
No
Off-Balance Sheet Arrangements or Unconsolidated Investments
We have
no unconsolidated or off-balance sheet investments in "variable interest
entities" or off-balance sheet financing, nor do we engage in trading activities
involving energy or commodity contracts or other derivative instruments.
Additionally, we have no joint ventures or mandatorily redeemable preferred
stock. As such, our financial position and results of operations are not
affected by accounting regulations regarding the consolidation of off-balance
sheet entities and classification of financial instruments with characteristics
of both liabilities and equity.
Competitive
Strategy
We
believe that to successfully pursue our investment philosophy and strategy, we
must seek to maintain the following competitive advantages:
|
●
|
Size and Type of Investment
Properties: We believe smaller ($500,000 to $10,000,000) net-leased
retail properties represent an attractive investment opportunity in
today's real estate environment. Due to the complexities of acquiring and
managing a large portfolio of relatively small assets, we believe these
types of properties have not experienced significant institutional
ownership interest or the corresponding yield reduction experienced by
larger income-producing properties. We believe the less intensive
day-to-day property management required by net-lease agreements, coupled
with the active management of a large portfolio of smaller properties, is
an effective investment strategy. The tenants of our freestanding retail
properties generally provide goods and services that satisfy basic
consumer needs. In order to grow and expand, they generally need capital.
Since the acquisition of real estate is typically the single largest
capital expenditure of many of these retailers, our method of purchasing
the property and then leasing it back, under a net-lease arrangement,
allows the retail chain to free up
capital.
|
|
●
|
Investment in New Retail
Industries: We will seek to further diversify our portfolio among a
variety of retail industries. We believe diversification will allow us to
invest in retail industries that currently are growing and have
characteristics we find attractive. These characteristics include, but are
not limited to, retail industries that are dominated by local store
operators where regional and national chain store operators can increase
market share and dominance by consolidating local operators and
streamlining their operations, as well as capitalizing on major
demographic shifts in a population
base.
|
|
●
|
Diversification:
Diversification of the portfolio by retail industry type, tenant, and
geographic location is key to our objective of providing predictable
investment results for our stockholders, therefore further diversification
of our portfolio is a continuing objective. At December 31, 2009, our
retail property portfolio consisted of 2,339 properties located in 49
states, leased to 118 retail chains doing business in 30 industry
segments. Each of the 30 industry segments, represented in our property
portfolio, individually accounted for no more than 21.3% of our rental
revenue for the quarter ended December 31,
2009.
|
|
●
|
Management
Specialization: We believe that our management's specialization in
single-tenant retail properties, operated under net-lease agreements, is
important to meeting our objectives. We plan to maintain this
specialization and will seek to employ and train high-quality
professionals in this specialized area of real estate ownership, finance
and management.
|
|
●
|
Technology: We intend
to stay at the forefront of technology in our efforts to efficiently and
economically carry out our operations. We maintain sophisticated
information systems that allow us to analyze our portfolio's performance
and actively manage our investments. We believe that technology and
information-based systems play an important role in our competitiveness as
an investment manager and source of capital to a variety of industries and
tenants.
|
At
December 31, 2009, we owned a diversified portfolio:
|
●
|
Of
2,339 retail properties;
|
|
●
|
With
an occupancy rate of 96.8%, or 2,264 properties occupied and only 75
properties available for lease;
|
|
●
|
Leased
to 118 different retail chains doing business in 30 separate retail
industries;
|
|
●
|
Located
in 49 states;
|
|
●
|
With
over 19.1 million square feet of leasable space;
and
|
|
●
|
With
an average leasable retail space per property of approximately 8,200
square feet.
|
In
addition to our real estate portfolio, our subsidiary, Crest, had an inventory
of three properties located in three states at December 31, 2009. These
properties are valued at $3.8 million and are classified as held for
sale.
At
December 31, 2009, of our 2,339 retail properties, 2,254 were leased under
net-lease agreements. A net lease typically requires the tenant to be
responsible for minimum monthly rent and property operating expenses including
property taxes, insurance and maintenance. In addition, our tenants are
typically responsible for future rent increases based on increases in the
consumer price index (typically subject to ceilings), fixed increases or
additional rent calculated as a percentage of the tenants' gross sales above a
specified level.
Our
net-leased retail properties primarily are leased to regional and national
retail chain store operators. Most buildings are single-story structures with
adequate parking on site to accommodate peak retail traffic periods. The
properties tend to be on major thoroughfares with relatively high traffic
counts, adequate access and proximity to a sufficient population base to
constitute a suitable market or trade area for the retailer's
business.
Our
net-lease agreements generally:
|
●
|
Are
for initial terms of 15 to 20
years;
|
|
●
|
Require
the tenant to pay minimum monthly rents and property operating expenses
(taxes, insurance and maintenance);
and
|
|
●
|
Provide
for future rent increases based on increases in the consumer price index
(typically subject to ceilings), fixed increases, or additional rent
calculated as a percentage of the tenants' gross sales above a specified
level. Where leases provide for rent increases based on increases in the
consumer price index, generally these increases become part of the new
permanent base rent. Where leases provide for percentage rent, this
additional rent is typically payable only if the tenants' gross sales, for
a given period (usually one year), exceed a specified level and is then
typically calculated as a percentage of only the amount of gross sales in
excess of that level.
|
|
Industry
Diversification
|
The
following table sets forth certain information regarding Realty Income’s
property portfolio (excluding properties owned by Crest) 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 Quarter
|
For
the Years Ended
|
|||||||||||||||||||||||||||
|
Industries
|
Ended
December
31,
2009
|
Dec
31,
2009
|
Dec
31,
2008
|
Dec
31,
2007
|
Dec
31,
2006
|
Dec
31,
2005
|
Dec
31,
2004
|
|||||||||||||||||||||
|
Apparel
stores
|
1.1 | % | 1.1 | % | 1.1 | % | 1.2 | % | 1.7 | % | 1.6 | % | 1.8 | % | ||||||||||||||
|
Automotive
collision services
|
1.1 | 1.1 | 1.0 | 1.1 | 1.3 | 1.3 | 1.0 | |||||||||||||||||||||
|
Automotive
parts
|
1.6 | 1.5 | 1.6 | 2.1 | 2.8 | 3.4 | 3.8 | |||||||||||||||||||||
|
Automotive
service
|
4.8 | 4.8 | 4.8 | 5.2 | 6.9 | 7.6 | 7.7 | |||||||||||||||||||||
|
Automotive
tire services
|
6.7 | 6.9 | 6.7 | 7.3 | 6.1 | 7.2 | 7.8 | |||||||||||||||||||||
|
Book
stores
|
0.2 | 0.2 | 0.2 | 0.2 | 0.2 | 0.3 | 0.3 | |||||||||||||||||||||
|
Business
services
|
* | * | * | 0.1 | 0.1 | 0.1 | 0.1 | |||||||||||||||||||||
|
Child
care
|
6.9 | 7.3 | 7.6 | 8.4 | 10.3 | 12.7 | 14.4 | |||||||||||||||||||||
|
Consumer
electronics
|
0.6 | 0.7 | 0.8 | 0.9 | 1.1 | 1.3 | 2.1 | |||||||||||||||||||||
|
Convenience
stores
|
17.0 | 16.9 | 15.8 | 14.0 | 16.1 | 18.7 | 19.2 | |||||||||||||||||||||
|
Crafts
and novelties
|
0.3 | 0.3 | 0.3 | 0.3 | 0.4 | 0.4 | 0.5 | |||||||||||||||||||||
|
Distribution
and office
|
1.1 | 1.0 | 1.0 | 0.6 | -- | -- | -- | |||||||||||||||||||||
|
Drug
stores
|
4.3 | 4.3 | 4.1 | 2.7 | 2.9 | 2.8 | 0.1 | |||||||||||||||||||||
|
Entertainment
|
1.3 | 1.3 | 1.2 | 1.4 | 1.6 | 2.1 | 2.3 | |||||||||||||||||||||
|
Equipment
rental services
|
0.2 | 0.2 | 0.2 | 0.2 | 0.2 | 0.4 | 0.3 | |||||||||||||||||||||
|
Financial
services
|
0.2 | 0.2 | 0.2 | 0.2 | 0.1 | 0.1 | 0.1 | |||||||||||||||||||||
|
General
merchandise
|
0.8 | 0.8 | 0.8 | 0.7 | 0.6 | 0.5 | 0.4 | |||||||||||||||||||||
|
Grocery
stores
|
0.7 | 0.7 | 0.7 | 0.7 | 0.7 | 0.7 | 0.8 | |||||||||||||||||||||
|
Health
and fitness
|
6.1 | 5.9 | 5.6 | 5.1 | 4.3 | 3.7 | 4.0 | |||||||||||||||||||||
|
Home
furnishings
|
1.3 | 1.3 | 2.4 | 2.6 | 3.1 | 3.7 | 4.1 | |||||||||||||||||||||
|
Home
improvement
|
1.9 | 1.9 | 1.9 | 2.1 | 3.4 | 1.1 | 1.0 | |||||||||||||||||||||
|
Motor
vehicle dealerships
|
2.8 | 2.7 | 3.1 | 3.1 | 3.4 | 2.6 | 0.6 | |||||||||||||||||||||
|
Office
supplies
|
1.0 | 1.0 | 1.0 | 1.1 | 1.3 | 1.5 | 1.6 | |||||||||||||||||||||
|
Pet
supplies and services
|
0.9 | 0.9 | 0.8 | 0.9 | 1.1 | 1.3 | 1.4 | |||||||||||||||||||||
|
Private
education
|
0.9 | 0.9 | 0.8 | 0.8 | 0.8 | 0.8 | 1.1 | |||||||||||||||||||||
|
Restaurants
|
21.3 | 21.3 | 21.8 | 21.2 | 11.9 | 9.4 | 9.7 | |||||||||||||||||||||
|
Shoe
stores
|
-- | -- | -- | -- | -- | 0.3 | 0.3 | |||||||||||||||||||||
|
Sporting
goods
|
2.5 | 2.6 | 2.3 | 2.6 | 2.9 | 3.4 | 3.4 | |||||||||||||||||||||
|
Theaters
|
9.3 | 9.2 | 9.0 | 9.0 | 9.6 | 5.2 | 3.5 | |||||||||||||||||||||
|
Travel
plazas
|
0.2 | 0.2 | 0.2 | 0.2 | 0.3 | 0.3 | 0.4 | |||||||||||||||||||||
|
Video
rental
|
1.1 | 1.0 | 1.1 | 1.7 | 2.1 | 2.5 | 2.8 | |||||||||||||||||||||
|
Other
|
1.8 | 1.8 | 1.9 | 2.3 | 2.7 | 3.0 | 3.4 | |||||||||||||||||||||
|
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 as
discontinued operations.
|
Service
Category Diversification
The
following table sets forth certain information regarding the properties owned by
Realty Income (excluding properties owned by Crest) at December 31, 2009,
classified according to the retail business types and the level of services they
provide (dollars in thousands):
|
Industry
|
Number
of
Properties
|
Rental
Revenue for the Quarter Ended December 31, 2009(1)
|
Percentage
of
Rental
Revenue
|
|||||||||
|
Tenants Providing Services
|
||||||||||||
|
Automotive
collision services
|
13 | $ | 884 | 1.1 | % | |||||||
|
Automotive
service
|
236 | 3,902 | 4.8 | |||||||||
|
Child
care
|
252 | 5,665 | 6.9 | |||||||||
|
Entertainment
|
8 | 1,083 | 1.3 | |||||||||
|
Equipment
rental services
|
2 | 150 | 0.2 | |||||||||
|
Financial
services
|
13 | 188 | 0.2 | |||||||||
|
Health
and fitness
|
31 | 4,999 | 6.1 | |||||||||
|
Private
education
|
11 | 719 | 0.9 | |||||||||
|
Theaters
|
34 | 7,585 | 9.3 | |||||||||
|
Other
|
12 | 1,465 | 1.8 | |||||||||
| 612 | 26,640 | 32.6 | ||||||||||
|
Tenants Selling Goods and
Services
|
||||||||||||
|
Automotive
parts (with installation)
|
23 | 468 | 0.5 | |||||||||
|
Automotive
tire services
|
154 | 5,447 | 6.7 | |||||||||
|
Business
services
|
1 | 5 | * | |||||||||
|
Convenience
stores
|
584 | 13,898 | 17.0 | |||||||||
|
Distribution
and office
|
3 | 864 | 1.1 | |||||||||
|
Home
improvement
|
3 | 111 | 0.1 | |||||||||
|
Motor
vehicle dealerships
|
17 | 2,252 | 2.8 | |||||||||
|
Pet
supplies and services
|
12 | 702 | 0.9 | |||||||||
|
Restaurants
|
637 | 17,461 | 21.3 | |||||||||
|
Travel
plazas
|
1 | 187 | 0.2 | |||||||||
|
Video
rental
|
27 | 866 | 1.1 | |||||||||
| 1,462 | 42,261 | 51.7 | ||||||||||
|
Tenants Selling Goods
|
||||||||||||
|
Apparel
stores
|
6 | 902 | 1.1 | |||||||||
|
Automotive
parts
|
49 | 884 | 1.1 | |||||||||
|
Book
stores
|
2 | 146 | 0.2 | |||||||||
|
Consumer
electronics
|
9 | 524 | 0.6 | |||||||||
|
Crafts
and novelties
|
5 | 227 | 0.3 | |||||||||
|
Drug
stores
|
51 | 3,482 | 4.3 | |||||||||
|
General
merchandise
|
33 | 684 | 0.8 | |||||||||
|
Grocery
stores
|
9 | 578 | 0.7 | |||||||||
|
Home
furnishings
|
43 | 1,101 | 1.3 | |||||||||
|
Home
improvement
|
29 | 1,451 | 1.8 | |||||||||
|
Office
supplies
|
10 | 788 | 1.0 | |||||||||
|
Pet
supplies
|
2 | 40 | * | |||||||||
|
Sporting
goods
|
17 | 2,087 | 2.5 | |||||||||
| 265 | 12,894 | 15.7 | ||||||||||
|
Totals
|
2,339 | $ | 81,795 | 100.0 | % | |||||||
|
|
*
Less than 0.1%
|
|
|
(1)
|
Includes
rental revenue for all properties owned by Realty Income at December 31,
2009, including revenue from properties reclassified as discontinued
operations of $169.
|
Lease
Expirations
The
following table sets forth certain information regarding Realty Income’s
property portfolio (excluding properties owned by Crest) regarding the timing of
the lease term expirations (excluding extension options) on our 2,254 net
leased, single-tenant retail properties as of December 31, 2009 (dollars in
thousands):
|
Total
Portfolio
|
Initial
Expirations(3)
|
Subsequent
Expirations(4)
|
||||||||||||||||||||||||||||||||||
|
Year
|
Total
Number
of Leases
Expiring(1)
|
Rental
Revenue
for
the
Quarter
Ended December 31, 2009(2)
|
%
of
Total
Rental Revenue
|
Number
of
Leases Expiring
|
Rental
Revenue
for
the
Quarter
Ended December 31, 2009
|
%
of
Total
Rental Revenue
|
Number
of
Leases Expiring
|
Rental
Revenue
for
the
Quarter
Ended December 31, 2009
|
%
of
Total
Rental Revenue
|
|||||||||||||||||||||||||||
|
2010
|
141 | $ | 2,776 | 3.5 | % | 45 | $ | 997 | 1.3 | % | 96 | $ | 1,779 | 2.2 | % | |||||||||||||||||||||
|
2011
|
115 | 3,384 | 4.3 | 53 | 1,909 | 2.4 | 62 | 1,475 | 1.9 | |||||||||||||||||||||||||||
|
2012
|
135 | 3,189 | 4.0 | 72 | 1,861 | 2.3 | 63 | 1,328 | 1.7 | |||||||||||||||||||||||||||
|
2013
|
140 | 5,040 | 6.3 | 98 | 3,447 | 4.3 | 42 | 1,593 | 2.0 | |||||||||||||||||||||||||||
|
2014
|
107 | 3,305 | 4.2 | 71 | 2,457 | 3.1 | 36 | 848 | 1.1 | |||||||||||||||||||||||||||
|
2015
|
115 | 2,986 | 3.8 | 81 | 2,218 | 2.8 | 34 | 768 | 1.0 | |||||||||||||||||||||||||||
|
2016
|
115 | 2,085 | 2.6 | 112 | 2,006 | 2.5 | 3 | 79 | 0.1 | |||||||||||||||||||||||||||
|
2017
|
49 | 1,835 | 2.3 | 42 | 1,662 | 2.1 | 7 | 173 | 0.2 | |||||||||||||||||||||||||||
|
2018
|
42 | 1,869 | 2.4 | 33 | 1,553 | 2.0 | 9 | 316 | 0.4 | |||||||||||||||||||||||||||
|
2019
|
99 | 5,148 | 6.5 | 92 | 4,665 | 5.9 | 7 | 483 | 0.6 | |||||||||||||||||||||||||||
|
2020
|
80 | 3,224 | 4.1 | 74 | 3,059 | 3.9 | 6 | 165 | 0.2 | |||||||||||||||||||||||||||
|
2021
|
177 | 7,553 | 9.5 | 170 | 7,163 | 9.0 | 7 | 390 | 0.5 | |||||||||||||||||||||||||||
|
2022
|
100 | 2,938 | 3.7 | 98 | 2,858 | 3.6 | 2 | 80 | 0.1 | |||||||||||||||||||||||||||
|
2023
|
249 | 8,169 | 10.3 | 248 | 8,124 | 10.2 | 1 | 45 | 0.1 | |||||||||||||||||||||||||||
|
2024
|
62 | 1,697 | 2.1 | 61 | 1,675 | 2.1 | 1 | 22 | * | |||||||||||||||||||||||||||
|
2025
|
69 | 5,389 | 6.8 | 65 | 5,317 | 6.7 | 4 | 72 | 0.1 | |||||||||||||||||||||||||||
|
2026
|
108 | 6,169 | 7.8 | 105 | 5,932 | 7.5 | 3 | 237 | 0.3 | |||||||||||||||||||||||||||
|
2027
|
159 | 4,642 | 5.8 | 158 | 4,625 | 5.8 | 1 | 17 | * | |||||||||||||||||||||||||||
|
2028
|
82 | 4,143 | 5.2 | 81 | 4,119 | 5.2 | 1 | 24 | * | |||||||||||||||||||||||||||
|
2029
|
49 | 1,151 | 1.4 | 49 | 1,151 | 1.4 | -- | -- | -- | |||||||||||||||||||||||||||
|
2030
|
20 | 929 | 1.2 | 20 | 929 | 1.2 | -- | -- | -- | |||||||||||||||||||||||||||
|
2031
|
27 | 650 | 0.8 | 27 | 650 | 0.8 | -- | -- | -- | |||||||||||||||||||||||||||
|
2032
|
2 | 57 | 0.1 | 2 | 57 | 0.1 | -- | -- | -- | |||||||||||||||||||||||||||
|
2033
|
7 | 460 | 0.6 | 7 | 460 | 0.6 | -- | -- | -- | |||||||||||||||||||||||||||
|
2034
|
2 | 276 | 0.3 | 2 | 276 | 0.3 | -- | -- | -- | |||||||||||||||||||||||||||
|
2037
|
2 | 354 | 0.4 | 2 | 354 | 0.4 | -- | -- | -- | |||||||||||||||||||||||||||
|
2043
|
1 | 13 | * | -- | -- | -- | 1 | 13 | * | |||||||||||||||||||||||||||
|
Totals
|
2,254 | $ | 79,431 | 100.0 | % | 1,868 | $ | 69,524 | 87.5 | % | 386 | $ | 9,907 | 12.5 | % | |||||||||||||||||||||
*Less
than 0.1%
|
(1)
|
Excludes
ten multi-tenant properties and 75 vacant unleased properties. The lease
expirations for properties under construction are based on the estimated
date of completion of those
properties.
|
|
(2)
|
Includes
rental revenue of $169 from properties reclassified as discontinued
operations and excludes revenue of $2,364 from ten multi-tenant properties
and from 75 vacant and unleased properties at December 31,
2009.
|
|
(3)
|
Represents
leases to the initial tenant of the property that are expiring for the
first time.
|
|
(4)
|
Represents
lease expirations on properties in the portfolio, which have previously
been renewed, extended or
re-tenanted.
|
State
Diversification
The
following table sets forth certain state-by-state information regarding Realty
Income’s property portfolio (excluding properties owned by Crest) as of December
31, 2009 (dollars in thousands):
|
State
|
Number
of
Properties
|
Percent
Leased
|
Approximate
Leasable
Square
Feet
|
Rental
Revenue for the Quarter Ended December 31, 2009(1)
|
Percentage
of
Rental
Revenue
|
|||||||||||||||
|
Alabama
|
63 | 97 | % | 425,300 | $ | 1,822 | 2.2 | % | ||||||||||||
|
Alaska
|
2 | 100 | 128,500 | 277 | 0.3 | |||||||||||||||
|
Arizona
|
79 | 99 | 392,700 | 2,479 | 3.0 | |||||||||||||||
|
Arkansas
|
17 | 94 | 92,400 | 377 | 0.5 | |||||||||||||||
|
California
|
65 | 97 | 1,178,900 | 4,390 | 5.4 | |||||||||||||||
|
Colorado
|
51 | 98 | 471,500 | 1,865 | 2.3 | |||||||||||||||
|
Connecticut
|
24 | 96 | 276,600 | 1,194 | 1.5 | |||||||||||||||
|
Delaware
|
17 | 100 | 33,300 | 429 | 0.5 | |||||||||||||||
|
Florida
|
166 | 93 | 1,426,700 | 6,534 | 8.0 | |||||||||||||||
|
Georgia
|
131 | 96 | 914,300 | 3,872 | 4.7 | |||||||||||||||
|
Idaho
|
12 | 100 | 80,700 | 339 | 0.4 | |||||||||||||||
|
Illinois
|
85 | 98 | 1,008,800 | 4,216 | 5.1 | |||||||||||||||
|
Indiana
|
81 | 96 | 686,400 | 3,244 | 4.0 | |||||||||||||||
|
Iowa
|
21 | 100 | 290,600 | 1,013 | 1.2 | |||||||||||||||
|
Kansas
|
33 | 88 | 573,200 | 1,118 | 1.4 | |||||||||||||||
|
Kentucky
|
22 | 100 | 110,600 | 679 | 0.8 | |||||||||||||||
|
Louisiana
|
32 | 100 | 184,900 | 899 | 1.1 | |||||||||||||||
|
Maine
|
3 | 100 | 22,500 | 161 | 0.2 | |||||||||||||||
|
Maryland
|
28 | 100 | 266,600 | 1,613 | 2.0 | |||||||||||||||
|
Massachusetts
|
64 | 98 | 575,400 | 2,576 | 3.1 | |||||||||||||||
|
Michigan
|
52 | 98 | 257,300 | 1,249 | 1.5 | |||||||||||||||
|
Minnesota
|
21 | 95 | 392,100 | 1,557 | 1.9 | |||||||||||||||
|
Mississippi
|
71 | 96 | 347,600 | 1,470 | 1.8 | |||||||||||||||
|
Missouri
|
62 | 94 | 640,100 | 2,109 | 2.6 | |||||||||||||||
|
Montana
|
2 | 100 | 30,000 | 76 | 0.1 | |||||||||||||||
|
Nebraska
|
19 | 95 | 196,300 | 478 | 0.6 | |||||||||||||||
|
Nevada
|
14 | 100 | 153,300 | 750 | 0.9 | |||||||||||||||
|
New
Hampshire
|
14 | 100 | 109,900 | 585 | 0.7 | |||||||||||||||
|
New
Jersey
|
33 | 100 | 261,300 | 1,936 | 2.4 | |||||||||||||||
|
New
Mexico
|
8 | 100 | 56,400 | 182 | 0.2 | |||||||||||||||
|
New
York
|
40 | 93 | 502,300 | 2,383 | 2.9 | |||||||||||||||
|
North
Carolina
|
96 | 97 | 548,300 | 2,850 | 3.5 | |||||||||||||||
|
North
Dakota
|
6 | 100 | 36,600 | 68 | 0.1 | |||||||||||||||
|
Ohio
|
136 | 96 | 845,500 | 3,323 | 4.1 | |||||||||||||||
|
Oklahoma
|
24 | 100 | 137,400 | 587 | 0.7 | |||||||||||||||
|
Oregon
|
18 | 94 | 297,300 | 894 | 1.1 | |||||||||||||||
|
Pennsylvania
|
98 | 99 | 677,200 | 3,507 | 4.3 | |||||||||||||||
|
Rhode
Island
|
3 | 100 | 11,000 | 58 | 0.1 | |||||||||||||||
|
South
Carolina
|
100 | 100 | 374,400 | 2,252 | 2.8 | |||||||||||||||
|
South
Dakota
|
9 | 100 | 24,900 | 102 | 0.1 | |||||||||||||||
|
Tennessee
|
133 | 96 | 621,800 | 2,925 | 3.6 | |||||||||||||||
|
Texas
|
212 | 97 | 2,280,000 | 7,918 | 9.7 | |||||||||||||||
|
Utah
|
4 | 100 | 25,200 | 91 | 0.1 | |||||||||||||||
|
Vermont
|
4 | 100 | 12,700 | 127 | 0.2 | |||||||||||||||
|
Virginia
|
104 | 98 | 637,100 | 3,513 | 4.3 | |||||||||||||||
|
Washington
|
36 | 94 | 286,200 | 790 | 1.0 | |||||||||||||||
|
West
Virginia
|
2 | 100 | 23,000 | 121 | 0.1 | |||||||||||||||
|
Wisconsin
|
21 | 90 | 252,700 | 779 | 0.9 | |||||||||||||||
|
Wyoming
|
1 | 100 | 4,200 | 18 | * | |||||||||||||||
|
Totals/Average
|
2,339 | 97 | % | 19,182,000 | $ | 81,795 | 100.0 | % | ||||||||||||
* Less
than 0.1%
|
(1)
|
Includes
rental revenue for all properties owned by Realty Income at December 31,
2009, including revenue from properties reclassified as discontinued
operations of $169.
|
This
annual report on Form 10-K, including the documents incorporated herein by
reference, contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. When
used in this annual report, the words "estimated", "anticipated", "expect",
"believe", "intend" and similar expressions are intended to identify
forward-looking statements. Forward-looking statements include discussions of
strategy, plans or intentions of management. 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 and the timing of these
acquisitions;
|
|
●
|
Our
intention to sell properties and the timing of these property
sales;
|
|
●
|
Our
intention to re-lease vacant
properties;
|
|
●
|
Anticipated
trends in our business, including trends in the market for long-term
net-leases of freestanding, single-tenant retail
properties;
|
|
●
|
Future
expenditures for development projects;
and
|
|
●
|
Profitability
of our subsidiary, Crest.
|
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 and future
events to differ materially from those set forth or contemplated in the
forward-looking statements are:
|
●
|
Our
continued qualification as a real estate investment
trust;
|
|
●
|
General
business and economic conditions;
|
|
●
|
Competition;
|
|
●
|
Fluctuating
interest rates;
|
|
●
|
Access
to debt and equity capital markets;
|
|
●
|
Continued
volatility and uncertainty in the credit markets and broader financial
markets;
|
|
●
|
Other
risks inherent in the real estate business including tenant defaults,
potential liability relating to environmental matters, illiquidity of real
estate investments, and potential damages from natural
disasters;
|
|
●
|
Impairments
in the value of our real estate
assets;
|
|
●
|
Changes
in the tax laws of the United States of
America;
|
|
●
|
The
outcome of any legal proceedings to which we are a party;
and
|
|
●
|
Acts
of terrorism and war.
|
Additional
factors that may cause risks and uncertainties include those discussed in the
sections entitled "Business", "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this annual
report.
Readers
are cautioned not to place undue reliance on forward-looking statements, which
speak only as of the date that this annual report was filed with the SEC. While
forward-looking statements reflect our good faith beliefs, they are not
guarantees of future performance. 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 annual report or
to reflect the occurrence of unanticipated events. In light of these risks and
uncertainties, the forward-looking events discussed in this annual report might
not occur.
Item
1A: Risk
Factors
This
"Risk Factors" section contains references to our "capital stock" and to our
"stockholders." Unless expressly stated otherwise, the references to
our "capital stock" represent our common stock and any class or series of our
preferred stock, while the references to our "stockholders" represent holders of
our common stock and any class or series of our preferred stock.
In
order to grow we need to continue to acquire investment
properties. The acquisition of investment properties may be subject
to competitive pressures.
We face
competition in the acquisition, operation and sale of property. We expect
competition from:
|
●
|
Businesses;
|
|
●
|
Individuals;
|
|
●
|
Fiduciary
accounts and plans; and
|
|
●
|
Other
entities engaged in real estate investment and
financing.
|
Some of
these competitors are larger than we are and have greater financial resources.
This competition may result in a higher cost for properties we wish to
purchase.
Negative
market conditions or adverse events affecting our existing or potential tenants,
or the industries in which they operate, could have an adverse impact on our
ability to attract new tenants, re-lease space, collect rent or renew leases,
which could adversely affect our cash flow from operations and inhibit
growth.
Cash
flow from operations depends in part on the ability to lease space to tenants on
economically favorable terms. We could be adversely affected by various facts
and events over which we have limited or no control, such as:
|
●
|
Lack
of demand in areas where our properties are
located;
|
|
●
|
Inability
to retain existing tenants and attract new
tenants;
|
|
●
|
Oversupply
of space and changes in market rental
rates;
|
|
●
|
Our
tenants' creditworthiness and ability to pay rent, which may be affected
by their operations, the current economic situation and competition within
their industries from other
operators;
|
|
●
|
Defaults
by and bankruptcies of tenants, failure of tenants to pay rent on a timely
basis, or failure of tenants to comply with their contractual obligations;
and
|
|
●
|
Economic
or physical decline of the areas where the properties are
located.
|
At any
time, any tenant may experience a downturn in its business that may weaken its
operating results or overall financial condition. As a result, a tenant may
delay lease commencement, fail to make rental payments when due, decline to
extend a lease upon its expiration, become insolvent or declare bankruptcy. Any
tenant bankruptcy or insolvency, leasing delay or failure to make rental
payments when due could result in the termination of the tenant's lease and
material losses to us.
If
tenants do not renew their leases as they expire, we may not be able to rent or
sell the properties. Furthermore, leases that are renewed, and some
new leases for properties that are re-leased, may have terms that are less
economically favorable than expiring lease terms, or may require us to incur
significant costs, such as renovations, tenant improvements or lease transaction
costs. Negative market conditions may cause us to sell vacant properties for
less than their carrying value, which could result in impairments. Any of these
events could adversely affect cash flow from operations and our ability to make
distributions to shareholders and service indebtedness. A significant portion of
the costs of owning property, such as real estate taxes, insurance and
maintenance, are not necessarily reduced when circumstances cause a decrease in
rental revenue from the properties. In a weakened financial condition, tenants
may not be able to pay these costs of ownership and we may be unable to recover
these operating expenses from them.
Further,
the occurrence of a tenant bankruptcy or insolvency could diminish the income we
receive from the tenant's lease or leases. In addition, a bankruptcy court might
authorize the tenant to terminate its leases with us. If that happens, our claim
against the bankrupt tenant for unpaid future rent would be subject to statutory
limitations that most likely would be substantially less than the remaining rent
we are owed under the leases. In addition, any claim we have for unpaid past
rent, if any, may not be paid in full. As a result, tenant bankruptcies may have
a material adverse effect on our results of operations.
Seventy-five
of our properties were available for lease or sale at December 31, 2009, of
which all but one were single-tenant properties. As of February 8, 2010,
transactions to lease or sell ten of the 75 properties were underway or
completed. At December 31, 2009, 36 of our properties under lease were
unoccupied and available for sublease by the tenants, all of which were current
with their rent and other obligations. During 2009, each of our tenants
accounted for less than 10% of our rental revenue.
For
2009, our tenants in the restaurant and convenience store industries accounted
for approximately 21.3% and 17.0%, respectively, of our rental revenue. A
downturn in either of these industries, whether nationwide or limited to
specific sectors of the United States, could adversely affect our tenants in
these industries, which in turn could have a material adverse affect on our
financial position, results of operations and our ability to pay the principal
of and interest on our debt securities and other indebtedness and to make
distributions on our common stock and preferred stock. Individually, each of the
other industries in our property portfolio accounted for less than 10% of our
rental revenue for 2009. Nevertheless, downturns in these other industries could
also adversely affect our tenants, which in turn could also have a material
adverse affect on our financial position, results of operations and our ability
to make debt payments and distributions on our common and preferred
stock.
In
addition, a substantial number of our properties are leased to middle-market
retail chains that generally have more limited financial and other resources
than certain upper-market retail chains, and therefore they are more likely to
be adversely affected by a downturn in their respective businesses or in the
regional or national economy.
As
a property owner, we may be subject to unknown environmental
liabilities.
Investments
in real property can create a potential for environmental liability. An owner of
property can face liability for environmental contamination created by the
presence or discharge of hazardous substances on the property. We can face such
liability regardless of:
|
●
|
Our
knowledge of the contamination;
|
|
●
|
The
timing of the contamination;
|
|
●
|
The
cause of the contamination; or
|
|
●
|
The
party responsible for the contamination of the
property.
|
There
may be environmental problems associated with our properties of which we are
unaware. In that regard, a number of our properties are leased to operators of
convenience stores that sell petroleum-based fuels, as well as to operators of
oil change and tune-up facilities. These facilities, and some other of our
properties, use, or may have used in the past, underground lifts or underground
tanks for the storage of petroleum-based or waste products, which could create a
potential for the release of hazardous substances.
The
presence of hazardous substances on a property may adversely affect our ability
to lease or sell that property and we may incur substantial remediation costs.
Although our leases generally require our tenants to operate in compliance with
all applicable federal, state and local environmental laws, ordinances and
regulations, and to indemnify us against any environmental liabilities arising
from the tenants’ activities on the property, we could nevertheless be subject
to strict liability by virtue of our ownership interest. There also can be no
assurance that our tenants could or would satisfy their indemnification
obligations under their leases. The discovery of environmental liabilities
attached to our properties could have an adverse effect on our results of
operations, our financial condition or our ability to make distributions to
stockholders and to pay the principal of and interest on our debt securities and
other indebtedness.
In
addition, several of our properties were built during the period when asbestos
was commonly used in building construction and other buildings with asbestos may
be acquired by us in the future. Environmental laws govern the presence,
maintenance and removal of asbestos-containing materials, or ACMs, and require
that owners or operators of buildings containing asbestos properly manage and
maintain the asbestos, that they adequately inform or train those who may come
into contact with asbestos and that they undertake special precautions,
including removal or other abatement in the event that asbestos is disturbed
during renovation or demolition of a building. These laws may impose fines and
penalties on building owners or operators for failure to comply with these
requirements and may allow third parties to seek recovery from owners or
operators for personal injury associated with exposure to asbestos
fibers.
It is
also possible that some of our properties may contain or develop harmful mold,
which could lead to liability for adverse health effects and costs of
remediation of the problem. When excessive moisture accumulates in buildings or
on building materials, mold growth may occur, particularly if the moisture
problem remains undiscovered or is not addressed over a period of time. Some
molds may produce airborne toxins or irritants. Concern about indoor exposure to
mold has been increasing, as exposure to mold may cause a variety of adverse
health effects and symptoms,
including
allergic or other reactions. As a result, should our tenants or their employees
or customers be exposed to mold at any of our properties we could be required to
undertake a costly remediation program
to
contain or remove the mold from the affected property, which would reduce our
cash available for distribution. In addition,
exposure to mold by our tenants or others could expose us to liability if
property damage or health concerns arise.
Compliance. We
have not been notified by any governmental authority, and are not otherwise
aware, of any material noncompliance, liability or claim relating to hazardous
substances, toxic substances, or petroleum products in connection with any of
our present properties. In addition, we believe we are in compliance in all
material respects with all present federal, state and local laws relating to
ACMs. Nevertheless, if environmental contamination should exist, we could be
subject to strict liability by virtue of our ownership interest.
Insurance and
Indemnity. In June 2005, we entered into a seven-year
environmental insurance policy ("June 2005 policy") which expires on June 1,
2012 on our property portfolio which replaced the previous five-year
environmental insurance policy. The limits on our current policy are
$10 million per occurrence, and $50 million in the aggregate, subject to a
$40,000 self insurance retention, per occurrence, for properties with
underground storage tanks and a $100,000 self insurance retention, per
occurrence, for all other properties.
Additionally,
in December 2009, we entered into a ten-year environmental insurance policy that
expires in December 2019 that will initially act in an excess capacity to our
June 2005 policy. On June 1, 2012, this policy will become our
primary environmental policy with the same limits as the June 2005 policy,
except that once we pay a total of $1 million for self insurance retention,
there will be a $50,000 per loss maintenance fee, rather than the $100,000 self
insurance retention, per occurrence, for general environmental
claims.
It is
possible that our insurance could be insufficient to address any particular
environmental situation and that, in the future, we could be unable to obtain
insurance for environmental matters at a reasonable cost, or at all. Our tenants
are generally responsible for, and indemnify us against, liabilities for
environmental matters that occur on our properties. For properties
that have underground storage tanks, in addition to providing an indemnity in
our favor, the tenants generally obtain environmental insurance or rely upon the
state funds in the states where these properties are located to reimburse
tenants for environmental remediation.
If
we fail to qualify as a real estate investment trust, the amount of dividends we
are able to pay would decrease, which could adversely affect the market price of
our capital stock and could adversely affect the value of our debt
securities.
Commencing
with our taxable year ended December 31, 1994, we believe that we have been
organized and have operated, and we intend to continue to operate, so as to
qualify as a "REIT" under Sections 856 through 860 of the Code. However, we
cannot assure you that we have been organized or have operated in a manner that
has satisfied the requirements for qualification as a REIT, or that we will
continue to be organized or operate in a manner that will allow us to continue
to qualify as a REIT.
Qualification
as a REIT involves the satisfaction of numerous requirements under highly
technical and complex Code provisions, for which there are only limited judicial
and administrative interpretations, as well as the determination of various
factual matters and circumstances not entirely within our control.
For
example, in order to qualify as a REIT, at least 95% of our gross income in each
year must be derived from qualifying sources, and we must pay distributions to
stockholders aggregating annually at least 90% of our REIT taxable income (as
defined in the Code and determined without regard to the dividends paid
deduction and by excluding net capital gains).
In the
future, it is possible that legislation, new regulations, administrative
interpretations or court decisions will change the tax laws with respect to
qualification as a REIT, or the federal income tax consequences of such
qualification.
If we
fail to satisfy all of the requirements for qualification as a REIT, we may be
subject to certain penalty taxes or, in some circumstances, we may fail to
qualify as a REIT. If we were to fail to qualify as a REIT in any
taxable year:
|
●
|
We
would be required to pay federal income tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate
rates;
|
|
●
|
We
would not be allowed a deduction in computing our taxable income for
amounts distributed to our
stockholders;
|
|
●
|
We
could be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is
lost;
|
|
●
|
We
would no longer be required to make distributions to stockholders;
and
|
|
●
|
This
treatment would substantially reduce amounts available for investment or
distribution to stockholders because of the additional tax liability for
the years involved, which could have a material adverse effect on the
market price of our capital stock and the value of our debt
securities.
|
Even if
we qualify for and maintain our REIT status, we may be subject to certain
federal, state and local taxes on our income and property. For example, if we
have net income from a prohibited transaction, that income will be subject to a
100% tax. Our subsidiary, Crest, is subject to federal and state taxes at the
applicable tax rates on its income and property.
Distributions
requirements imposed by law limit our flexibility.
To
maintain our status as a REIT for federal income tax purposes, we generally are
required to distribute to our stockholders at least 90% of our REIT taxable
income, determined without regard to the dividends paid deduction and by
excluding net capital gains each year. We also are subject to tax at regular
corporate rates to the extent that we distribute less than 100% of our REIT
taxable income (including net capital gains) each year.
In
addition, we are subject to a 4% nondeductible excise tax to the extent that we
fail to distribute during any calendar year at least the sum of 85% of our
ordinary income for that calendar year, 95% of our capital gain net income for
the calendar year, and any amount of that income that was not distributed in
prior years.
We
intend to continue to make distributions to our stockholders to comply with the
distribution requirements of the Code as well as to reduce our exposure to
federal income taxes and the nondeductible excise tax. Differences in timing
between the receipt of income and the payment of expenses to arrive at taxable
income, along with the effect of required debt amortization payments, could
require us to borrow funds on a short-term basis to meet the distribution
requirements that are necessary to achieve the tax benefits associated with
qualifying as a REIT.
Future
issuances of equity securities could dilute the interest of holders of our
common stock.
Our
future growth will depend, in large part, upon our ability to raise additional
capital. If we were to raise additional capital through the issuance of equity
securities, we could dilute the interests of holders of our common stock. The
interests of our common stockholders could also be diluted by the issuance of
shares of common stock upon the exercise of outstanding options or pursuant to
stock incentive plans. Likewise, our Board of Directors is authorized to cause
us to issue preferred stock of any class or series (with dividend, voting and
other rights as determined by the Board of Directors). Accordingly, the Board of
Directors may authorize the issuance of preferred stock with voting, dividend
and other similar rights that could dilute, or otherwise adversely affect, the
interest of holders of our common stock.
We
are subject to risks associated with debt and capital stock
financing.
We
intend to incur additional indebtedness in the future, including borrowings
under our $355 million acquisition credit facility. At December 31, 2009, we had
borrowings outstanding under our $355 million acquisition credit facility of
$4.6 million and we had a total of $1.355 billion of outstanding credit facility
borrowings and aggregate principal amount of outstanding unsecured senior debt
securities. To the extent that new indebtedness is added to our current debt
levels, the related risks that we now face would increase. As a result, we are
and will be subject to risks associated with debt financing, including the risk
that our cash flow could be insufficient to meet required payments on our debt.
We also face variable interest rate risk as the interest rate on our $355
million credit facility is variable and could therefore increase over
time. We also face the risk that we may be unable to refinance or
repay our debt as it comes due. Given the recent disruptions in the financial
markets, we also face the risk that one or more of the participants in our
credit facility may not be able to lend us money.
In
addition, our $355 million credit facility contains provisions that could limit
the amount of distributions payable by us on our common stock and preferred
stock. In particular, our $355 million acquisition credit facility provides that
the aggregate amount of cash distributions paid on, plus any payments made to
repurchase, our common stock and preferred stock may not exceed the sum of (a)
95% of our funds from operations (as defined in the credit facility) plus (b)
cash distributions on our preferred stock, determined as of the end of each
fiscal quarter for the four fiscal quarters then ending, except that we may
repurchase preferred stock with the net proceeds from the issuance of our common
stock or preferred stock. The credit facility further provides that, in the
event of a failure to pay principal, interest or any other amount payable
thereunder when due or upon the occurrence of certain events of bankruptcy,
insolvency or reorganization with respect to us or any of our subsidiaries, we
and our subsidiaries may not pay any distributions on, or repurchase, any shares
of our capital stock, including our common stock and preferred stock. In
addition, the credit facility provides that, if any other event of default (as
defined in the credit facility) thereunder exists, we and our subsidiaries may
not pay any distributions on, or repurchase, any shares of our capital stock,
including our common stock and preferred stock, except that we may pay cash
distributions to stockholders in the minimum amount necessary to maintain our
status as a REIT. If this were to occur, it would likely have a
material adverse effect on the market price of our outstanding common and
preferred stock and on the value of our debt securities and may adversely affect
our ability to qualify as a REIT or our tax treatment as a REIT.
Our
indebtedness could also have other important consequences to holders of our
common and preferred stock, including:
|
●
|
Increasing
our vulnerability to general adverse economic and industry
conditions;
|
|
●
|
Limiting
our ability to obtain additional financing to fund future working capital,
capital expenditures and other general corporate
requirements;
|
|
●
|
Requiring
the use of a substantial portion of our cash flow from operations for the
payment of principal and interest on our indebtedness, thereby reducing
our ability to use our cash flow to fund working capital, capital
expenditures and general corporate
requirements;
|
|
●
|
Limiting
our flexibility in planning for, or reacting to, changes in our business
and our industry; and
|
|
●
|
Putting
us at a disadvantage compared to our competitors with less
indebtedness.
|
Our
business operations may not generate the cash needed to make distributions on
our capital stock or to service our indebtedness.
Our
ability to make distributions on our common stock and preferred stock and
payments on our indebtedness and to fund planned capital expenditures will
depend on our ability to generate cash in the future. We cannot
assure you that our business will generate sufficient cash flow from operations
or that future borrowings will be available to us in an amount sufficient to
enable us to make distributions on our common stock and preferred stock, to pay
our indebtedness or to fund our other liquidity needs.
The
market value of our capital stock and debt securities could be substantially
affected by various factors.
The
market value of our capital stock and debt securities will depend on many
factors, which may change from time to time, including:
|
●
|
Prevailing
interest rates, increases in which may have an adverse effect on the
market value of our capital stock and debt
securities;
|
|
●
|
The
market for similar securities issued by other
REITs;
|
|
●
|
General
economic and financial market
conditions;
|
|
●
|
The
financial condition, performance and prospects of us, our tenants and our
competitors;
|
|
●
|
Changes
in financial estimates or recommendations by securities analysts with
respect to us, our competitors or our
industry;
|
|
●
|
Changes
in our credit ratings; and
|
|
●
|
Actual
or anticipated variations in quarterly operating
results.
|
In
addition, over the last two years, stock prices in the U.S. markets have been
experiencing extreme price fluctuations, and the market value of our common
stock has fluctuated significantly during this period. As a result of these and
other factors, investors who purchase our capital stock and debt securities may
experience a decrease, which could be substantial and rapid, in the market value
of our capital stock and debt securities, including decreases unrelated to our
operating performance or prospects.
Real
estate ownership is subject to particular economic conditions that may have a
negative impact on our revenue.
We are
subject to all of the inherent risks associated with the ownership of real
estate. In particular, we face the risk that rental revenue from our
properties may be insufficient to cover all corporate operating expenses, debt
service payments on indebtedness we incur and distributions on our capital
stock. Additional real estate ownership risks include:
|
●
|
Adverse
changes in general or local economic
conditions;
|
|
●
|
Changes
in supply of, or demand for, similar or competing
properties;
|
|
●
|
Changes
in interest rates and operating
expenses;
|
|
●
|
Competition
for tenants;
|
|
●
|
Changes
in market rental rates;
|
|
●
|
Inability
to lease properties upon termination of existing
leases;
|
|
●
|
Renewal
of leases at lower rental rates;
|
|
●
|
Inability
to collect rents from tenants due to financial hardship, including
bankruptcy;
|
|
●
|
Changes
in tax, real estate, zoning and environmental laws that may have an
adverse impact upon the value of real
estate;
|
|
●
|
Uninsured
property liability;
|
|
●
|
Property
damage or casualty losses;
|
|
●
|
Unexpected
expenditures for capital improvements or to bring properties into
compliance with applicable federal, state and local
laws;
|
|
●
|
The
need to periodically renovate and repair our
properties;
|
|
●
|
Physical
or weather-related damage to
properties;
|
|
●
|
The
potential risk of functional obsolescence of properties over
time;
|
|
●
|
Acts
of terrorism and war; and
|
|
●
|
Acts
of God and other factors beyond the control of our
management.
|
An
uninsured loss or a loss that exceeds the policy limits on our properties could
subject us to lost capital or revenue on those properties.
Under
the terms and conditions of the leases currently in force on our properties,
tenants generally are required to indemnify and hold us harmless from
liabilities resulting from injury to persons, air, water, land or property, due
to activities conducted on the properties, except for claims arising from the
negligence or intentional misconduct of us or our agents. Additionally, tenants
are generally required, at the tenant's expense, to obtain and keep in full
force during the term of the lease, liability and property damage insurance
policies. The insurance policies our tenants are required to maintain for
property damage are generally in amounts not less than the full replacement cost
of the improvements less slab, foundations, supports and other customarily
excluded improvements. Our tenants are generally required to maintain general
liability coverage varying between $1,000,000 and $10,000,000 depending on the
tenant and the industry in which the tenant operates.
In
addition to the indemnities and required insurance policies identified above,
many of our properties are also covered by flood and earthquake insurance
policies (subject to substantial deductibles) obtained and paid for by the
tenants as part of their risk management programs. Additionally, we have
obtained blanket liability, flood and earthquake (subject to substantial
deductibles) and property damage insurance policies to protect us and our
properties against loss should the indemnities and insurance policies provided
by the tenants fail to restore the properties to their condition prior to a
loss. However, should a loss occur that is uninsured or in an amount exceeding
the combined aggregate limits for the policies noted above, or in the event of a
loss that is subject to a substantial deductible under an insurance policy, we
could lose all or part of our capital invested in, and anticipated revenue from,
one or more of the properties, which could have a material adverse effect on our
results of operations or financial condition and on our ability to pay the
principal of and interest on our debt securities and other indebtedness and to
make distributions to our stockholders. Given the recent disruptions in the
insurance industry, we also face the risk that our insurance carriers may not be
able to provide payment under any potential claims that might arise under the
terms of our insurance policies, and we may not have the ability to purchase
insurance policies we desire.
Compliance
with the Americans with Disabilities Act of 1990 and fire, safety, and other
regulations may require us to make unintended expenditures that could adversely
impact our results of operations.
Our
properties are generally required to comply with the Americans with Disabilities
Act of 1990, or the ADA. The ADA has separate compliance requirements for
"public accommodations" and "commercial facilities," but generally requires that
buildings be made accessible to people with disabilities. Compliance with the
ADA requirements could require removal of access barriers and non-compliance
could result in imposition of fines by the U.S. government or an award of
damages to private litigants. The retailers to whom we lease properties are
obligated by law to comply with the ADA provisions, and we believe that these
retailers may be obligated to cover costs associated with compliance. If
required changes involve greater expenditures than anticipated, or if the
changes must be made on a more accelerated basis than anticipated, the ability
of these retailers to cover costs could be adversely affected and we could be
required to expend our own funds to comply with the provisions of the ADA, which
could materially adversely affect our results of operations or financial
condition and our ability to pay the principal of and interest on our debt
securities and other indebtedness and to make distributions to our stockholders.
In addition, we are required to operate our properties in compliance with fire
and safety regulations, building codes and other land use regulations, as they
may be adopted by governmental agencies and bodies and become applicable to our
properties. We may be required to make substantial capital expenditures to
comply with those requirements and these expenditures could have a material
adverse effect on our results of operations or financial condition and our
ability to pay the principal of and interest on our debt securities and other
indebtedness and to make distributions to our stockholders.
Property
taxes may increase without notice.
The
real property taxes on our properties and any other properties that we develop
or acquire in the future may increase as property tax rates change and as those
properties are assessed or reassessed by tax authorities.
We
depend on key personnel.
We
depend on the efforts of our executive officers and key employees. The loss of
the services of our executive officers and key employees could have a material
adverse effect on our results of operations or financial condition and on our
ability to pay the principal and interest on our debt securities and other
indebtedness and to make distributions to our stockholders. It is possible that
we will not be able to recruit additional personnel with equivalent experience
in the retail, net-lease industry.
Terrorist
attacks and other acts of violence or war may affect the value of our debt and
equity securities, the markets in which we operate and our results of
operations.
Terrorist
attacks may negatively affect our operations, the market price of our capital
stock and the value of our debt securities. There can be no assurance that there
will not be further terrorist attacks against the United States or U.S.
businesses. These attacks, or armed conflicts, may directly impact our physical
facilities or the businesses of our tenants.
If
events like these were to occur, they could cause consumer confidence and
spending to decrease or result in increased volatility in the U.S. and worldwide
financial markets and economy. They also could result in or prolong an economic
recession in the U.S. or abroad. Any of these occurrences could have a
significant adverse impact on our operating results and revenues and on the
market price of our capital stock and on the value of our debt securities. It
could also have an adverse effect on our ability to pay principal and interest
on our debt securities or other indebtedness and to make distributions to our
stockholders.
Disruptions
in the financial markets could affect our ability to obtain financing on
reasonable terms and have other adverse effects on us and the market price of
our common stock.
Over
the last two years, the United States stock and credit markets have experienced
significant price volatility, dislocations and liquidity disruptions, which have
caused market prices of many stocks to fluctuate substantially and the spreads
on prospective debt financings to widen considerably. These circumstances have
materially impacted liquidity in the financial markets, making terms for certain
financings less attractive, and in certain cases have resulted in the
unavailability of certain types of financing. Continued uncertainty in the stock
and credit markets may negatively impact our ability to access additional
financing at reasonable terms, which may negatively affect our ability to make
acquisitions. A prolonged downturn in the stock or credit markets may cause us
to seek alternative sources of potentially less attractive financing, and may
require us to adjust our business plan accordingly. In addition, these factors
may make it more difficult for us to sell properties or may adversely affect the
price we receive for properties that we do sell, as prospective buyers may
experience increased costs of financing or difficulties in obtaining financing.
These events in the stock and credit markets may make it more difficult or
costly for us to raise capital through the issuance of our common stock or
preferred stock. These disruptions in the financial markets also may have a
material adverse effect on the market value of our common stock, the income we
receive from our properties and the lease rates we can charge for our
properties, and may have other unknown adverse effects on us or the economy in
general.
Inflation
may adversely affect our financial condition and results of
operations.
Although
inflation has not materially impacted our results of operations in the recent
past, increased inflation could have a more pronounced negative impact on any
variable rate debt we incur in the future and on our results of operations.
During times when inflation is greater than increases in rent, as provided for
in our leases, rent increases may not keep up with the rate of inflation.
Likewise, even though net leases reduce our exposure to rising property expenses
due to inflation, substantial inflationary pressures and increased costs may
have an adverse impact on our tenants if increases in their operating expenses
exceed increases in revenue, which may adversely affect the tenants' ability to
pay rent.
Current
volatility in market and economic conditions may impact the accuracy of the
various estimates used in the preparation of our financial statements and
footnotes to the financial statements.
Various
estimates are used in the preparation of our financial statements, including
estimates related to asset and liability valuations (or potential impairments),
and various receivables. Often these estimates require the use of market data
values which are currently difficult to assess, as well as estimates of future
performance or receivables collectability which can also be difficult to
accurately predict. Although management believes it has been prudent and used
reasonable judgment in making these estimates, it is possible that actual
results may differ from these estimates.
Item
1B: Unresolved Staff comments
There
are no unresolved staff comments.
Item
2: Properties
Information
pertaining to our properties can be found under Item 1.
Item
3: Legal Proceedings
We are
subject to certain claims and lawsuits in the ordinary course of business, the
outcome of which cannot be determined at this time. In the opinion of
management, any liability we might incur upon the resolution of these claims and
lawsuits will not, in the aggregate, have a material adverse effect on our
consolidated financial position or results of operations.
No
matters were submitted to stockholders during the fourth quarter of the fiscal
year.
PART
II
A. Our
common stock is traded on the NYSE under the ticker symbol “O.” The following
table shows the high and low sales prices per share for our common stock as
reported by the NYSE, and distributions declared per share of common stock for
the periods indicated.
|
Price
Per Share
|
||||||||||||
|
of
Common Stock
|
Distributions
|
|||||||||||
|
High
|
Low
|
Declared(1)
|
||||||||||
|
2009
|
||||||||||||
|
First
quarter
|
$ | 23.41 | $ | 14.26 | $ | 0.425563 | ||||||
|
Second
quarter
|
23.23 | 17.90 | 0.426500 | |||||||||
|
Third
quarter
|
28.20 | 19.83 | 0.427438 | |||||||||
|
Fourth
quarter
|
27.53 | 22.17 | 0.428375 | |||||||||
|
Total
|
$ | 1.707876 | ||||||||||
|
2008
|
||||||||||||
|
First
quarter
|
$ | 27.16 | $ | 20.27 | $ | 0.410875 | ||||||
|
Second
quarter
|
28.15 | 22.67 | 0.412750 | |||||||||
|
Third
quarter
|
34.86 | 21.38 | 0.419625 | |||||||||
|
Fourth
quarter
|
26.50 | 15.00 | 0.424000 | |||||||||
|
Total
|
$ | 1.667250 | ||||||||||
(1)
Common stock cash distributions currently are declared monthly by us based on
financial results for the prior months. At December 31, 2009, a
distribution of $0.143 per common share had been declared and was paid in
January 2010.
There
were 8,755 registered holders of record of our common stock as of January 1,
2010. We estimate that our total number of shareholders is approximately 99,000
when we include both registered and beneficial holders of our common
stock.
Item
6: Selected Financial Data
|
|
(not
covered by Report of Independent Registered Public Accounting
Firm)
|
|
|
(dollars
in thousands, except for per share
data)
|
|
As
of or for the years ended December 31,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Total
assets (book value)
|
$ | 2,914,787 | $ | 2,994,179 | $ | 3,077,352 | $ | 2,546,508 | $ | 1,920,988 | ||||||||||
|
Cash
and cash equivalents
|
10,026 | 46,815 | 193,101 | 10,573 | 65,704 | |||||||||||||||
|
Lines
of credit and notes payable
|
1,354,600 | 1,370,000 | 1,470,000 | 920,000 | 891,700 | |||||||||||||||
|
Total
liabilities
|
1,426,778 | 1,439,518 | 1,539,260 | 970,516 | 931,774 | |||||||||||||||
|
Total
stockholders’ equity
|
1,488,009 | 1,554,661 | 1,538,092 | 1,575,992 | 989,214 | |||||||||||||||
|
Net
cash provided by operating activities
|
226,707 | 246,155 | 318,169 | 86,945 | 109,557 | |||||||||||||||
|
Net
change in cash and cash equivalents
|
(36,789 | ) | (146,286 | ) | 182,528 | (55,131 | ) | 63,563 | ||||||||||||
|
Total
revenue
|
327,581 | 327,773 | 291,483 | 234,527 | 190,460 | |||||||||||||||
|
Income
from continuing operations
|
122,133 | 115,427 | 123,778 | 102,227 | 84,717 | |||||||||||||||
|
Income
from discontinued operations
|
8,994 | 16,414 | 16,631 | 8,554 | 14,402 | </ | ||||||||||||||