Realty Income 2010 Annual Report
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R e a lty Inco me 2 2010 Annual Report
2010 Contents
Our Mission 4
Our Long-Term Business Plan 5
Historical Financial Performance 6
Letter to Fellow Shareholders 10
Investor Returns 11
2010 Summary of Operations 12
Investments for Now and the Future 14
Widening the Investment Net 14
Diageo — The Tenant and the Wine Business 21
What We Own 22
What’s Next? 23
More Details About Our 2010 Real Estate and Financial Performance 23
Stable Financial Performance and Conservative Balance Sheet 24
Renewing Our Monthly Dividend Commitment 25
Charts of Interest
Dividends Paid per Common Share 10
Yield Comparisons 11
Total Return Comparisons 11
The Magic of Rising Dividends Over Time 12
Realty Income Historical Performance vs. Major Stock Indices 13
Number of Properties 22
Portfolio Occupancy 23
Total Revenue 24
FFO Per Common Share 25
Comparison of $100 Invested in Realty Income in 1994 vs. Major Stock Indices 26
We Are
The Monthly Dividend
Company®
Monthly dividends
are our mission,
our passion,
our reason to be.
Monthly dividends
give our shareholders
the freedom to
reinvent themselves,
engage others and
pursue their dreams.
R e a lty Income 4 2010 Annual Report
OUR LONG-TERM BUSINESS PLAN
• Pay 12 Monthly Dividends
• Raise the Dividend
• Maintain a Conservative Balance Sheet
• Maintain High Portfolio Occupancy
• Acquire Additional Properties
• Tell More People about The Monthly Dividend Company®
• Remain Conservative
THE RESULTS SO FAR ...
• 485 Consecutive Monthly Dividends
• 60 Dividend Increases
• $1.9 Billion in Dividends Paid
2010 RESULTS
• 2,496 Properties Owned
• 96.6% Occupancy
• 186 Properties Acquired for $713.5 Million
• $182.5 Million in Monthly Dividends Paid
• Four Dividend Increases
• 38.6% Return to Shareholders
R ealty Inco me 5 2 010 Annual Report
Historical Financia
For the Years Ended December 31, 2010 2009 2
2
2
2
2
2
2
2
2
1
1
1
1
1
1
Total revenue (1) $ 346,709,000 $ 328,794,000 $
$ 2
$
$
1
$
$
1
$
$
1
$
1
$
1
$
8
$ 6
$
$ 5
$ 4
Net income available to
common stockholders $ 106,531,000 $ 106,874,000 $
1
Funds from operations (“FFO”)(2) $ 193,713,000 $ 190,444,000 $
Adjusted funds from operations (“AFFO”)(2) $ 197,256,000 $ 192,739,000 $
Dividends paid to common stockholders $ 182,500,000 $ 178,008,000 $
1
$
$
$
1
1
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
6
6
5
$
$
$
$
$
$
$
5
$
$ 3
$ 5
$ 5
$ 4
$
$
$
$
$ 2
$ 4
$ 3
$ 3
$
$ 3
$ 3
$
Special dividend paid
$
5
$
5
AT YEA R END
Real estate at cost, before
accumulated depreciation(3) $ 4,112,862,000 $ 3,439,456,000 $
$ 3
$
$ 2
$
$ 1
$ 1
$ 1
$ 1
$ 1
$
$ 6
$
$ 5
$ 4
Number of properties 2,496 2,339 2
2
1
1
1
1
1
1
1
1
9
8
7
6
6
Gross leasable square feet 21,215,800 19,182,000 1
1
1
1
1
1
9
9
9
8
7
6
5
4
4
Properties acquired (4) 186 16 1
3
3
1
1
3
1
1
2 1
1
9 6 5 4
Cost of properties acquired(4) $ 713,534,000 $
57,937,000 $
$ 5
$ 7
$
4
$ 2
$
3
$ 1
$
1
$
9
$
1
$ 1
$ 1
$ 5
$ 6
$
3
Properties sold 28 25 2 1 1 2 4 3 3 3 2 3 5 1 7 3 5
Number of retail industries 32 30 3 3 2 2 3 2 2 2 2 2 2 1 8 7 5
Number of states 49 49 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4
Portfolio occupancy rate 96.6% 96.8% 9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
Remaining weighted average
lease term in years 11.4 11.2 1
1
1
1
1
1
1
1
9 1
1
9 9 9 9
PER CO MMO N SHA RE DATA(5)
Net income (diluted) $
Funds from operations (“FFO”)(2) $
Adjusted funds from operations (“AFFO”)(2) $
1.01 $
1.83 $
1.86 $
1.03 $
1
$
1
$
1
$
1
$
1
$
1
$
0
$
$
0
$
0
$
0
$
1.84 $
$
$
$
$
$
1.86 $
$
$
$
$
$
Dividends paid $
1.722 $
1.707 $
$
$
$
$
1
$
$
0
$
Special dividend $
Annualized dividend amount(6) $
1.731 $
1.716 $
$
1
$
$
$
$
1
$
$
$
$
$
1
$
$
$
$
0
0
$
$
$
$
$
$
$
$
$
$
$
$
$
$
0
1
1
$
$
$
$
$
$
$
$
$
$
$
$
0
0
0
Common shares outstanding 118,058,988 104,286,705 1
7
7
5
5
5
4
4
3
INVESTMENT RESULTS
Closing price on December 31, $
34.20 $
25.91 $
2
$
2
$
$
$
$
8
Dividend yield(7) (8) (9) 6.6% 7.4% 6
5
6
5
6
6
7
9
1
8
7
7
8
1
9
Total return to stockholders(9) (10) 38.6% 19.3% –
3
3
–9
3
2
2
2
3
–
5
1
1
4
2
(1) Total revenue includes amounts reclassified to income from discontinued operations, but excludes revenue from Crest Net Lease, a subsidiary of Realty Income.
(2) Refer to Management’s Discussion and Analysis for FFO and AFFO definition and reconciliation to net income available to common stockholders.
(3) Does not include properties held for sale.
(4) Includes properties acquired by Realty Income and Crest Net Lease.
(5) All share and per share amounts reflect the 2-for-1 stock split on December 31, 2004.
(6) Annualized dividend amount reflects the December declared dividend rate per share multiplied by twelve.
Real ty Inco me 6 2010 Annual Repo rt
2
2
al Performance
2008 2007 2006 2005 2004 2
2
2
2
1
1
1
1
1
1
$
$
$ 331,701,000 $ 297,396,000 $ 240,626,000 $
197,751,000 $ 177,606,000 $
1
$
$
1
$
1
$
1
$
8
$ 6
$
$ 5
$ 4
$ 1
$ 1
$
107,588,000 $ 116,156,000 $ 99,419,000 $ 89,716,000 $ 90,168,000 $
$
$
$
$
$ 185,524,000 $
189,675,000 $ 155,799,000 $ 129,647,000 $ 118,181,000 $
$ 192,003,000 $
193,079,000 $ 158,763,000 $ 130,843,000 $ 126,424,000 $
$ 1
$ 1
$
169,655,000 $ 157,659,000 $ 129,667,000 $ 108,575,000 $ 97,420,000 $
$
$
$
$
$
$
$
$
$
$
$
$
6
6
5
$
$
$
$
$
$
$
5
$
$ 3
$ 5
$ 5
$ 4
$
$
$
$
$ 2
$ 4
$ 3
$ 3
$
$ 3
$ 3
$
$
5
$
5
$
$
$ 3,408,910,000 $ 3,238,794,000 $ 2,743,973,000 $ 2,096,156,000 $ 1,691,283,000 $ 1
$ 1
$ 1
$ 1
$ 1
$
$ 6
$
$ 5
$ 4
2
2
2,348 2,270 1,955 1,646 1,533 1
1
1
1
1
9
8
7
6
6
2
1
19,106,700 18,504,800 16,740,100 13,448,600 11,986,100 1
9
9
9
8
7
6
5
4
4
1
1 108 357 378 156 194 3
1
1
2 1
1
9 6 5 4
$
$
$ 189,627,000 $ 533,726,000 $ 769,900,000 $
486,553,000 $ 215,314,000 $
3
$ 1
$
1
$
9
$
1
$ 1
$ 1
$ 5
$ 6
$
3
2 2 29 10 13 23 43 3 3 3 2 3 5 1 7 3 5
3 3 30 30 29 29 30 2 2 2 2 2 2 1 8 7 5
4 4 49 49 48 48 48 4 4 4 4 4 4 4 4 4 4
9
9
97.0% 97.9% 98.7% 98.5% 97.9% 9
9
9
9
9
9
9
9
9
9
C
N
N
1
1
11.9 13.0 12.9 12.4 12.0 1
1
1
9 1
1
9 9 9 9
$
1
$
1
$
1.06 $
1.16 $
1.11 $
1.12 $
1.15 $
1
$
1
$
0
$
$
0
$
$
$
$
$ 1.83 $
1.89 $ 1.73 $ 1.62 $
1.50 $
$ 1.90 $
1.92 $ 1.77 $ 1.63 $
1.61 $
$
1
$
1
$ 1.662 $
1.560 $ 1.437 $ 1.346 $
1.241 $
1
$
$
0
$
$
0
A
$
$
1.701 $
1.641 $
1.518 $ 1.395 $
1.32 $
1
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
0
1
1
$
$
$
$
$
$
$
0
$
$
$
$
$
$
$
0
0
0
1
1
104,211,541 101,082,717 100,746,226 83,696,647 79,301,630 7
6
6
5
5
5
5
4
4
3
$
3
$
2
$
23.15 $
27.02 $
27.70 $
21.62 $
25.29 $
2
$
1
$
1
$
$
$
1
$
1
$
$
$
8
6
7
6.1% 5.6% 6.7% 5.3% 6.2%
3
1
–8.2% 3.2% 34.8% –9.2% 32.7%
9
1
2
3
7
5
8
1
1
4
(7) Dividend yield was calculated by dividing the dividend paid per share, during the year, by the closing share price on December 31 of the previous year.
(8) Dividend yield excludes special dividends.
(9) The 1994 dividend yield is based on the annualized dividends for the period from August 15, 1994 (the date of the consolidation of
the predecessors to the Company) to December 31, 1994. The 1994 total return is based on the price change from the opening on
October 18, 1994 (the Company’s first day of trading) to December 31, 1994 plus the annualized dividend yield.
R ealty Inco me 7 2 010 Annual Repo rt
2
2
2
2
2
2
2
2003 2002 2001 2000 1999 1
1
1
1
1
$
$
$
$ 2
$
$
1
$
$
150,370,000 $ 137,600,000 $
121,081,000 $
116,310,000 $
104,510,000 $
8
$ 6
$
$ 5
$ 4
c
$ 1
$ 1
$
1
$
$
$
76,722,000 $ 68,954,000
$
57,846,000 $
45,076,000 $
41,012,000 $
$
5
$
5
$ 103,366,000 $ 93,539,000 $
76,378,000 $
67,239,000 $
65,917,000 $
$ 106,659,000 $ 95,844,000 $
78,504,000 $
67,836,000 $
66,330,000 $
$
83,842,000 $ 78,042,000 $
64,871,000 $
58,262,000 $
55,925,000 $
$
$
$
$
$
$
$ 1
$ 1
$
1
$
$
$
1
1
$
$
$
$
$
$
$
$
$
$
$
$ 3
$ 5
$ 5
$
$
$
$
$ 2
$ 4
$ 3
$ 3
$
$ 3
$ 3
$
a
$
$
$
$ 3
$
$ 2
$
$ 1,533,182,000 $ 1,285,900,000 $ 1,178,162,000 $ 1,073,527,000 $ 1,017,252,000 $
$ 6
$
$ 5
$ 4
2
2
2
2
1
1
1
1,404 1,197 1,124 1,068 1,076 9
8
7
6
6
2
1
1
1
1
1
1
11,350,800 9,997,700 9,663,000 9,013,200 8,648,000 7
6
5
4
4
1
1 1
3
3
1
1
302 111 117 22 110 1
9 6 5 4
C
$
$
$
$ 5
$ 7
$
4
$ 2
$
371,642,000 $ 139,433,000 $
156,472,000 $
98,559,000 $
181,376,000 $ 1
$ 1
$ 5
$ 6
$
3
2 2 2 1 1 2 4 35 35 35 21 3 5 1 7 3 5
3 3 3 3 2 2 3 28 26 25 24 24 2 1 8 7 5
4 4 4 4 4 4 4 48 48 48 46 45 4 4 4 4 4
9
9
9
9
9
9
9
98.1% 97.7% 98.2% 97.7% 98.4% 9
9
9
9
9
1
1
1
1
1
1
1
11.8 10.9 10.4 9.8 10.7 1
9 9 9 9
N
N
l
$
1
$
1
$
1
$
$
1
$
1
$
1
$
1.08 $
1.01 $
0.99 $
0.84 $
0.76 $
0
$
$
$
$
$
$
$
$
$
$
$
$
$
1.45 $
1.38 $
$
1.50 $
1.41 $
1.30 $
1.34 $
1.26 $ 1.23 $
1.27 $ 1.24 $
$
1
$
1
$
$
$
$
$
$
1.181 $
1.151 $
1.121 $
1.091 $
1.043 $
$
A
$
$
$
$
1
$
$
$
$
1.20 $
1.17 $
1.14 $
1.11 $
1.08 $
1
$
$
$
$
$
$
$
0
1
1
0
$
$
$
$
0
$
$
$
$
$
$
$
0
0
0
0
0
1
1
1
1
1
8
7
75,818,172 69,749,654 65,658,222 53,127,038 53,644,328 5
5
4
4
3
$
3
$
2
$
2
$
2
$
2
$
2
$
2
$
20.00 $
17.50 $
14.70 $
12.4375 $
10.3125 $
1
$
1
$
$
$
8
6
7
6
5
6
5
6
6.7% 7.8% 9.0% 10.6% 8.4% 7
7
8
1
9
3
1
–
3
3
–9
3
21.0% 26.9% 27.2% 31.2% –8.7% 5
1
1
4
2
(10) Total return was calculated by dividing the net change in the share price, during the year, plus the dividends paid per share, during the
year, by the closing share price on December 31 of the preceding year.
R e a lty Inco me 8 2010 Annual Report
2
2
2
2
2
2
2
2
2
2
2
1
1998 1997 1996 1995 1994
$
$
$
$ 2
$
$
1
$
$
1
$
$
1
$
1
$
1
$
85,132,000 $ 67,897,000 $ 56,957,000 $ 51,555,000 $ 48,863,000
c
$ 1
$ 1
$
1
$
$
$
$
$
$
$
$
$ 1
$ 1
$
1
$
$
$
1
1
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
6
6
5
$
$
$
$ 41,304,000 $ 34,770,000 $ 32,223,000 $ 25,600,000 $ 15,224,000
$ 62,799,000 $ 52,188,000 $ 47,139,000 $ 40,414,000 $ 39,050,000
$ 62,364,000 $ 52,077,000 $ 47,430,000 $ 39,668,000 $ 39,185,000
$
5
$ 52,301,000 $ 44,367,000 $ 42,794,000 $ 36,710,000 $ 38,816,000
$
5,285,000 $
5,850,000
a
$
$
$
$ 3
$
$ 2
$
$ 1
$ 1
$ 1
$ 1
$ 1
$ 889,835,000 $ 699,797,000 $ 564,540,000 $ 515,426,000 $ 450,703,000
2
2
2
2
1
1
1
1
1
1
1
1
970 826 740 685 630
2
1
1
1
1
1
1
1
9
9
9
8
7,824,100 6,302,300 5,226,700 4,673,700 4,064,800
1
1 1
3
3
1
1
3
1
1
2 1
149 96 62 58 4
C
$
$
$
$ 5
$ 7
$
4
$ 2
$
3
$ 1
$
1
$
9
$
1
$ 193,436,000 $ 142,287,000 $ 55,517,000 $ 65,393,000 $
3,273,000
2 2 2 1 1 2 4 3 3 3 2 3 5 10 7 3 5
3 3 3 3 2 2 3 2 2 2 2 2 22 14 8 7 5
4 4 4 4 4 4 4 4 4 4 4 4 45 43 42 42 41
9
9
9
9
9
9
9
9
9
9
9
9
99.5% 99.2% 99.1% 99.3% 99.4%
1
1
1
1
1
1
1
1
1
1
9 1
10.2 9.8 9.5 9.2 9.5
N
N
l
$
1
$
1
$
1
$
$
1
$
1
$
1
$
1
$
1
$
0
$
$
0.78 $
0.74 $
0.70 $
0.63 $
0.39
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1.18 $
1.11 $
1.03 $ 1.00 $
$
$
1.17 $
1.10 $
1.03 $ 0.98 $
0.98
0.98
$
1
$
1
$
$
$
$
$
$
1
$
$
0.983 $
0.946 $
0.931 $ 0.913 $
0.300
$
0.23
A
$
$
$
$
1
$
$
$
1
$
$
$
$
$
1.02 $
0.96 $
0.945 $ 0.93 $
0.90
$
$
$
$
$
$
$
$
$
$
1
1
1
1
1
8
7
7
6
6
5
5
53,634,206 51,396,928 45,959,074 45,952,474 39,004,182
$
3
$
2
$
2
$
2
$
2
$
2
$
2
$
2
$
1
$
1
$
$
$
12.4375 $
12.719 $
11.9375 $
11.25 $
8.5625
6
7
6
5
6
5
6
6
7
9
1
8
7.7% 7.9% 8.3% 10.7% 9.9%
3
1
–
3
3
–9
3
2
2
2
3
–
5.5% 14.5% 15.4% 42.0% 28.5%
R e a lty I n come 9 2010 Annual Report
Dear Fellow Shareholders,
As the introductory pages to this year’s report suggest, we would like to hear from
you about what you actually do with the monthly dividends generated by our Company.
Over the years, investors have sent us
To summarize our results for 2010:
letters, or shared stories with us, about
• Shareholders received 12 monthly
their experiences as a shareholder receiving
dividends
monthly dividends. These stories get passed
• Dividends per common share increased
around to our staff and inspire us to continue
0.9%
to focus our efforts on those activities that
• Investors achieved a 38.6% total return
will generate the cash flow to pay and increase
• Revenue grew to over $346 million
the monthly dividends we all rely on. Now
• Funds from operations increased to
we’ve set aside a section of our new, updated,
$193.7 million
website at www.realtyincome.com so that
• We maintained a large and diverse
you can easily email us and tell us what
portfolio of 2,496 properties located in
monthly dividends do for you. For our part,
49 states occupied by 122 retail and
we’ll look forward to hearing all of the ways
other consumer businesses in 32
that monthly dividends from Realty Income
different industries
are used by our shareholders.
• Portfolio occupancy remained high
I am pleased to report that, during 2010,
at 96.6% at year-end
your Company continued to collect more
• Same store rents increased 0.6%
rent, maintain stable funds from operations
and raise the dividend. Once again, The
Monthly Dividend Company®’s strategy
of owning a portfolio of properties under
long-term leases that have been carefully
underwritten, coupled with a conservative
balance sheet, enabled us to deliver consis-
tent results. We also added new employees
during the year to assist us with our goal of
accelerating our growth. In addition, we
widened the net, in terms of the type of
industries with which we do business (more
on that later). In short, I believe we did a
good job of setting the stage for additional
earnings and dividend growth during 2011.
DIVIDENDS PAID PER COMM ON SHARE
$ 1.80
$ 1.70
$ 1.60
$ 1.50
$ 1.40
$ 1.30
$ 1.20
$ 1.10
$ 1.00
$ 0.90
$ 0.80
d
e
z
i
l
a
u
n
n
A
4
9
0
9
.
0
$
5
9
1
9
.
0
$
6
9
3
9
.
0
$
7
9
5
9
.
0
$
8
9
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.
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0
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.
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0
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R e a lty Income 10 2010 Annual Report
• 186 new properties were acquired
dividend income in a low interest rate
for $713.5 million
environment. When you add the $1.722 per
• We raised approximately $679 million
common share in dividends we paid last
of attractively priced new capital
year, this works out to a total return to
• We arranged a new $425 million credit
shareholders of 38.6%, as compared to the
facility for property acquisitions,
Equity REIT Index at 27.9%, the Dow Jones
ended the year with a zero balance
Industrial Average at 14.0%, the Standard &
on the facility and we had $18 million
Poor’s 500 Index at 15.1%, and the NASDAQ
in cash on hand
Composite Average at 16.9%.
While our main focus is on providing
INVESTOR RETURNS
dependable monthly dividends to shareholders,
We increased the amount of the monthly
we know that investors regularly compare
dividend four times during 2010. Dividends
Realty Income to other investments in terms
paid per common share increased 0.9% and
of total return. Since the calculation of total
common shareholders, who owned the stock
return can rely on the whims of stock market
for the entire year, received $1.722 per share
pricing, it does not always mirror a company’s
in dividends during 2010, as compared to
actual operating results in a given year. With
$1.707 per share in 2009.
that said, the chart on page 13 shows Realty
During 2010, the price of our shares rose
Income’s compounded average annual return
32.0% to $34.20 from $25.91, largely due,
since 1994, when we were listed on the New
we believe, to the increasing demand for
York Stock Exchange, in comparison to other
YIELD COMPAR ISONS
(as of December 31, 2010 )
TOTA L RET URN CO MPA RIS ONS
(as of December 31, 2010 )
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
%
9
.
3
DJ
Utility
Index
%
9
.
1
S&P
500
%
1
.
5
%
5
.
3
%
6
.
2
DJ
Industrial
Average
Realty
Income
Equity
REIT
%
9
.
7
2
%
1
.
5
1
%
9
.
6
1
%
0
.
4
1
DJ
Industrial
Average
S&P
500
Nasdaq
Composite
Equity
REIT
Realty
Income
%
6
.
8
3
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
R e a lty Income 11 2 010 Annual Report
major stock indices. For that 16-year period,
on the Dow Jones Industrial Average was
our compounded average annual return to
2.6%, Standard & Poor’s 500 Index was 1.9%,
shareholders was 17.9%, as compared to the
Dow Jones Utility Index was 3.9% and Equity
Equity REIT Index at 10.7%, the Dow Jones
REIT Index was 3.5% (see Yield Comparisons
Industrial Average at 9.3%, the Standard &
on page 11).
Poor’s 500 Index at 8.3%, and the NASDAQ
Composite Average at 8.0%.
2010 SUMMARY OF OPERATIONS
The dividend yield on our shares at
During 2010, we succeeded in maintaining a
December 31, 2010, was 5.1% based on
healthy and stable company, while positioning
the annualized dividend amount of $1.731
ourselves for future earnings growth. Our
per common share and a closing share price
portfolio of net-leased commercial properties
of $34.20. This compares favorably to other
continues to perform well and provide the
investments as measured by the various
lease revenue from which we pay monthly
indices. For example, at year end, the yield
dividends. As of December 31, 2010, portfolio
THE MAGI C OF RISING DIVIDENDS OVER TI ME
Yield on Cost The Cumulative Dividend Effect
1000 Shares Original Original Original Current Yield Dividends % of Original
Purchase Date Investment Dividends(1) Yield On Cost(2) Received to Date Investment Paid Back
10/18/94 $ 8,000.00 $ 900.00 11.3% 21.6% $ 20,450.50 255.6%
12/31/94 8,562.50 900.00 10.5% 20.2% 20,150.50 235.3%
12/31/95 11,250.00 930.00 8.3% 15.4% 19,238.00 171.0%
12/31/96 11,937.50 945.00 7.9% 14.5% 18,191.75 152.4%
12/31/97 12,719.00 960.00 7.5% 13.6% 17,245.50 135.6%
12/31/98 12,437.50 1,020.00 8.2% 13.9% 16,263.00 130.8%
12/31/99 10,312.50 1,080.00 10.5% 16.8% 15,220.50 147.6%
12/31/00 12,437.50 1,110.00 8.9% 13.9% 14,129.25 113.6%
12/31/01 14,700.00 1,140.00 7.8% 11.8% 13,008.00 88.5%
12/31/02 17,500.00 1,170.00 6.7% 9.9% 11,856.75 67.8%
12/31/03 20,000.00 1,200.00 6.0% 8.7% 10,675.50 53.4%
12/31/04 25,290.00 1,320.00 5.2% 6.8% 9,434.25 37.3%
12/31/05 21,620.00 1,395.00 6.5% 8.0% 8,088.00 37.4%
12/31/06 27,700.00 1,518.00 5.5% 6.2% 6,650.75 24.0%
12/31/07 27,020.00 1,641.00 6.1% 6.4% 5,090.50 18.8%
12/31/08 23,150.00 1,701.00 7.3% 7.5% 3,428.25 14.8%
12/31/09 25,910.00 1,716.00 6.6% 6.7% 1,721.63 6.6%
12/31/10 34,200.00 1,731.00 5.1% 5.1%
(1) Based on annualized dividend per share on the purchase date
(2) Based on 12/31/10 annualized dividend per share amount of $1.731
R e a lty Income 12 2010 Annual Report
occupancy was 96.6% with just 84 properties
acquiring 186 new properties for $713.5 million
available for lease or sale out of 2,496
during 2010. We permanently funded these
properties in the portfolio. The weighted
acquisitions through two common stock
average remaining lease term for properties
offerings, generating approximately
in our portfolio was 11.4 years, and our
$433 million in net proceeds, and a 10-year,
portfolio continues to be well diversified by
senior notes offering of $250 million, which
industry, geographic region and individual
generated net proceeds of $246.1 million.
tenant. We were also able to capitalize on
In addition, we entered into a new and
our excellent liquidity and substantially
expanded credit facility that increased our
increase the size of our real estate portfolio by
access to short-tem acquisition funding
REALTY I NCOME H IS TORICAL PERFORMANC E VS. MA JOR STOCK IN D ICE S
Equity Dow Jones Standard & Poor’s NASDAQ
Realty Income REIT Index(1) Industrial Average 500 Composite
Dividend Total Dividend Total Dividend Total Dividend Total Dividend Total
Yield Return(2) Yield Return(3) Yield Return(3) Yield Return(3) Yield Return(4)
1995 8.3% 42.0% 7.4% 15.3% 2.4% 36.9% 2.3% 37.6% 0.6% 39.9%
1996 7.9% 15.4% 6.1% 35.3% 2.2% 28.9% 2.0% 23.0% 0.2% 22.7%
1997 7.5% 14.5% 5.5% 20.3% 1.8% 24.9% 1.6% 33.4% 0.5% 21.6%
1998 8.2% 5.5% 7.5% (17.5%) 1.7% 18.1% 1.3% 28.6% 0.3% 39.6%
1999 10.5% (8.7%) 8.7% (4.6%) 1.3% 27.2% 1.1% 21.0% 0.2% 85.6%
2000 8.9% 31.2% 7.5% 26.4% 1.5% (4.7%) 1.2% (9.1%) 0.3% (39.3%)
2001 7.8% 27.2% 7.1% 13.9% 1.9% (5.5%) 1.4% (11.9%) 0.3% (21.1%)
2002 6.7% 26.9% 7.1% 3.8% 2.6% (15.0%) 1.9% (22.1%) 0.5% (31.5%)
2003 6.0% 21.0% 5.5% 37.1% 2.3% 28.3% 1.8% 28.7% 0.6% 50.0%
2004 5.2% 32.7% 4.7% 31.6% 2.2% 5.6% 1.8% 10.9% 0.6% 8.6%
2005 6.5% (9.2%) 4.6% 12.2% 2.6% 1.7% 1.9% 4.9% 0.9% 1.4%
2006 5.5% 34.8% 3.7% 35.1% 2.5% 19.0% 1.9% 15.8% 0.8% 9.5%
2007 6.1% 3.2% 4.9% (15.7%) 2.7% 8.8% 2.1% 5.5% 0.8% 9.8%
2008 7.3% (8.2%) 7.6% (37.7%) 3.6% (31.8%) 3.2% (37.0%) 1.3% (40.5%)
2009 6.6% 19.3% 3.7% 28.0% 2.6% 22.6% 2.0% 26.5% 1.0% 43.9%
2010 5.1% 38.6% 3.5% 27.9% 2.6% 14.0% 1.9% 15.1% 1.2% 16.9%
Compounded Average
Annual Total Return(5) 17.9% 10.7% 9.3% 8.3% 8.0%
Note: All of these Dividend Yields are calculated as annualized dividend based on last dividend paid in applicable time period divided by closing price as of period end.
Dividend Yield sources: NAREIT website and Bloomberg.
(1) FTSE NAREIT US Equity REIT Index, as per NAREIT website.
(2) Calculated as closing stock price as of period end plus dividends paid in period divided by closing stock price as of end of previous period. Does not include reinvestment
of dividends.
(3) Includes reinvestment of dividends. Sources: NAREIT website and Factset.
(4) Price only index, does not include dividends. Source: Factset.
(5) All of these Compounded Average Annual Total Return rates are calculated in the same manner: from Realty Income’s NYSE listing on October 18, 1994 through
December 31, 2010, and assuming reinvestment of dividends, except for NASDAQ. Past performance does not guarantee future performance. Realty Income presents
this data for informational purposes only and makes no representation about its future performance or how it will compare in performance to other indices in the future.
R e a lty Income 13 2 010 Annual Report
from $355 million to $425 million (with an
agent, Wells Fargo Shareowner Services,
additional $200 million expansion feature).
a division of Wells Fargo Bank, N.A. The site
Our ability to access public capital to
also features a “Connect” section that allows
permanently fund property acquisitions
shareholders to contact us in a variety of
provides us with a healthy balance sheet and
ways to share information, get answers to
plenty of liquidity as we begin 2011. As such,
their questions, or to sign up to receive
we believe we are well positioned to fund
various types of email communications from
additional property acquisitions during 2011.
us. Our goal in launching this new website
is to build an online bridge between the
INVESTMENTS FOR NOW
Company and its owners that will enhance our
AND THE FUTURE
communications and enrich the experience
New property investments weren’t the only
of being a Realty Income shareholder.
investments we made in 2010. We also
invested in additional personnel in key areas of
WIDENING THE INVESTMENT NET
the company (research, acquisitions, investor
Likely the most important activity we
communications) and in company operations
commenced in the past year-and-a-half was
to maintain continued access to the high
our effort to broaden our areas of investment
quality tools and resources required to manage
by expanding the types of businesses in
a large portfolio of commercial real estate.
which we invest. But, before I get into that,
All of these new associates and operating
perhaps I should talk a bit about the history
improvements are in accordance with our
of our investment process. Most of you will
strategic plan to increase our property portfolio
recall that virtually all of the Company’s
footprint and enhance revenue growth, to
acquisitions over the last 42 years have been
widen our industry net and further diversify the
structured as sale-leasebacks. A sale-lease-
cash flow supporting dividends, and to expand
back is where a retailer, or other business
our connection with the individual investor.
that uses real estate to conduct their
In early 2011, we launched a new corporate
business, elects to sell their real estate to
website and added a dividend reinvestment
a company like ours and then lease it back
and direct stock purchase plan. The new
under a long-term lease agreement. In this
website provides a wealth of information
transaction, the seller is able to take their
that has been organized so investors can
cash out of their real estate and reallocate
get the information they need quickly and
it for additional growth in other areas, while
efficiently. The new site also provides informa-
still maintaining the use of the property
tion about and access to our new dividend
where they operate their business and
reinvestment plan and direct stock purchase
generate their profits. For Realty Income,
plan that is administered by our transfer
we are able to acquire a property operated
R e a lty Income 14 2010 Annual Report
by a large tenant, under a long-term lease
horizons to include other retail industries
agreement, that will generate the cash flow
that had similar characteristics such as auto
we use to pay monthly dividends. This is very
parts, auto service and the child day care
much a win-win situation for Realty Income
business. Expanding into these areas fueled
and the seller of the property, and we believe
the growth of the Company and enabled
this will continue to be our focus for many
us to build a track record of consistent
years to come.
dividends to our investors over a prolonged
period of time.
Real Estate Investment History Perspective
Early in our history, we mostly bought the
Most of the investments we have made over
new stores that retailers were opening. This
the years have been sale-leasebacks to retail
worked out pretty well as we selected the
chains where we have acquired the stores
up-and-coming retailers, in growing segments
in which they sell their goods and services.
of the retail industry, and the majority of the
Acquiring these stores turned out to be a
stores we acquired proved to be profitable to
very attractive area of investment as consumer
the retailers. Over time, however, we noticed
spending continued to increase fairly rapidly
that, at the end of the 15 to 20-year lease
over the last 40 years and retailers were
term, there were usually a number of the
constantly opening new stores.
stores that the retailer no longer wanted to
In the Company’s first decade, we invested
use because the stores had proven to be only
primarily in growing companies in the fast
marginally profitable. Once the initial lease
food restaurant business, as that industry was
terms expired, on the less profitable stores,
developing in the 1970s. Realty Income’s
we did not do as well since we often had to
founders, Bill and Joan Clark, identified that
re-lease the store to another tenant, some-
these growing companies needed their store
times at a lower rental rate. As a result, about
locations in order to produce their profits, and
15 years ago, we changed our focus to
they also needed capital to open new stores.
acquiring existing, seasoned stores that were
They concluded that sale-leaseback was the
already profitable and stores where profits
perfect answer for these growing retailers.
far exceeded the rent the retailer paid to us.
The Clarks also focused our business on
In these more profitable stores, the retailer is
purchasing properties from companies selling
making a significant profit and is more likely
basic consumer goods and services at low
to want to stay in the property and extend
price points, which people buy and use
the lease when the initial long-term lease is
regularly, since they felt that these businesses
completed. We believe this adjustment to
would be more likely to produce stable cash
our acquisitions strategy, many years ago,
flow and be able to pay rent over the long term.
is a key reason for our real estate portfolio’s
In the 1980s, the Company expanded its
stability and continued high occupancy.
R e a lty Income 15 2 010 Annual Report
Another important aspect of our investment
invested, I also believe that we will find new
history is the fact that, after going public in
opportunities that will provide us with the
1994, we invested in building our research
consistent cash flow we need to generate in
capacity by adding staff in both industry and
order to pay monthly dividends.
real estate research. We did this so that we
While looking to identify and invest in new
could continue to find new areas in which to
industries we are careful to make sure that
invest. In 1994, we owned 630 properties in
the core concepts and characteristics of the
5 different industries that generated about
investments we make should generally
$49 million in revenue. Utilizing our increased
remain as follows:
research capacity, over the last 16 years, we
• The acquisition of well located commer-
have grown dramatically to where we are
cial properties under long-term,
today, with approximately 2,500 properties
net-lease agreements where the tenant
in 32 different industries and annualized
is responsible for paying the operating
revenue exceeding $380 million. I think it is
expenses of the property and paying
fair to say that these adjustments to our
increasing rent over time
investment strategy have been vital to our
• The tenant is a significant commercial
success and are likely to continue to be
enterprise with multiple cash flows
important for many years to come.
and revenue sources
• The tenant is a large owner and user
How We’re Thinking about Investments Today
of real estate to operate its business
Last year, in my letter to shareholders, I wrote
• The real estate is important to the
about “retail consumer shifts” that we are
tenant’s business and is necessary
keeping our eyes on, stating that the “deci-
in the production of its earnings
sions we make over the next few years with
• The tenant is in a business that we
respect to investment opportunities will be
can understand and is in a business
very important.” While our general focus on
we believe will be sustainable over
consumer retail has served us well over the
a prolonged period of time
years, I believe we must continue to widen the
• Our decision to invest will continue to
net and look for new areas of investment to
be based on a three-pronged research
continue to fuel our growth. It is likely that the
approach that analyzes:
growth in retail spending, and the resulting
1. The tenant’s industry, financial
growth in new retail stores, will be more
strength, competitors and business
muted in the future than over the last decade
operations
or two. I think we will continue to find the
2. The real estate attributes of the property
majority of our acquisition opportunities
3. The profitability to the tenant of the
in the areas in which we have previously
property we acquire
R e a lty Income 16 2010 Annual Report
Additionally, our approach has generally
dividends. It also has allowed us to diversify
been to seek areas of investment that aren’t
our real estate portfolio over time. Today we
being efficiently financed or that aren’t on
are in 32 different industries, and we would
the radar screen of other potential buyers.
like to continue to expand into new areas
Often these areas are considered “out of the
with the goal of being in 40 to 50 different
financial mainstream” by many investors,
industries a decade from now. As always,
they may currently be harder to finance than
the objective when we invest in new proper-
other areas, or they are in a business area
ties and industries is to generate an ongoing,
that may be new to the use of sale-leaseback
stable cash flow that will allow us to continue
transaction to generate capital. If we can
to pay increasing monthly dividends.
manage to be “first to invest” (or at least
early) in these areas we are more likely
Source and Research New
to receive a higher return on investment.
Investment Opportunities
History has also shown us that, over time,
Uncovering new acquisition opportunities
these “new” types of sale-leaseback
is the responsibility of our acquisition calling
financing opportunities tend to become
officers who maintain relationships with a wide
more mainstream, which means competition
variety of private equity firms, commercial and
increases and investment returns tend to
investment banking contacts and over 1,100
decline. As in many things, the early bird often
retailers throughout the US. Their goal is to
gets the worm (or at least a few bigger ones).
generate a constant stream of opportunities
Some examples of new areas of investment
for us to analyze for potential investment.
that we uncovered in the past that became
The amount of work involved is daunting, but
very profitable for us are:
it is absolutely key to our success. To give
• Fast food in the 60s and 70s
you an idea of the volume of opportunities
• Child day care in the 70s and 80s
we have analyzed, since 2002 the acquisi-
• Auto service in the 80s and 90s
tions department has brought us over 840
• Convenience stores and multi-plex
transactions, representing 15,426 individual
theaters 10-12 years ago
properties with an approximate value of
• Entertainment venues like family
$27.5 billion. Wow! Out of this, we then
entertainment centers and water
acquired 1,808 properties with an approximate
parks ten years ago
value of $3.5 billion, or about 12.7% of what
• Health and fitness centers over the
we evaluated.
last six years.
Once our calling officers have uncovered
Our ability to innovate and find new areas
a viable opportunity, the important task of
of investment has allowed us to expand
underwriting begins. This involves researching
our portfolio and grow our earnings and
1) the tenant’s industry, financial strength
R e a lty Income 17 2 010 Annual Report
and operations, 2) the specific real estate
Typically, we obtain data on property values,
locations we are being offered and 3) the
and we review area demographics, traffic
profitability and cash flow coverage of the
flow, regional economic data, as well as
properties we are acquiring. When examining
comparative purchase and lease prices for
a potential tenant and industry, we attempt
each location.
to ascertain competitive conditions of the
The final key analysis is the individual
industry, how the particular tenant we are
unit profitability that is shown by the cash
considering fits within their industry, the
flow coverage metric. This is calculated by
historical performance of the industry, the
dividing the cash flow of a particular location
outlook for future operating performance,
we’re considering for purchase by the rent
as well as some indication of the challenges
that would have to be paid. This measure
and opportunities that might impact the
helps us figure out how much cushion we
industry in the future. We also meet with
have before the tenant may experience
the prospective tenant’s management team,
difficulty in paying rent. We also call this
review audited financial statements and a
our “margin of safety.”
variety of internal operating metrics that can
The research compiled in this underwriting
give us insight into the tenant’s performance.
process is reviewed by our investment
The real estate analysis consists of
committee that consists of five senior
sending our real estate research people to
members of the Company. The path to
visit every property and review the trade
approval of a potential tenant, generally,
area in which the business operates.
goes something like this (see table below):
Initial research to determine a
viable opportunity
Preliminary credit research report
Meet with management team
Final credit research report
Presentation of real estate research
Legal review of potential transaction
Approve, close and fund transaction
>
>
>
>
>
>
>
Committee Meeting—Decide whether or not to allocate
time and resources to the opportunity
Committee Meeting—Decide whether the potential
tenant warrants further due diligence
Trip by research and committee member—
More in-depth financial review and assessment of
operations expertise
Committee meeting—Decide whether or not the
potential tenant is approved based on credit review
Committee meeting—Determine whether or not the
real estate meets our investment guidelines
Legal team meeting—Determine whether lease
provisions and property conditions are acceptable
The tenant and real estate is approved and transaction
is funded and closed
R e a lty Income 18 2010 Annual Report
As evidenced by the number of times a
investing in a new industry is one of our
potential transaction is analyzed, reviewed
acquisitions this year. It is a story of how
and discussed in our investment committee
we were able to get comfortable with an
before it is approved, we make every effort
investment in the beverage industry (specifi-
to determine that a potential tenant offers
cally the wine segment), culminating in over
the reliable and sustainable cash flow that
$300 million in investments during 2010.
is required before we make an investment.
A few years ago, we undertook a look at
Historically, our approach to sourcing
investing in the wine industry and set about
tenants that represent new industry
learning everything we could about the
opportunities has been that we tend to first
business, but we made no acquisitions at
crawl, then walk, and occasionally run.
that time. However, this background research
This is because new industries require even
was helpful in determining what we would
more research than those in which we have
require in order for us to invest in this area.
already developed expertise. In addition
During that research, we identified several
to the standard research process just
potential hurdles to our acquiring properties
described, we also have to do a great deal
in this industry. First, there were only a limited
more research into the competition, the
number of large owners and operators, with
types of properties that are important to
multiple cash flows (one of our requirements
a new industry, and to what extent certain
for investment). Most winery and vineyard
demographic profiles are related to the
operators are “one-off” operators consisting
industry. Often, we may conduct a research
of a single winery and a few vineyards.
project on a new industry for a year or more,
Second, we had some difficulty assessing
with no business coming in during that time.
how consistently the earnings, generated
However, the initial research has been done
from a winemaker’s business of making and
and often we have developed a certain
selling wine to the consumer, could be tied
amount of expertise in the new industry,
to the vineyards and wine production,
as well as some important relationships that
storage and distribution buildings. Third,
may prove useful to us in the future. This
it was even harder to tie the vineyards
legwork sets us up so that when an oppor -
themselves to the earnings of the winemaker
tunity does arise, in this new area, we are
since, often, the winemakers purchased their
ready to move forward. We intend to accel-
grapes from one or more growers, as well as
erate our efforts to find new investment
using grapes from their own vineyards. In
areas in the years ahead.
other words, grapes are easily bought from
A New Industry Investment Story
necessarily have to grow their own grapes.
A very good example of our approach to
This could potentially be a problem for
a variety of growers, so winemakers don’t
R e a lty Income 19 2 010 Annual Report
whoever owns the wine company’s real
areas in the state and one of those areas,
estate. Should the winemaker get into
the Napa Valley, produces about 4% of the
financial difficulty and enter Chapter 11,
wine that comes from California. The price
the wine company in bankruptcy could
differential, for grapes grown in these different
potentially accept the lease on the winery
areas, can be substantial. For instance,
and reject the lease on the vineyards them-
according to the 2010 Crush Report, US
selves, continuing on in the wine-making
Department of Agriculture, the price of a ton
business by buying grapes from third parties.
of cabernet sauvignon grapes, from the 2010
This would reduce the amount of rent the
harvest in California, averaged $1,025 per
landlord could collect and negatively impact
ton with the lowest of the sixteen regions
the anticipated return on investment.
getting $357 per ton and the highest region,
The possible exception we identified to
the Napa Valley, commanding $4,478 per
this scenario was towards the premium end
ton. Where the grapes are grown matters a
of the wine business, where the winemaker’s
great deal when considering the value of the
brand may well be closely tied to estate
property and the price you can get for the wine.
bottling (growing the grapes on site) or a
Finally, wine is a consumer product and
specific region where the grapes are grown.
analyzing a consumer product involves a
(For example: the Rutherford, Oakville,
wide variety of additional factors that include;
Stag’s Leap, or Carneros areas in Napa
the branding of the product, its production,
Valley). The premium wine consumer often
its marketing and, in this particular industry,
values and seeks out the wines from these
its distribution through wholesalers and
specific regions and the vintners producing
distributors to the stores and restaurants
wine from grapes in these areas. Thus, the
where it is sold. This has been especially
consumer may be willing to pay a higher
true over the last couple of years, during the
price for these appellations and it is some-
recession, as many stores and restaurants
what easier to tie the premium winemaker’s
culled their lists of premium wine offerings
earnings to both the winery operations and
and kept those brands that could be the
the vineyards themselves.
most meaningful to their sales.
The research also confirmed our knowledge
Our conclusion, after analyzing the
that the prices that can be charged for wine
industry, was that there would most likely
can be heavily impacted by a number of fac-
be a limited number of potential tenants
tors: the brand of the wine, the winemaker
that would meet our criteria, and that it
and, most importantly, where the grapes are
would be unlikely that we would structure
grown. California produces approximately
transactions in this industry. To reiterate,
94% of the wine produced in the United
we felt the tenant would need to meet the
States. There are 17 different wine producing
following criteria:
R e a lty Income 20 2010 Annual Report
• A large entity with multiple cash flows
premium spirits, beer and wines, satisfied our
and strong financials
investment requirement for multiple sources
• Premium vineyards in premium areas
of reliable and sustainable cash flow. In
(Napa Valley)
addition, the Sterling and Beaulieu (BV) wine
• Vineyards that are critical to the
brands proved to be businesses where real
production of the particular brand
estate was tied to the generation of earnings
and the profitability of the winery
for the wineries. Diageo also has, arguably, the
• An excellent track record of good
best distribution and marketing in the business.
operations
Its impact and/or influence with distributors is
• A well-known, quality brand with a
unparalleled so that its wine brands generally
large consumer following
command prized shelf space at the retail level.
• Strong operations with the ability
Diageo also represented a high-quality,
to market the brand year after year
credit tenant that would enhance the overall
• Solid relationships with distributors
credit quality of our real estate portfolio.
willing to put the winemaker’s products
Based in London, and traded on the London
on the shelf
and New York stock exchanges, Diageo has
As frequently happens, as we look at new
investment grade credit ratings, a market
industries, there is a lot of work with little to
capitalization of $49 billion, and annual
show for it in terms of attractive property
revenue of about $16 billion.
acquisitions.
DIAGEO — THE TENANT
AND THE WINE BUSINESS
We were able to become quite comfortable
with both Diageo as our tenant and the cash
flow sources, so our next step was to learn
more about the Sterling and Beaulieu wineries,
When a transaction with Diageo arose this
the competitive landscape for these brands,
year, we suspected that this would likely be an
and the real estate.
investment that met all of our investment criteria
Beaulieu Vineyards (BV) is 100 years old.
since Diageo is the world’s leading global pre-
It is located in the heart of the Napa wine
mium drinks company. Diageo brands are sold
region and about 40,000 visitors come to the
in approximately 180 markets worldwide and
winery each year. It is known for its Cabernet
include names like: Smirnoff, Johnnie Walker,
Sauvignon, Chardonnay and premium wine
Captain Morgan, Jose Cuervo, Tanqueray,
blends, of which 1.6 million cases of wine
Gordon’s, Crown Royal, (spirit brands);
are produced annually. BV wines are widely
Guinness, Red Stripe, Harp, (beer brands);
distributed in retail stores, restaurants and
Sterling and Beaulieu (BV) (wine brands).
hospitality venues throughout the US.
The Diageo business model, with a 100%
Sterling Vineyards is 39 years old and the
focus on producing, distributing and marketing
winery is as well known for its architecture
R e a lty Income 21 2 010 Annual Report
and scenic surroundings as it is for its
that offer several renewal options, since
premium Cabernet Sauvignon, Merlot and
Diageo intends to operate these wineries
Chardonnay wines. About 150,000 people
into the foreseeable future. The real estate is
visit this winery every year. The 1.4 million
in the Napa Valley with two vineyards in the
cases of wine that Sterling produces every
Carneros area of the valley, and nine in the
year are also widely distributed in retail
Rutherford, Oakville and Calistoga areas
stores, restaurants and hospitality venues
of the north valley, some of the premier
throughout the US.
growing areas in the Napa Valley.
These two wineries are among the most
visited and recognized destinations in the
WHAT WE OWN
Napa Valley and feature some of the best
This acquisition is a bit different from many
real estate locations in the area. As we
of the other real estate assets that we own in
already noted, the grapes grown in this
that the revenue and earnings are not primarily
region command higher prices compared
generated by a “storefront” operation. True,
to grapes grown elsewhere in California. The
we do own land and buildings, but the
vineyards have been producing the highest
revenue and earnings that are generated
quality grapes for 25 to 100 years and the
by Diageo are most closely tied to the
grapes grown on the land are directly tied
consumer brands that they sell at a variety
to the production of the Sterling and BV
of locations other than the winery. A well-
wines and the premium brand recognition
defined, brand-building strategy, superbly
inherent in the region’s appellation. In other
executed, has been key to Diageo’s success.
words, the fact that Sterling and BV wineries
The company has great distributors and
produce wine from grapes that are primarily
grown in their own vineyards means that the
earnings derived from the wine production
are directly related to the grapes grown on
their land. You may recall that this was an
important criterion for us in order to acquire
both the buildings and the land.
What we acquired in this transaction are
11 vineyards on approximately 2,000 acres,
of which 68% are plantable land, and the
two wineries, consisting of wine production
facilities, storage, shipping and tourist
properties for $269 million. We acquired
these assets under 20-year, triple-net leases
NU MBER OF PR OPERT IES
(at the end of each year)
2,600
2,400
2,200
2,000
1,800
1,600
1,400
1,200
1,000
800
600
4
9
0
3
6
5
9
5
8
6
6
9
0
4
7
7
9
6
2
8
8
9
0
7
9
9
9
6
7
0
,
1
0
0
8
6
0
,
1
1
0
4
2
1
,
1
2
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7
9
1
,
1
3
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4
0
4
,
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6
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5
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0
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2
9
0
9
3
3
,
2
0
1
6
9
4
,
2
R e a lty Income 22 2010 Annual Report
wholesalers and they market the spirits, beer
With that said, we will look to existing areas
and wine with the same sales force through
for our real estate acquisitions in 2011. But,
the same channels. This provides convenient,
we will remain open to considering new areas
one-stop shopping for the retailer, restaurant
and committing the resources to investigate
chain, or hotel since they can buy multiple
them. If, a few years from now, we have been
products from a single source.
successful in securing a good piece of our
Bottom line, our analysis and due diligence
revenue from other areas, that would be fine.
convinced us that Diageo is an expert in the
But only after we have carefully researched,
wine business and they will be a valuable
discussed and analyzed something new, will
tenant, generating reliable cash flow that
we make an investment. Again, the expansion
should allow them to meet their long-term
into new investment areas has been the key
lease obligations with us. So now we are all
to our growth for over 30 years.
owners of two of the largest wineries and
vineyards in Napa Valley that are operated
MORE DETAILS ABOUT OUR 2010 REAL
by the experts at Diageo.
ESTATE AND FINANCIAL PERFORMANCE
WHAT’S NEXT?
Consistent Real Estate Portfolio Performance
At the end of 2010, we owned 2,496 proper-
This has been a good example of what we
ties located in 49 states leased to 122 different
will be trying to do as we seek to invest in
retail chains and other businesses in 32
additional industries now and in the future.
separate consumer-oriented industries.
What I hope I’ve conveyed is the methodical,
Our goal for 2011 and forward is to continue
analytical and measured approach we took
to diversify our sources of lease revenue and
in order to make the Diageo transaction a
reality, and that this is the approach that we
will take when venturing into new industry
territory. We walk a fine line between
remaining flexible about investing in new
areas and being disciplined about our
approach. It can sometimes be difficult to
put a great deal of work into an area and
then have to wait for months, or years, for
our work to pay off in terms of attractive
acquisitions. However, we believe this is the
right approach and that it reflects the manner
in which our shareholders expect us to go
about making investments in new areas.
PORT FOLIO O CC UPANCY
(as of December 31)
3
9
9
1
–
0
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1
y
c
n
a
p
u
c
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O
e
g
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v
A
4
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0
0
1
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2
0
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4
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5
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6
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7
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7
.
9
9
%
4
.
9
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%
3
.
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%
1
.
9
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2
.
9
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%
5
.
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%
4
.
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%
7
.
7
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%
2
.
8
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%
7
.
7
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%
1
.
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9
.
7
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5
.
8
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%
7
.
8
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%
9
.
7
9
%
0
.
7
9
%
8
.
6
9
%
6
.
6
9
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
R e a lty Income 23 2 010 Annual Report
increase the credit quality of our portfolio
occupancy was 96.6%. As I’ve said before,
of net-leased real estate assets.
keeping the majority of our properties leased,
Same store rents on 2,131 properties
year after year, is the key to generating
under lease for 2010 increased 0.6% as
dependable lease revenue to support
compared to 2009. To break down same
your monthly dividend payments.
store rent increases for 2010, we had 23
industries with rent increases, 3 with flat
STABLE FINANCIAL PERFORMANCE
rents, and 3 with declining rents. We think
AND CONSERVATIVE BALANCE SHEET
that same store rent increases will probably
Revenue, funds from operations (FFO),
be a bit higher in 2011 than they were in
and net income results for the year ended
2010 given the fact that the economy is
December 31, 2010, as compared to the
improving and we have no tenants on
same period in 2009 were as follows:
our financial performance watch list.
• Revenue was $345.0 million as
We also selectively sold 28 properties for
compared to $325.2 million in 2009
$27.2 million during 2010. These properties
• FFO available to common shareholders
had been targeted for sale based on very
was $193.7 million as compared to
specific asset sale guidelines. In general, our
$190.4 million in 2009
business model is to hold properties for the
• FFO per diluted common share was
long-term cash flow that is generated to pay
$1.83 as compared to $1.84 in 2009
dividends. However, we will pursue the sale
• Net income available to common
of properties out of the portfolio when we
believe that reinvesting the sales proceeds
will generate higher returns, that the asset
sales will enhance the credit quality of our
real estate portfolio, or that specific tenant or
industry concentration levels will be reduced.
Looking at lease expirations during 2010,
the portfolio management group continued
to be diligent in proactively anticipating lease
expirations and did a tremendous job of
handling 105 leases that expired during the
year. Their efforts allowed us to maintain our
historical occupancy rate that has never fallen
below 96% since the company was founded
in 1969. As of December 31, 2010, we had
just 84 properties available for lease and
TOTAL R EVENUE ( 1 )
For the years ended (dollars in millions)
$ 350
$ 340
$ 320
$ 300
$ 280
$ 260
$ 240
$ 220
$ 200
$ 180
$ 160
$ 140
$ 120
$ 100
$ 80
$ 60
$ 40
4
9
9
.
8
4
$
5
9
6
.
1
5
$
6
9
0
.
7
5
$
7
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9
.
7
6
$
8
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1
.
5
8
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9
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5
.
4
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$
0
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.
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1
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7
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.
0
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1
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.
7
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1
$
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0
8
.
7
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1
$
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0
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.
0
4
2
$
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0
4
.
7
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2
$
8
0
7
.
1
3
3
$
9
0
8
.
8
2
3
$
0
1
7
.
6
4
3
$
(1) Includes amounts reclassified to income from discontinued operations, but excludes
revenue from Crest Net Lease, Inc., a subsidiary of Realty Income
R e a lty Income 24 2010 Annual Report
shareholders was $106.5 million as
tions, should continue to contribute to
compared to $106.9 million in 2009
increased productivity and positively
Funds from operations per share were
impact our 2011 earnings.
lower, in comparison to 2009, due to our
With respect to our capital structure, it
deliberate cessation of acquisition activities
remains very conservative and we have one
during 2008 and 2009, which means the
of the strongest balance sheets in our industry,
revenue contributing to our earnings has
according to many research analysts. Our
been essentially flat during this period. Even
capital structure consisted of 67.5% in
though we had a very successful year of
common shares, 5.8% in preferred shares,
acquisitions in 2010, the majority of the
26.7% in notes outstanding, and $17.6 million
transactions closed during the third and fourth
in cash on hand, and no mortgages on any
quarter, limiting the positive contribution the
of our properties, at the end of 2010.
additional revenue might otherwise have
had on our earnings. In addition, I already
RENEWING OUR MONTHLY
mentioned the fact that we added staff in
DIVIDEND COMMITMENT
the acquisitions, research and investor
As we begin 2011, we’ve crossed the
communications areas during the year, which
threshold for $1.9 billion in monthly dividends
increased our administrative expenses. We
paid. We also celebrated our 42nd birthday
anticipate that the high level of acquisition
on February 28, 2011. During all these years,
activity in 2010, along with our staff addi-
we’ve been committed to being The Monthly
FFO PER COMMON SHARE
For the years ended
4
9
8
9
.
0
$
5
9
0
0
.
1
$
6
9
4
0
.
1
$
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1
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.
1
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.
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1
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0
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3
.
1
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0
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1
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.
1
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0
2
6
.
1
$
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0
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.
1
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0
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.
1
$
8
0
3
8
.
1
$
9
0
4
8
.
1
$
0
1
3
8
.
1
$
$ 1.90
$ 1.80
$ 1.70
$ 1.60
$ 1.50
$ 1.40
$ 1.30
$ 1.20
$ 1.10
$ 1.00
$ .90
Dividend Company®. I’m particularly pleased
with the fact that, even during the troubled
economic times we’ve all endured in the
past two to three years, we’ve still been
able to not only continue paying the monthly
dividend, but also increase it a bit each year.
Our primary goal is, and always has been,
to manage our real estate assets so that
they continue to provide the lease revenue
to support monthly dividend payments.
Secondarily, we hope to manage our
operations, and effectively plan for the
future, so that we also have the resources
to increase the number of assets we own
and to continue to increase our revenue
and the amount of the dividend over time.
R e a lty Income 25 2 010 Annual Report
While we’re not 100% out of the woods,
their income. I would also highly recommend
in terms of the financial challenges that face
that all of you visit the “Risk” section of our
our nation and the millions of people still
new corporate website where you can
unemployed, we are seeing some improvement
watch a video that discusses risk and read
in the broader economy. Our view is that,
a helpful summary of the risks involved in
as we begin 2011, we have a somewhat
owning our shares.
improved operating environment as compared
We will do our best, this year, to operate
to the last few years, and that we should be
your Company in a prudent fashion so that
successful in achieving our objective of
the monthly dividends just keep on coming.
paying 12 monthly dividends and increasing
Also, please be sure to go to the new website
the dividend over time.
and, if you care to do so, email us a sentence
We remain grateful for the support of
or two about what monthly dividends do
thousands of loyal shareholders (nearly
for you. We’d love to hear from you.
100,000) many of whom, like us, have
enjoyed years of monthly dividends. As
always, there are no guarantees we will be as
successful in our efforts during 2011 as we
Sincerely,
have been in the past and, for that reason,
Tom A. Lewis
we recommend that all investors remain
Chief Executive Officer
diversified and rely on us for only a portion of
Vice Chairman of the Board of Directors
COMPARISON OF $100 INVESTED IN REALTY INCOME IN 1994 VS. MAJOR STOCK INDICES
1,300
1,100
900
700
500
300
100
Realty Income Corporation
Equity REIT Index
Dow Jones Industrial Average
Standard & Poors 500
NASDAQ Composite
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
R e a lty Income 26 2010 Annual Report
REALTy INCOME CORPORATION AND SuBSIDIARIES
Financial Information
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Consolidated Quarterly Financial Data
Reports of Independent Registered Public Accounting Firm
Business Description
Property Portfolio Information
Forward-Looking Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Liquidity and Capital Resources
Results of Operations
Funds from Operations Available to Common Stockholders (FFO)
Adjusted Funds from Operations Available to Common Stockholders (AFFO)
Impact of Inflation
Impact of Recent Accounting Pronouncements
Quantitative and Qualitative Disclosures About Market Risk
Selected Financial Data
Controls and Procedures
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities, including Total Return Performance
28
29
30
31
32
48
49
51
59
64
65
65
65
69
76
77
78
78
78
79
80
82
R e a l t y I n c o m e 27 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except per share data)
December 31,
Assets
Real estate, at cost:
Land
Buildings and improvements
Total real estate, at cost
Less accumulated depreciation and amortization
Net real estate held for investment
Real estate held for sale, net
Net real estate
Cash and cash equivalents
Accounts receivable, net
Goodwill
Other assets, net
Total assets
Liabilities and Stockholders’ Equity
Distributions payable
Accounts payable and accrued expenses
Other liabilities
Lines of credit payable
Notes payable
Total liabilities
Commitments and contingencies
Stockholders’ equity:
2010
2009
$ 1,520,413
2,592,449
4,112,862
(711,615)
3,401,247
3,631
3,404,878
17,607
11,301
17,206
84,598
$ 1,169,295
2,270,161
3,439,456
(630,840)
2,808,616
8,266
2,816,882
10,026
10,396
17,206
60,277
$ 3,535,590
$ 2,914,787
$ 19,051
$ 16,926
47,019
22,555
—
1,600,000
1,688,625
38,445
16,807
4,600
1,350,000
1,426,778
Preferred stock and paid in capital, par value $1.00 per share, 20,000,000 shares authorized,
13,900,000 shares issued and outstanding in 2010 and 2009
337,790
337,790
Common stock and paid in capital, par value $1.00 per share, 200,000,000 shares authorized,
118,058,988 and 104,286,705 shares issued and outstanding as of
December 31, 2010 and 2009, respectively
Distributions in excess of net income
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes to consolidated financial statements are an integral part of these statements.
2,066,287
(557,112)
1,846,965
1,629,237
(479,018)
1,488,009
$ 3,535,590
$ 2,914,787
R e a l t y I n c o m e 28 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Consolidated Statements of Income
(dollars in thousands, except per share data)
years Ended December 31,
2010
2009
2008
Revenue
Rental
Other
Total revenue
Expenses
Depreciation and amortization
Interest
General and administrative
Property
Income taxes
Provisions for impairment
Total expenses
Income from continuing operations
Income from discontinued operations:
Real estate acquired for resale by Crest
Real estate held for investment
Total income from discontinued operations
Net income
Preferred stock cash dividends
Net income available to common stockholders
Amounts available to common stockholders per common share:
Income from continuing operations:
Basic
Diluted
Net income:
Basic
Diluted
$ 344,080
929
345,009
95,513
93,237
25,311
7,332
1,393
807
223,593
121,416
946
8,422
9,368
130,784
(24,253)
$ 106,531
$ 0.92
$ 0.92
$ 1.01
$ 1.01
$ 323,819
1,426
325,245
90,519
85,528
20,946
6,601
677
199
204,470
120,775
1,172
9,180
10,352
131,127
(24,253)
$ 106,874
$ 0.93
$ 0.93
$ 1.03
$ 1.03
$ 323,164
1,877
325,041
89,104
93,956
21,618
5,458
1,230
3,374
214,740
110,301
3,819
17,721
21,540
131,841
(24,253)
$ 107,588
$ 0.85
$ 0.85
$ 1.06
$ 1.06
Weighted average common shares outstanding:
Basic
Diluted
105,869,637
105,942,721
103,577,507
103,581,053
101,178,191
101,209,883
The accompanying notes to consolidated financial statements are an integral part of these statements.
R e a l t y I n c o m e 29 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(dollars in thousands)
years Ended
December 31, 2008, 2009, 2010
Shares of
preferred
stock
Shares of
common
stock
Preferred
stock and
paid in
capital
Common
stock and
paid in
capital
Distributions
in excess of
net income
Total
Balance, December 31, 2007
13,900,000
101,082,717
$ 337,790
$ 1,545,037
$ (344,735)
$ 1,538,092
Net income
Distributions paid and payable
Shares issued in stock offering,
net of offering costs of $4,024
Share-based compensation
—
—
—
—
—
—
2,925,000
203,824
—
—
—
—
—
—
74,425
5,160
Balance, December 31, 2008
13,900,000
104,211,541
337,790
1,624,622
Net income
Distributions paid and payable
Share-based compensation
—
—
—
—
—
75,164
—
—
—
—
—
4,615
Balance, December 31, 2009
13,900,000
104,286,705
337,790
1,629,237
Net income
Distributions paid and payable
Shares issued in stock offerings,
net of offering costs of $22,471
Share-based compensation
—
—
—
—
—
—
13,558,500
213,783
—
—
—
—
—
—
432,591
4,459
131,841
(194,857)
—
—
(407,751)
131,127
(202,394)
—
(479,018)
130,784
(208,878)
—
—
131,841
(194,857)
74,425
5,160
1,554,661
131,127
(202,394)
4,615
1,488,009
130,784
(208,878)
432,591
4,459
Balance, December 31, 2010
13,900,000
118,058,988
$ 337,790
$ 2,066,287
$ (557,112)
$ 1,846,965
The accompanying notes to consolidated financial statements are an integral part of these statements.
R e a l t y I n c o m e 30 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Consolidated Statements of Cash Flows
(dollars in thousands)
years Ended December 31,
2010
2009
2008
Cash Flows From Operating Activities
Net income
Adjustments to net income:
Depreciation and amortization
Income from discontinued operations:
Real estate acquired for resale
Real estate held for investment
Gain on sales of land
Amortization of share-based compensation
Provisions for impairment on real estate held for investment
Cash provided by (used in) discontinued operations:
Real estate acquired for resale
Real estate held for investment
Investment in real estate acquired for resale
Proceeds from sales of real estate acquired for resale
Collection of notes receivable by Crest
Change in assets and liabilities:
Accounts receivable and other assets
Accounts payable, accrued expenses and other liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities
Proceeds from sales of investment properties:
Continuing operations
Discontinued operations
Restricted escrow deposit for Section 1031 tax-deferred exchange
Acquisition of and improvements to investment properties
Intangibles acquired in connection with acquisitions of investment properties
Net cash used in investing activities
Cash Flows from Financing Activities
Cash distributions to common stockholders
Cash dividends to preferred stockholders
Borrowings from lines of credit
Payments under lines of credit
Proceeds from notes issued, net
Proceeds from common stock offerings, net
Debt issuance costs
Principal payment on notes payable
Other items
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
$ 130,784
$ 131,127
$ 131,841
95,513
90,519
(946)
(8,422)
(271)
6,166
807
946
866
—
—
138
5,270
12,517
243,368
—
25,779
(6,361)
(701,391)
(15,385)
(697,358)
(182,500)
(24,253)
612,200
(616,800)
246,131
432,591
(4,091)
—
(1,707)
461,571
7,581
10,026
(1,172)
(9,180)
(15)
4,726
199
1,250
2,674
—
1,987
129
3,607
856
226,707
170
19,904
(4,479)
(60,459)
(860)
(45,724)
(178,008)
(24,253)
4,600
—
—
—
—
(20,000)
(111)
(217,772)
(36,789)
46,815
89,104
(3,819)
(17,721)
(236)
5,049
3,374
(52)
6,336
(9)
31,455
87
(930)
1,676
246,155
439
27,365
(3,174)
(194,106)
(397)
(169,873)
(169,655)
(24,253)
—
—
—
74,425
(3,196)
(100,000)
111
(222,568)
(146,286)
193,101
Cash and cash equivalents, end of year
$ 17,607
$ 10,026
$ 46,815
For supplemental disclosures, see note 13.
The accompanying notes to consolidated financial statements are an integral part of these statements.
R e a l t y I n c o m e 31 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
1. ORgANIzATION AND OPERATION
Realty Income Corporation (“Realty Income,” the “Company,” “we”, “our” or “us”) is organized as a Maryland corporation. We invest in
commercial real estate and have elected to be taxed as a real estate investment trust, or REIT.
At December 31, 2010, we owned 2,496 properties, located in 49 states, containing over 21.2 million leasable square feet, along with three
properties owned by our wholly-owned taxable REIT subsidiary, Crest Net Lease, Inc., or Crest. 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, or the Code.
Information with respect to number of properties, square feet, average initial lease term and weighted average contractual lease rate is unaudited.
2. SuMMARy OF SIgNIFICANT ACCOuNTINg POLICIES AND PROCEDuRES
AND RECENT ACCOuNTINg PRONOuNCEMENTS
Federal Income Taxes. We have elected to be taxed as a REIT under the Code. We believe we have qualified and continue to qualify as a REIT.
Under the REIT operating structure, we are permitted to deduct distributions paid to our stockholders and generally will not be required to pay
federal corporate income taxes on such income. Accordingly, no provision has been made for federal income taxes in the accompanying
consolidated financial statements, except for the federal income taxes of Crest, which are included in discontinued operations. The income taxes
recorded on our consolidated statements of income represent amounts paid by Realty Income for city and state income and franchise taxes.
Earnings and profits that determine the taxability of distributions to stockholders differ from net income reported for financial reporting purposes
due to differences in the estimated useful lives and methods used to compute depreciation and the carrying value (basis) of the investments in
properties for tax purposes, among other things.
The following reconciles our net income available to common stockholders to taxable income (dollars in thousands):
Net income available to common stockholders
Preferred stock cash dividends
Depreciation and amortization timing differences
Tax gain on the sales of real estate less than book gain
Tax loss on the sale of real estate less than book gain
Dividends received from Crest
Elimination of net revenue and expenses from Crest
Adjustment for share-based compensation
Adjustment for straight-line rent
Adjustment for an increase (decrease) in prepaid rent
Other adjustments
2010(1)
$ 106,531
24,253
22,905
—
(10,063)
—
1,337
562
(1,613)
4,223
3,579
2009
$ 106,874
2008
$ 107,588
24,253
27,094
(5,436)
—
—
378
1,824
(1,117)
1,273
(752)
24,253
28,624
(4,518)
—
2,500
270
2,270
(1,997)
(1,226)
(321)
Taxable net income, before our dividends paid deduction
$ 151,714
$ 154,391
$ 157,443
(1) The 2010 information presented is a reconciliation of our net income available to common stockholders to estimated taxable net income.
We regularly analyze our various federal and state filing positions and only recognize the income tax effect in our financial statements when
certain criteria regarding uncertain income tax positions have been met. We believe that our income tax positions would more likely than not be
sustained upon examination by all relevant taxing authorities. Therefore, no reserves for uncertain income tax positions have been recorded in
our financial statements.
Absent an election to the contrary, if a REIT acquires property that is or has been owned by a C corporation in a transaction in which the tax
basis of the property in the hands of the REIT is determined by reference to the tax basis of the property in the hands of the C corporation, and
the REIT recognizes gain on the disposition of such property during the 10 year period beginning on the date on which it acquired the property,
then the REIT will be required to pay tax at the highest regular corporate tax rate on this gain to the extent of the excess of the fair market value of
the property over the REIT’s adjusted basis in the property, in each case determined as of the date the REIT acquired the property. In August 2007,
we acquired 100% of the stock of a C corporation that owned real property. At the time of acquisition, the C corporation became a Qualified REIT
Subsidiary, was deemed to be liquidated for Federal income tax purposes, and the real property was deemed to be transferred to us with a carry-
over tax basis. As of December 31, 2010, we have built-in gains of $60 million with respect to such property. We do not expect that we will be
R e a l t y I n c o m e 32 2 0 1 0 A n n u a l R e p o r t
required to pay income tax on the built-in gains in these properties during the ten-year period ending August 28, 2017. It is our intent, and we have
the ability, to defer any dispositions of these properties to periods when the related gains would not be subject to the built-in gain income tax or
otherwise to defer the recognition of the built-in gain related to these properties. However, our plans could change and it may be necessary to
dispose of one or more of these properties in a taxable transaction before August 28, 2017, in which case we would be required to pay corporate
level tax with respect to the built-in gains on these properties as described above.
Net Income Per Common Share. Basic net income per common share is computed by dividing net income available to common stockholders by
the weighted average number of common shares outstanding during each period. Diluted net income per common share is computed by dividing
net income available to common stockholders for the period by the weighted average number of common shares that would have been outstanding
assuming the issuance of common shares for all potentially dilutive common shares outstanding during the reporting period.
The following is a reconciliation of the denominator of the basic net income per common share computation to the denominator of the diluted
net income per common share computation:
Weighted average shares used for the basic net income
per share computation
Incremental shares from share-based compensation
Adjusted weighted average shares used for diluted net income
2010
2009
2008
105,869,637
73,084
103,577,507
3,546
101,178,191
31,692
per share computation
105,942,721
103,581,053
101,209,883
Unvested shares from share-based compensation
that were anti-dilutive
87,600
542,368
614,917
Other Assets. Other assets consist of the following (dollars in thousands) at:
December 31,
Value of in-place and above-market leases, net
Notes receivable issued in connection with Crest property sales
Deferred bond financing costs, net
Prepaid expenses
Escrow deposits for Section 1031 tax-deferred exchanges
Credit facility organization costs, net
Corporate assets, net of accumulated depreciation and amortization
Other items
2010
$ 26,221
22,075
14,203
8,431
6,361
4,619
827
1,861
2009
$ 10,928
22,214
11,899
7,738
4,479
1,470
1,058
491
Distributions Payable. Distributions payable consist of the following declared distributions (dollars in thousands) at:
$ 84,598
$ 60,277
December 31,
Common stock distributions
Preferred stock dividends
2010
$ 17,030
2,021
$ 19,051
2009
$ 14,905
2,021
$ 16,926
Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses consist of the following (dollars in thousands) at:
December 31,
Bond interest payable
Other items
2010
$ 33,240
13,779
$ 47,019
2009
$ 25,972
12,473
$ 38,445
R e a l t y I n c o m e 33 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Notes to Consolidated Financial Statements, cont’d.
Other Liabilities. Other liabilities consist of the following (dollars in thousands) at:
December 31,
Rent received in advance
Security deposits
Value of in-place below-market leases, net
2010
$ 14,564
4,539
3,452
$ 22,555
2009
$ 10,341
4,334
2,132
$ 16,807
Discontinued Operations. Operations from nine of our investment properties were classified as held for sale at December 31, 2010, plus properties
sold in 2010, 2009 and 2008, are reported as discontinued operations. Their respective results of operations have been reclassified to “income
from discontinued operations, real estate held for investment” on our consolidated statements of income. We do not depreciate properties that are
classified as held for sale.
Crest acquires properties with the intention of reselling them rather than holding them for investment and operating the properties. Consequently,
we typically classify Crest’s assets as held for sale at the date of acquisition and do not depreciate them. As a result, the operations of Crest’s
property assets are typically classified as “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated
statements of income.
However, if we determine we have no plans to sell a property asset in the near term (i.e. within the next 12 months), and this property
was previously classified as held for sale, the property is reclassified as real estate held for investment. A property that is reclassified to held
for investment is measured and recorded at the lower of (i) its carrying amount before the property was classified as held for sale, adjusted for
any depreciation expense that would have been recognized had the property been continuously classified as held for investment, or (ii) the fair
value at the date of the subsequent decision not to sell.
At December 31, 2010, we determined that three property assets, acquired by Crest in 2006, no longer met the held for sale criteria because
we decided to lease rather than sell these properties in the near term. As a result, investment in real estate of $3.0 million was reclassified from real
estate held for sale to real estate held for investment on our consolidated balance sheet at December 31, 2010. At December 31, 2009, Crest’s
property inventory consisted of three properties valued at $3.8 million, all of which was held for sale and included on our consolidated balance
sheet at December 31, 2009, in “real estate held for sale, net.” The results of operations for these properties are included in “income from continuing
operations” on our consolidated statements of income. As a result of this reclassification, $911,000, $214,000 and $3.2 million in operating loss
was reclassified from discontinued operations to continuing operations for 2010, 2009 and 2008, respectively.
No debt was assumed by buyers of our investment properties, or repaid as a result of our investment property sales, and we do not allocate
interest expense to discontinued operations related to real estate held for investment. We allocate interest expense related to borrowings specifically
attributable to Crest’s properties. The interest expense amounts allocated to the Crest properties held for sale are included in “income from
discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income.
The following is a summary of Crest’s “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated
statements of income (dollars in thousands):
Crest’s income from discontinued operations, real estate acquired for resale
2010
Rental revenue
Interest revenue
Gain on sales of real estate acquired for resale
Interest expense
General and administrative expense
Property expenses
Provisions for impairment
Depreciation(1)
Income tax benefit (expense)
Income from discontinued operations, real estate
acquired for resale by Crest
$
—
1,397
—
(557)
(226)
(12)
—
—
344
2009
$ 157
1,403
—
(595)
(336)
(24)
(78)
—
645
2008
$ 1,595
899
4,642
(1,797)
(511)
(13)
—
(771)
(225)
$ 946
$ 1,172
$ 3,819
(1) Depreciation was recorded on one property that was classified as held for investment. This property was sold in 2008.
R e a l t y I n c o m e 34 2 0 1 0 A n n u a l R e p o r t
The following is a summary of Realty Income’s “income from discontinued operations, from real estate held for investment” on our consolidated
statements of income (dollars in thousands):
Realty Income’s income from discontinued operations,
real estate held for investment
Gain on sales of investment properties
Rental revenue
Other revenue
Depreciation and amortization
Property expenses
Provisions for impairment
2010
$ 8,405
1,771
32
(636)
(937)
(213)
2009
$ 8,044
3,592
45
(1,428)
(963)
(110)
2008
$ 13,314
6,813
96
(1,929)
(573)
—
Income from discontinued operations, real estate held for investment
$ 8,422
$ 9,180
$ 17,721
The following is a summary of our total income from discontinued operations (dollars in thousands, except per share data):
Total discontinued operations
Real estate acquired for resale by Crest
Real estate held for investment
Income from discontinued operations
Per common share, basic and diluted
2010
$
946
8,422
$ 9,368
$ 0.09
2009
$ 1,172
9,180
$ 10,352
$ 0.10
2008
$ 3,819
17,721
$ 21,540
$ 0.21
The per share amounts for “income from discontinued operations” above and the “income from continuing operations” and “net income”
reported on the consolidated statements of income have each been calculated independently.
Revenue Recognition and Accounts Receivable. All leases are accounted for as operating leases. Under this method, lease payments that
have fixed and determinable rent increases are recognized on a straight-line basis over the lease term. Any rental revenue contingent upon a tenant’s
sales is recognized only after the tenant exceeds their sales breakpoint. Rental increases based upon changes in the consumer price indexes are
recognized only after the changes in the indexes have occurred and are then applied according to the lease agreements.
We recognize an allowance for doubtful accounts relating to accounts receivable for amounts deemed uncollectible. We consider tenant
specific issues, such as financial stability and ability to pay, when determining collectibility of accounts receivable and appropriate allowances to
record. Our allowance for doubtful accounts at December 31, 2010 was $1.1 million and at December 31, 2009 was $865,000.
Other revenue includes non-operating interest earned from investments in money market funds and other notes of $96,000 in 2010, $51,000
in 2009 and $1.4 million in 2008.
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of Realty Income, Crest and other entities
for which we make operating and financial decisions (i.e. control), after elimination of all material intercompany balances and transactions. All of
Realty Income’s subsidiaries are wholly-owned. We have no unconsolidated or off-balance sheet investments in variable interest entities.
Cash Equivalents. We consider all short-term, highly liquid investments that are readily convertible to cash and have an original maturity of three
months or less at the time of purchase to be cash equivalents. Our cash equivalents are primarily investments in United States Treasury or
government money market funds.
Gain on Sales of Properties. When real estate is sold, the related net book value of the applicable assets is removed and a gain from the sale is
recognized in our consolidated statements of income. We record a gain from the sale of real estate provided that various criteria, relating to the
terms of the sale and any subsequent involvement by us with the real estate, have been met.
Allocation of the Purchase Price of Real Estate Acquisitions. When acquiring a property for investment purposes, we allocate the fair value of
real estate acquired to: 1) land and 2) building and improvements, based in each case on their estimated fair values.
R e a l t y I n c o m e 35 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Notes to Consolidated Financial Statements, cont’d.
For properties acquired with in-place operating leases, the fair value of real estate is allocated to: 1) land, 2) building and improvements, and
3) identified intangible assets and liabilities, based in each case on their estimated fair values. Intangible assets and liabilities consist of above-
market and below-market leases, the value of in-place leases and tenant relationships.
Our estimated fair value determinations are based on management’s judgment, which is based on various factors, including: (1) market
conditions, (2) industry that tenant operates in, (3) characteristics of the real estate, i.e.: location, size, demographics, value and comparative rental
rates, (4) tenant credit profile, (5) store profitability and the importance of the location of the real estate to the operations of the tenant’s business,
and/or (6) real estate appraisals, prepared by an independent appraisal firm. When real estate appraisals are utilized, the measurement of fair
value related to the allocation of the purchase price of real estate acquisitions is derived principally from observable market data that is not readily
available to the public (and thus should be categorized as level 2 on FASB’s three-level valuation hierarchy). Our other methodologies for measuring
fair value related to the allocation of the purchase price of real estate acquisitions (except for independent third-party real estate appraisals) include
unobservable inputs that reflect our own internal assumptions and calculations (and thus should be categorized as level 3 on FASB’s three-level
valuation hierarchy).
The fair value of the tangible assets of an acquired property (which includes land and buildings/improvements) is determined by valuing the
property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings/improvements based on our determination of the
relative fair value of these assets. Our fair value determinations are based on a real estate appraisal for each property, prepared by an independent
appraisal firm, and consider estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute
similar leases. In allocating the fair value to identified intangibles for above-market or below-market leases, an amount is recorded based on the
present value of the difference between (i) the contractual amount to be paid pursuant to the in-place lease and (ii) our estimate of fair market lease
rate for the corresponding in-place lease, measured over a period equal to the remaining term of the lease.
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized
below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-
market renewal option periods.
The aggregate value of other acquired intangible assets consists of the value of in-place leases and tenant relationships. These are measured
by the excess of the purchase price paid for a property, after adjusting for above or below-market lease value, less the estimated fair value of the
property “as if vacant,” determined as set forth above. The value of in-place leases, exclusive of the value of above-market and below-market
in-place leases, is amortized to expense over the remaining periods of the respective leases. If a lease were to be terminated prior to its stated
expiration, all unamortized amounts relating to that lease would be recorded to revenue or expense as appropriate.
Depreciation and Amortization. Land, buildings and improvements are recorded and stated at cost. Major replacements and betterments,
which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives, while ordinary repairs and
maintenance are expensed as incurred. Buildings and improvements that are under redevelopment, or are being developed, are carried at cost
and no depreciation is recorded on these assets. Additionally, amounts essential to the development of the property, such as pre-construction,
development, construction, interest and any other costs incurred during the period of development are capitalized. We cease capitalization when
the property is available for occupancy upon substantial completion of tenant improvements, but in any event no later than one year from the
completion of major construction activity.
Properties are depreciated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows:
Buildings
Building improvements
Typically 25 years
4 to 15 years
Tenant improvements and lease commissions
The shorter of the term of the related lease or useful life
Acquired in-place leases
Remaining terms of the respective leases
Provisions for Impairment. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. An impairment is recorded if estimated future operating cash flows (undiscounted and without interest
charges) plus estimated disposition proceeds (undiscounted) are less than the current book value of the property. Key factors that we use in this
analysis include: projected rental rates, capital expenditures and property sales capitalization rates. Additionally, a property classified as held for
sale is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell.
R e a l t y I n c o m e 36 2 0 1 0 A n n u a l R e p o r t
In 2010, Realty Income recorded total provisions for impairment of $213,000 on three properties in the restaurant industry and one property in
the child care industry. These provisions for impairment are included in “income from discontinued operations, real estate held for investment” on
our consolidated statement of income for 2010, as three of the properties were subsequently sold and one is anticipated to be sold in the first quarter
of 2011. During 2010, Crest recorded total provisions for impairment of $807,000 on three properties held for investment at December 31, 2010.
These provisions for impairment are included in “income from continuing operations” on our consolidated statement of income for 2010.
In 2009, we recorded a provision for impairment of $110,000 on one property in the convenience store industry, which was sold during 2010.
This provision for impairment is included in “income from discontinued operations, real estate held for investment” on our consolidated statement
of income for 2009. Additionally, in 2009, Crest recorded total provisions for impairment of $199,000 on three properties classified as held for
investment at December 31, 2010. These provisions for impairment are included in “income from continuing operations” on our consolidated
statement of income for 2009. Additionally, Crest recorded total provisions for impairment of $78,000 on two properties which were sold in 2009.
These provisions for impairment are included in “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated
statement of income for 2009.
No provisions for impairment were recorded by Realty Income in 2008. In 2008, Crest recorded total provisions for impairment of $3.4 million
on three properties, which were held for investment at December 31, 2010. These provisions for impairment are included in “income from continuing
operations” on our consolidated statement of income for 2008.
Asset Retirement Obligations. We analyze our future legal obligations associated with the other-than-temporary removal of tangible long-lived
assets, also referred to as asset retirement obligations. When we determine that we have a legal obligation to provide services upon the retirement
of a tangible long-lived asset, we record a liability for this obligation based on the estimated fair market value of this obligation and adjust the
carrying amount of the related long-lived asset by the same amount. This asset is amortized over its estimated useful life. The estimated fair value
of the asset retirement obligation is calculated by discounting the future cash flows using a credit-adjusted risk-free interest rate.
Goodwill. Goodwill is tested for impairment during the second quarter of each year as well as when events or circumstances occur indicating that
our goodwill might be impaired. During our tests for impairment of goodwill, during the second quarters of 2010, 2009 and 2008, we determined
that the estimated fair values of our reporting units exceeded their carrying values. We did not record any new goodwill or impairment on our
existing goodwill during 2010, 2009 or 2008.
Sales Taxes. We collect and remit sales taxes assessed by different governmental authorities that are both imposed on and concurrent with
a revenue-producing transaction between us and our tenants. We report the collection of these taxes on a net basis (excluded from revenues).
The amounts of these taxes are not significant to our financial position or results of operations.
Use of Estimates. The consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles, or
GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Impact of Recent Accounting Pronouncements. In December 2010, the Financial Accounting Standards Board issued Accounting Standards
Update, or ASU, No. 2010-29, Business Combinations (Topic 805), Disclosure of Supplementary Pro Forma Information for Business Combinations.
Effective for periods beginning after December 15, 2010, ASC No. 2010-29 specifies that if a public entity enters into business combinations that
are material on an individual or aggregate basis and presents comparative financial statements, the entity must present pro forma revenue and
earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of
the comparable prior annual reporting period only. ASU No. 2010-29 only applies to our disclosures in note 3 related to acquisitions and is not
expected to have a significant impact on our footnote disclosures.
Reclassifications. Certain of the 2009 and 2008 balances have been reclassified to conform to the 2010 presentation.
R e a l t y I n c o m e 37 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Notes to Consolidated Financial Statements, cont’d.
3. PROPERTIES ACQuIRED
We acquire the land, buildings and improvements that are necessary for the successful operations of retail and other commercial enterprises.
A. During 2010, Realty Income invested $713.5 million in 186 new properties with an initial weighted average contractual lease rate of 7.9%. These
186 properties are located in 14 states, contain over 2.2 million leasable square feet, and are 100% leased with an average lease term of 15.7
years. The initial weighted average contractual lease rate is computed by dividing the estimated aggregate base rent for the first year of each lease
by the estimated total cost of the properties. In accordance with GAAP, acquisition transaction costs of $368,000 were recorded to “general and
administrative” expense on our consolidated statement of income for 2010.
Included in the $713.5 million invested during 2010 are the following acquisitions:
(1) The acquisition and lease-back of approximately $304.1 million of winery and vineyard properties under 20-year, triple-net lease
arrangements with Diageo Chateau & Estates Wine Company, guaranteed by Diageo plc (NYSE: ADR: DEO), or, together with its
subsidiaries, Diageo. The properties are primarily located in California’s Napa Valley and include two wineries that produce wines for
Diageo’s Sterling Vineyards, or Sterling, and Beaulieu Vineyards, or BV, brands and 14 vineyards producing grapes for their Sterling, BV
and other brands. The properties include approximately 3,600 acres and 426,000 square feet of winery, production, storage, shipping
and tourist buildings. Diageo will continue to operate the wineries and vineyards.
(2) The acquisition of 23 retail properties leased to 13 tenants in six states, for approximately $126.5 million, under long-term, net lease
agreements. The properties are in eight different industries, all of which are already in our portfolio. All of the properties acquired have
in-place leases.
(3) The acquisition of 135 SuperAmerica convenience stores and one support facility, for approximately $247.6 million, under long-term,
triple-net lease agreements. The stores are located in Minnesota and Wisconsin, and average approximately 3,500 leasable square feet
on approximately 1.14 acres.
(4) The remaining 11 properties acquired totaled approximately $35.3 million.
The 2010 aggregate acquisitions were allocated as follows: $358.3 million to land, $339.8 million to buildings and improvements, $17.0 million
to intangible assets and $1.6 million to intangible liabilities. All of the acquisitions were cash purchases and there were no contingent considerations
associated with these acquisitions.
Total revenues of $16.0 million and income from continuing operations of $12.1 million are included in the 2010 consolidated income statement
for the aggregate 2010 acquisitions.
The following pro forma total revenue and income from continuing operations of the 2010 acquisitions in aggregate, assumes the acquisitions
had taken place on January 1, 2010 for the 2010 pro forma information, and on January 1, 2009 for the 2009 pro forma information (in millions):
Supplemental pro forma for the year ended December 31, 2010(1)
Supplemental pro forma for the year ended December 31, 2009(1)
Total Revenue
$ 385.4
$ 381.6
Income from
Continuing Operations
$ 137.7
$ 142.3
(1) This unaudited pro forma supplemental information does not purport to be indicative of what our operating results would have been had the acquisitions occurred on
January 1, 2010 or January 1, 2009, and may not be indicative of future operating results.
In comparison, during 2009, Realty Income 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. In accordance with GAAP, acquisition transaction costs of $62,000 were recorded to “general and administrative” expense
on our consolidated statement of income for 2009.
B. During 2010 and 2009, Crest did not invest in any new properties.
C. Of the $713.5 million invested by Realty Income in 2010, approximately $126.5 million was used to acquire 23 properties with existing leases.
Realty Income recorded $12.6 million as the intangible value of the in-place leases, $4.4 million as the intangible value of above-market leases and
$1.6 million as the intangible value of below-market leases for 2010. The value of the in-place and above-market leases are recorded to “other
R e a l t y I n c o m e 38 2 0 1 0 A n n u a l R e p o r t
assets” on our consolidated balance sheet, as of December 31, 2010, and the value of the below-market leases are recorded to “other liabilities”
on our consolidated balance sheet as of December 31, 2010. All of these amounts are amortized over the life of the respective leases.
Of the $57.9 million invested by Realty Income in 2009, $10.5 million was used to acquire three properties with existing leases. Realty Income
recorded $1.4 million as the intangible value of the in-place leases, $150,000 as the intangible value of above-market leases and $655,000 as
the intangible value of below-market leases for 2009. The value of the in-place and above-market leases are recorded to “other assets” on
our consolidated balance sheet, as of December 31, 2009, and the value of the below-market leases are recorded to “other liabilities” on our
consolidated balance sheet as of December 31, 2009. All of these amounts are amortized over the life of the respective leases.
4. CREDIT FACILITy
In December 2010, we entered into a new $425 million revolving, unsecured credit facility that replaced our previous $355 million acquisition
credit facility that was scheduled to expire in May 2011. The initial term of the new credit facility expires in March 2014 and includes two, one-year
extension options. Under the new credit facility, our investment grade credit ratings provide for financing at the London Interbank Offered Rate,
commonly referred to as LIBOR, plus 185 basis points with a facility commitment fee of 35 basis points, for all-in drawn pricing of 220 basis points
over LIBOR. We also have other interest rate options available to us. Our credit facility is unsecured and, accordingly, we have not pledged any
assets as collateral for this obligation.
In December 2010, as a result of entering into our current credit facility, we incurred $4.2 million of credit facility origination costs that were
classified as part of “other assets” on our consolidated balance sheet at December 31, 2010 and are being amortized over the term of the credit
facility. The remaining credit facility origination costs that were incurred as a result of entering into our previous $355 million credit facility, which
were $452,000 at December 31, 2010, are included in “other assets” and are being amortized over the remaining term of our current $425 million
credit facility.
The average borrowing rate on our credit facility was 1.3% during 2010. During 2009, we did not utilize our credit facility until December and,
during 2008, we did not utilize our credit facility. Our effective borrowing rate at December 31, 2010 was 2.1% and at December 31, 2009 was
1.2%. Our current and prior credit facilities are and were subject to various leverage and interest coverage ratio limitations. We are and have been
in compliance with these covenants.
5. NOTES PAyABLE
A. General
Our senior unsecured note obligations consist of the following, sorted by maturity date (dollars in millions):
December 31,
5.375% notes, issued in March 2003 and due in March 2013
5.5% notes, issued in November 2003 and due in November 2015
5.95% notes, issued in September 2006 and due in September 2016
5.375% notes, issued in September 2005 and due in September 2017
6.75% notes, issued in September 2007 and due in August 2019
5.75% notes, issued in June 2010 and due in January 2021
5.875% bonds, issued in March 2005 and due in March 2035
2010
$ 100
150
275
175
550
250
100
2009
$ 100
150
275
175
550
—
100
$ 1,600
$ 1,350
The following table summarizes the maturity of our notes payable as of December 31, 2010 (dollars in millions):
year of Maturity
2011
2012
2013
2014
2015
Thereafter
Totals
Notes
$ —
—
100
—
150
1,350
$ 1,600
R e a l t y I n c o m e 39 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Notes to Consolidated Financial Statements, cont’d.
Interest incurred on all of the notes for 2010 was $89.7 million, for 2009 was $82.5 million and for 2008 was $91.2 million. The interest rate
on each of these notes is fixed.
Our outstanding notes are unsecured; accordingly, we have not pledged any assets as collateral for these or any other obligations. Interest
on all of the senior note obligations is paid semiannually.
All of these notes contain various covenants, including: (i) a limitation on incurrence of any debt which would cause our debt to total adjusted
assets ratio to exceed 60%; (ii) a limitation on incurrence of any secured debt which would cause our secured debt to total adjusted assets ratio to
exceed 40%; (iii) a limitation on incurrence of any debt which would cause our debt service coverage ratio to be less than 1.5 times; and (iv) the
maintenance at all times of total unencumbered assets not less than 150% of our outstanding unsecured debt. We have been in compliance with
these covenants since each of the notes were issued.
B. Note Issuance
In June 2010, we issued $250 million in aggregate principal amount of 5.75% senior unsecured notes due January 2021, or the 2021 Notes.
The price to the investor for the 2021 Notes was 99.404% of the principal amount for an effective yield of 5.826%. The net proceeds of approximately
$246.1 million from this offering were used to repay borrowings under our acquisition credit facility, which were used to finance the acquisition of
the Diageo properties in June 2010. Interest is paid semiannually on the 2021 Notes.
C. Note Redemptions
On their maturity date in January 2009, we redeemed, using cash on hand, all of our outstanding 8.00% notes issued in January 1999 at
a redemption price equal to 100% of the principal amount of $20 million, plus accrued and unpaid interest.
On their maturity date in November 2008, we redeemed, using proceeds from our September 2008 common stock offering and cash on hand,
all of our outstanding 8.25% senior notes issued in October 1998, or the 2008 Notes, at a redemption price equal to 100% of the principal
amount, plus accrued and unpaid interest.
6. COMMON STOCk OFFERINgS
In December 2010, we issued 7,360,000 shares of common stock at a price of $33.70 per share. The net proceeds of approximately
$235.7 million were used to repay borrowings of $179.8 million under our acquisition credit facility and to fund property acquisitions during
December 2010. The remaining net proceeds were used for general corporate purposes and working capital.
In September 2010, we issued 6,198,500 shares of common stock at a price of $33.40 per share. The net proceeds of approximately
$196.9 million were used to repay borrowings of $49.7 million under our acquisition credit facility and to fund $126.5 million of property
acquisitions during October 2010. The remaining net proceeds were used for general corporate purposes and working capital.
In September 2008, we issued 2,925,000 shares of common stock at a price of $26.82 per share. The net proceeds of approximately
$74.4 million were used, along with our available cash on hand, to redeem the $100 million outstanding principal amount of our 2008 Notes
in November 2008.
7. PREFERRED STOCk
A. In 2004, we issued 5.1 million shares of 7.375% Monthly Income Class D cumulative redeemable preferred stock. In May 2009, the Class D
preferred shares became redeemable, at our option, for $25 per share. During 2010, 2009 and 2008, we paid twelve monthly dividends to holders
of our Class D preferred stock totaling $1.8437508 per share, or $9.4 million, and at December 31, 2010, a monthly dividend of $0.1536459 per
share was payable and was paid in January 2011.
B. In 2006, we issued 8.8 million shares of 6.75% Monthly Income Class E cumulative redeemable preferred stock. Beginning December 7, 2011,
the Class E preferred shares are redeemable, at our option, for $25 per share. During 2010, 2009 and 2008, we paid twelve monthly dividends to
holders of our Class E preferred stock totaling $1.6875 per share, or $14.9 million, and at December 31, 2010, a monthly dividend of $0.140625
per share was payable and was paid in January 2011.
We are current in our obligations to pay dividends on our Class D and Class E preferred stock.
R e a l t y I n c o m e 40 2 0 1 0 A n n u a l R e p o r t
8. DISTRIBuTIONS PAID AND PAyABLE
A. Common Stock
We pay monthly distributions to our common stockholders. The following is a summary of monthly distributions paid per common share for the years:
Month
January
February
March
April
May
June
July
August
September
October
November
December
Total
2010
2009
2008
$ 0.1430000
$ 0.1417500
$ 0.136750
0.1430000
0.1430000
0.1433125
0.1433125
0.1433125
0.1436250
0.1436250
0.1436250
0.1439375
0.1439375
0.1439375
0.1417500
0.1417500
0.1420625
0.1420625
0.1420625
0.1423750
0.1423750
0.1423750
0.1426875
0.1426875
0.1426875
0.136750
0.136750
0.137375
0.137375
0.137375
0.138000
0.138000
0.140500
0.141125
0.141125
0.141125
$ 1.7216250
$ 1.7066250
$ 1.662250
The following presents the federal income tax characterization of distributions paid or deemed to be paid per common share for the years:
Ordinary income
Nontaxable distributions
Capital gain
Totals
2010
2009
2008
$ 1.2598879
0.4617371
—
$ 1.7216250
$ 1.2739214
0.4113034
0.0214002
$ 1.7066250
$ 1.2681285
0.3121490
0.0819725
$ 1.6622500
At December 31, 2010, a distribution of $0.14425 per common share was payable and was paid in January 2011. At December 31, 2009,
a distribution of $0.143 per common share was payable and was paid in January 2010.
B. Class D Preferred Stock
Dividends of $0.1536459 per share are paid monthly in arrears on the Class D preferred stock. We declared dividends to holders of our Class D
preferred stock totaling $9.4 million in 2010, 2009 and 2008, respectively.
The following presents the federal income tax characterization of dividends paid per share to our Class D preferred stockholders for the years:
Ordinary income
Capital gain
Totals
C. Class E Preferred Stock
2010
2009
2008
$ 1.8437508
—
$ 1.8437508
$ 1.8206316
0.0231192
$ 1.8437508
$ 1.7528280
0.0909228
$ 1.8437508
Dividends of $0.140625 per share are paid monthly in arrears on the Class E preferred stock. We declared dividends to holders of our Class E
preferred stock totaling $14.9 million in 2010, 2009 and 2008.
The following presents the federal income tax characterization of dividends paid per share to our Class E preferred stockholders for the years:
Ordinary income
Capital gain
Totals
2010
2009
2008
$ 1.6875000
—
$ 1.6875000
$ 1.6663392
0.0211608
$ 1.6875000
$ 1.6042824
0.0832176
$ 1.6875000
R e a l t y I n c o m e 41 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Notes to Consolidated Financial Statements, cont’d.
9. OPERATINg LEASES
A. At December 31, 2010, we owned 2,496 properties in 49 states, plus an additional three properties owned by Crest. Of the 2,496 properties,
2,485, or 99.6%, are single-tenant, properties and the remaining 11 are multi-tenant, distribution and office properties. At December 31, 2010,
84 properties were vacant and available for lease or sale.
Substantially all leases are net leases where the tenant pays property taxes and assessments, maintains the interior and exterior of the building
and leased premises, and carries insurance coverage for public liability, property damage, fire and extended coverage.
Rent based on a percentage of a tenants’ gross sales (percentage rents) for 2010 was $1.4 million, for 2009 was $1.3 million and for 2008
was $1.3 million, including amounts recorded to discontinued operations of $56,000 in 2010, $90,000 in 2009 and $61,000 in 2008.
At December 31, 2010, minimum future annual rents to be received on the operating leases for the next five years and thereafter are as follows
(dollars in thousands):
2011
2012
2013
2014
2015
Thereafter
Total
$ 373,787
360,338
346,073
328,318
314,855
2,637,944
$ 4,361,315
B. Major Tenants — No individual tenant’s rental revenue, including percentage rents, represented more than 10% of our total revenue for each of
the years ended December 31, 2010, 2009 or 2008.
10. gAIN ON SALES OF REAL ESTATE ACQuIRED FOR RESALE By CREST
During 2010, Crest did not sell any properties. During 2009, Crest sold two properties for $2.0 million, which resulted in no gain. During 2008,
Crest sold 25 properties for $50.7 million, which resulted in a gain of $4.6 million. In 2008, as part of two sales, Crest provided buyer financing of
$19.2 million. Crest’s gains on sales are reported before income taxes and are included in discontinued operations.
11. gAIN ON SALES OF INvESTMENT PROPERTIES By REALTy INCOME
During 2010, we sold 28 investment properties for $26.6 million, which resulted in a gain of $8.4 million. The results of operations for these
properties have been reclassified as discontinued operations. Additionally, we sold excess land from one property for $600,000, which resulted
in a gain of $271,000. This gain is included in “other revenue” on our consolidated statement of income for 2010 because this excess land was
associated with a property that continues to be owned as part of our core operations.
During 2009, we sold 25 investment properties for $20.3 million, which resulted in a gain of $8.0 million. The results of operations for these
properties have been reclassified as discontinued operations. Additionally, we received proceeds of $170,000 from the sale of excess land from
one property, which resulted in a gain of $15,000. This gain is included in “other revenue” on our consolidated statement of income for 2009
because this excess land was associated with a property that continues to be owned as part of our core operations.
During 2008, we sold 29 investment properties for $27.4 million, which resulted in a gain of $13.3 million. The results of operations for these
properties have been reclassified as discontinued operations. Additionally, we received proceeds of $439,000 from the sale of excess land from
one property, which resulted in a gain of $236,000. This gain is included in “other revenue” on our consolidated statement of income for 2008
because this excess land was associated with a property that continues to be owned as part of our core operations.
12. FAIR vALuE OF FINANCIAL INSTRuMENTS
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The disclosure for assets and liabilities measured at fair value requires allocation to a three-level
valuation hierarchy. This valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement
date. Categorization within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
R e a l t y I n c o m e 42 2 0 1 0 A n n u a l R e p o r t
We believe that the carrying values reflected in our consolidated balance sheets reasonably approximate the fair values for cash and cash
equivalents, accounts receivable, and all liabilities, due to their short-term nature, except for our notes receivable issued in connection with
property sales and our notes payable, which are disclosed below (dollars in millions):
At December 31, 2010
Notes receivable issued in connection with Crest property sales
Notes payable
At December 31, 2009
Notes receivable issued in connection with Crest property sales
Notes payable
Carrying value per
balance sheet
$ 22.1
$ 1,600.0
Carrying value per
balance sheet
$ 22.2
$ 1,350.0
Estimated fair
market value
$ 23.2
$ 1,707.1
Estimated fair
market value
$ 20.0
$ 1,276.4
The estimated fair value of our notes receivable, issued in connection with property sales, has been calculated by discounting the future cash
flows using an interest rate based upon the current 5-year or 7-year Treasury Yield Curve, plus an applicable credit-adjusted spread. These notes
receivable were issued in connection with the sale of three Crest properties. Payments to us on these notes receivable are current and no
allowance for doubtful accounts has been recorded for them.
The estimated fair value of our notes payable is based upon indicative market prices and recent trading activity of our notes payable.
13. SuPPLEMENTAL DISCLOSuRES OF CASh FLOw INFORMATION
Interest paid in 2010 was $82.6 million, in 2009 was $83.2 million and in 2008 was $90.3 million. Interest capitalized to properties under
development in 2010 was $10,000, in 2009 was $5,000 and in 2008 was $92,000. Income taxes paid by Realty Income and Crest in 2010
were $907,000, in 2009 were $1.2 million and in 2008 were $1.7 million.
The following non-cash investing and financing activities are included in the accompanying consolidated financial statements:
A. Share-based compensation expense for 2010 was $6.2 million, for 2009 was $4.7 million and for 2008 was $5.0 million.
B. See “Provisions for Impairment” in note 2 for a discussion of provisions for impairments recorded by Realty Income and Crest.
C. At December 31, 2010, Realty Income had escrow deposits of $6.4 million held for tax-deferred exchanges under Section 1031 of the
Code. The $6.4 million is included in “other assets” on our consolidated balance sheet at December 31, 2010.
D. At December 31, 2009, Realty Income had escrow deposits of $4.5 million held for tax-deferred exchanges under Section 1031 of the
Code. The $4.5 million is included in “other assets” on our consolidated balance sheet at December 31, 2009.
E. At December 31, 2008, Realty Income had escrow deposits of $3.2 million held for tax-deferred exchanges under Section 1031 of the
Code. The $3.2 million is included in “other assets” on our consolidated balance sheet at December 31, 2008.
F. In 2010, Realty Income recorded a $799,000 receivable for the sale of an investment property as a result of an eminent domain action and
recorded a $600,000 receivable for the sale of excess land from an investment property. These receivables are included in “other assets” on
our consolidated balance sheet at December 31, 2010.
G. At December 31, 2009, Realty Income recorded $1.5 million for a new environmental insurance policy, which supplements its primary insurance
policy. The $1.5 million is included in “other assets” and “accounts payable and accrued expenses” on our consolidated balance sheet at
December 31, 2009.
R e a l t y I n c o m e 43 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Notes to Consolidated Financial Statements, cont’d.
H. In 2009, Realty Income and Crest amended certain prior year state tax returns and determined that it is more-likely-than-not that we will
be collecting refunds in the future as a result of these amendments. As a result of this, in 2009, Realty Income recorded a tax receivable of
$454,000 and Crest recorded a tax receivable of $303,000.
I. In 2008, Crest sold two properties for $23.5 million and received notes totaling $19.2 million from the buyers, which are included in “other
assets” on our consolidated balance sheets.
J. In accordance with our policy, we recorded adjustments to our estimated legal obligations related to asset retirement obligations on two land
leases in the following amounts: an increase of $82,000 in 2010, a reduction of $63,000 in 2009 and an increase of $335,000 in 2008. These
asset retirement obligations account for the difference between our obligations to the landlord under the two land leases and our subtenant’s
obligations to us under the subleases.
K. Accrued costs on properties under development resulted in an increase in buildings and improvements and accounts payable of $337,000
at December 31, 2010.
14. EMPLOyEE BENEFIT PLAN
We have a 401(k) plan covering substantially all of our employees. Under our 401(k) plan, employees may elect to make contributions to the
plan up to a maximum of 60% of their compensation, subject to limits under the Code. We match 50% of our employee’s contributions, up to
3% of the employee’s compensation. Our aggregate matching contributions each year have been immaterial to our results of operations.
15. COMMON STOCk INCENTIvE PLAN
In 2003, our Board of Directors adopted, and stockholders approved, the 2003 Incentive Award Plan of Realty Income Corporation, or the
Stock Plan, to enable us to attract and retain the services of directors, employees and consultants, considered essential to our long-term success.
The Stock Plan offers our directors, employees and consultants an opportunity to own stock in Realty Income and/or rights that will reflect our
growth, development and financial success. The Stock Plan was amended and restated by our Board of Directors in February 2006 and in May
2007. Under the terms of this plan, the aggregate number of shares of our common stock subject to options, stock purchase rights, or SPR,
stock appreciation rights, or SAR, and other awards will be no more than 3,428,000 shares. The maximum number of shares that may be subject
to options, SPR, SAR and other awards granted under the plan to any individual in any calendar year may not exceed 1,600,000 shares. This
plan has a term of 10 years from the date it was adopted by our Board of Directors, which was March 12, 2003. To date, we have not issued
any SPR or SAR.
The amount of share-based compensation costs recognized in “general and administrative expense” on our consolidated statements of
income during 2010 was $6.2 million, during 2009 was $4.7 million and during 2008 was $5.0 million.
The following table summarizes our common stock grant activity under our Stock Plan. Our common stock grants vest over periods ranging
from immediately to 10 years.
Outstanding nonvested shares,
beginning of year
Shares granted
Shares vested
Shares forfeited
Outstanding nonvested shares,
end of year
(1) Grant date fair value.
2010
2009
2008
Number
of shares
853,234
278,200
(206,153)
(987)
weighted
average
price(1)
$ 19.14
28.99
23.70
26.03
Number
of shares
994,453
142,860
(214,521)
(69,558)
weighted
average
price(1)
$ 19.70
22.86
23.14
25.95
Number
of shares
994,572
249,447
(188,215)
(61,351)
weighted
average
price(1)
$ 19.46
26.63
21.96
22.13
924,294
$ 19.69
853,234
$ 19.14
994,453
$ 19.70
R e a l t y I n c o m e 44 2 0 1 0 A n n u a l R e p o r t
During 2010, we issued 278,200 shares of common stock under our Stock Plan. These shares vest over the following service periods: 32,000
vested immediately, 5,000 vest over a service period of two years, 12,000 vest over a service period of three years, 50,000 vest over a service
period of four years and 179,200 vest over a service period of five years.
The vesting schedule for shares granted to non-employee directors is as follows:
• For directors with less than six years of service at the date of grant, shares vest in 33.33% increments on each of the first three anniversaries
of the date the shares of stock are granted;
• For directors with six years of service at the date of grant, shares vest in 50% increments on each of the first two anniversaries of the date
the shares of stock are granted;
• For directors with seven years of service at the date of grant, shares are 100% vested on the first anniversary of the date the shares of
stock are granted; and
• For directors with eight or more years of service at the date of grant, there is immediate vesting as of the date the shares of stock are
granted.
The vesting schedule for shares granted to employees is as follows:
• For employees age 55 and below at the grant date, shares vest in 20% increments on each of the first five anniversaries of the grant date;
• For employees age 56 at the grant date, shares vest in 25% increments on each of the first four anniversaries of the grant date;
• For employees age 57 at the grant date, shares vest in 33.33% increments on each of the first three anniversaries of the grant date;
• For employees age 58 at the grant date, shares vest in 50% increments on each of the first two anniversaries of the grant date;
• For employees age 59 at the grant date, shares are 100% vested on the first anniversary of the grant date; and
• For employees age 60 and above at the grant date, shares vest immediately on the grant date.
In addition, after they have been employed for six full months, all non-executive employees receive 200 shares of nonvested stock which vests
over a five year period.
As of December 31, 2010, the remaining unamortized share-based compensation expense totaled $18.2 million, which is being amortized
on a straight-line basis over the service period of each applicable award. The amount of share-based compensation is based on the fair value
of the stock at the grant date. We define the grant date as the date the recipient and Realty Income have a mutual understanding of the key
terms and condition of the award, and the recipient of the grant begins to benefit from, or be adversely affected by, subsequent changes in the
price of the shares.
Due to a historically low turnover rate, we do not estimate a forfeiture rate for our nonvested shares. Accordingly, unexpected forfeitures will
lower share-based compensation expense during the applicable period. Under the terms of our Stock Plan, we pay non-refundable dividends to
the holders of our nonvested shares. Applicable accounting guidance requires that the dividends paid to holders of these nonvested shares be
charged as compensation expense to the extent that they relate to nonvested shares that do not or are not expected to vest. However, since we
do not estimate forfeitures given our historical trends, we did not record any amount to compensation expense related to dividends paid in 2010,
2009 or 2008.
No stock options were granted after January 1, 2002, all outstanding options were fully vested as of December 31, 2006, and 2006 represented
the last year for which we recorded expense on our stock option awards. Stock options were granted with an exercise price equal to the underlying
stock’s fair value at the date of grant. The outstanding stock options expire on December 31, 2011, ten years from the date they were granted
and have an exercise price of $14.70.
The following table summarizes our stock option activity for the years:
Outstanding options, beginning of year
Options exercised
Outstanding and exercisable options,
end of year
2010
2009
2008
Number
of shares
5,846
(3,392)
weighted
average
exercise
price
$ 14.70
14.70
Number
of shares
21,294
(15,448)
weighted
average
exercise
price
$ 13.33
12.81
Number
of shares
45,007
(23,713)
weighted
average
exercise
price
$ 12.71
12.15
2,454
$ 14.70
5,846
$ 14.70
21,294
$ 13.33
R e a l t y I n c o m e 45 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Notes to Consolidated Financial Statements, cont’d.
The intrinsic value of a stock option is the amount by which the market value of the underlying stock at December 31 of each year exceeds the
exercise price of the option. The market value of our stock was $34.20, $25.91 and $23.15 at December 31, 2010, 2009 and 2008, respectively.
The total intrinsic value of options exercised during the years ended December 31, 2010, 2009 and 2008 was $61,000, $157,000 and $319,000,
respectively. The aggregate intrinsic value of options outstanding and exercisable was $48,000, $66,000 and $209,000 at December 31, 2010,
2009 and 2008, respectively.
16. SEgMENT INFORMATION
We evaluate performance and make resource allocation decisions on an industry by industry basis. For financial reporting purposes, we have
grouped our tenants into 33 industry and activity segments (including properties owned by Crest that are grouped together as a segment). All
of the properties are incorporated into one of the applicable segments. Because almost all of our leases require the tenant to pay operating
expenses, revenue is the only component of segment profit and loss we measure.
The following tables set forth certain information regarding the properties owned by us, classified according to the business of the respective
tenants, as of December 31, 2010 (dollars in thousands):
Assets, as of December 31:
Segment net real estate:
Automotive service
Automotive tire services
Child care
Convenience stores
Drug stores
Health and fitness
Restaurants
Theaters
Wine and spirits
24 non-reportable segments
Total segment net real estate
Other intangible assets - Apparel
Other intangible assets - Automotive tire service
Other intangible assets - Drug stores
Other intangible assets - Grocery stores
Other intangible assets - Health and fitness
Other intangible assets - Office supplies
Other intangible assets - Theaters
Other intangible assets - Sporting goods
Other intangible assets - Other
Goodwill - Automotive service
Goodwill - Child care
Goodwill - Convenience stores
Goodwill - Home furnishings
Goodwill - Restaurants
Goodwill - non reportable segments
Other corporate assets
Total assets
2010
2009
$ 106,669
$ 105,085
195,064
72,827
706,173
143,739
220,296
709,523
281,072
302,159
667,356
3,404,878
3,644
588
5,938
6,031
1,707
390
1,579
5,786
558
1,338
5,353
2,074
1,557
3,779
3,105
201,233
77,987
477,640
141,057
200,316
730,460
290,386
—
592,718
2,816,882
—
647
6,066
860
845
—
1,885
—
625
1,338
5,353
2,074
1,557
3,779
3,105
87,285
$ 3,535,590
69,771
$ 2,914,787
R e a l t y I n c o m e 46 2 0 1 0 A n n u a l R e p o r t
For the years ended December 31,
2010
Revenue
2009
2008
Segment rental revenue:
Automotive service
Automotive tire services
Child care
Convenience stores
Drug stores
Health and fitness
Restaurants
Theaters
Wine and spirits
24 non-reportable segments
Total rental revenue
Other revenue
Total revenue
$ 16,123
$ 15,797
$ 15,853
21,859
22,417
58,883
13,962
23,768
69,923
30,634
10,292
76,219
344,080
929
$ 345,009
22,616
23,408
55,136
13,727
18,787
69,181
30,078
—
75,089
323,819
1,426
$ 325,245
22,040
23,758
51,971
13,125
18,419
70,763
29,640
—
77,595
323,164
1,877
$ 325,041
17. COMMITMENTS AND CONTINgENCIES
In the ordinary course of our business, we are party to various legal actions which we believe are routine in nature and incidental to the
operation of our business. We believe that the outcome of the proceedings will not have a material adverse effect upon our consolidated financial
position or results of operations.
At December 31, 2010, we have contingent payments of $4.2 million for tenant improvements and leasing costs. In addition, we have committed
$420,000 under construction contracts, which is expected to be paid in the next three months.
We have certain properties that are subject to ground leases which are accounted for as operating leases. Our tenants, who are generally
sub-tenants under the ground leases, are responsible for paying the rent under these ground leases. In the event a tenant fails to pay the ground
lease rent, we are primarily responsible. At December 31, 2010, minimum future rental payments for the next five years and thereafter under
these ground leases are as follows (dollars in thousands):
2011
2012
2013
2014
2015
Thereafter
Total
$ 3,631
3,527
3,385
3,150
3,096
31,933
$ 48,722
18. SuBSEQuENT EvENTS
In January 2011 and February 2011, we declared the following dividends, which will be paid in February 2011 and March 2011, respectively:
• $0.14425 per share to our common stockholders;
• $0.1536459 per share to our Class D preferred stockholders; and
• $0.140625 per share to our Class E preferred stockholders.
R e a l t y I n c o m e 47 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Consolidated Quarterly Financial Data
(dollars in thousands, except per share data)
(not covered by Report of Independent Registered Public Accounting Firm)
2010(1)
Total revenue
Depreciation and amortization expense
Interest expense
Other expenses
Income from continuing operations
Income from discontinued operations
Net income
Net income available to common stockholders
Net income per common share:
Basic and diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
year(2)
$ 82,725
$ 83,047
$ 87,018
$ 92,219
$ 345,009
23,060
21,395
8,932
29,338
867
30,205
24,142
23,353
21,576
8,615
29,503
1,545
31,048
24,985
24,045
25,135
8,276
29,562
2,092
31,654
25,591
25,055
25,131
9,020
33,013
4,864
37,877
31,814
95,513
93,237
34,843
121,416
9,368
130,784
106,531
0.23
0.24
0.25
0.28
1.01
Dividends paid per common share
0.4290000
0.4299375
0.4308750
0.4318125
1.7216250
2009(1)
Total revenue
Depreciation and amortization expense
Interest expense
Other expenses
Income from continuing operations
Income from discontinued operations
Net income
Net income available to common stockholders
Net income per common share:
Basic and diluted
$ 81,906
$ 80,776
$ 81,276
$ 81,286
$ 325,245
22,578
21,410
8,428
29,490
594
30,084
24,021
22,611
21,367
7,089
29,709
2,851
32,560
26,497
22,626
21,374
6,537
30,739
2,413
33,152
27,089
22,704
21,377
6,369
30,836
4,495
35,331
29,268
90,519
85,528
28,423
120,775
10,352
131,127
106,874
0.23
0.26
0.26
0.28
1.03
Dividends paid per common share
0.4252500
0.4261875
0.4271250
0.4280625
1.7066250
(1) The consolidated quarterly financial data includes revenues and expenses from our continuing and discontinued operations. The results of operations related to certain properties,
classified as held for sale or disposed of, have been reclassified to income from discontinued operations. Therefore, some of the information may not agree to our previously filed 10-Qs.
(2) Amounts for each period are calculated independently. The sum of the quarters may differ from the annual amount.
R e a l t y I n c o m e 48 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Reports of Independent Registered
Public Accounting Firm
ThE BOARD OF DIRECTORS AND STOCkhOLDERS
REALTy INCOME CORPORATION:
We have audited the accompanying consolidated balance sheets of Realty Income Corporation and subsidiaries as of December 31, 2010
and 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period
ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Realty
Income Corporation and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Realty Income
Corporation’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 10, 2011
expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
San Diego, California
February 10, 2011
R e a l t y I n c o m e 49 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Reports of Independent Registered Public Accounting Firm, cont’d.
ThE BOARD OF DIRECTORS AND STOCkhOLDERS
REALTy INCOME CORPORATION:
We have audited Realty Income Corporation’s internal control over financial reporting as of December 31, 2010, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Realty
Income Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Realty Income Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010,
based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of Realty Income Corporation and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of
income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010, and our report dated
February 10, 2011 expressed an unqualified opinion on those consolidated financial statements.
San Diego, California
February 10, 2011
R e a l t y I n c o m e 50 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Business Description
ThE COMPANy
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 properties leased to retail and
other commercial enterprises. We have in-house acquisition, leasing, legal, credit research, real estate research, portfolio management and capital
markets expertise. Over the past 42 years, Realty Income and its predecessors have been acquiring and owning freestanding retail and other
commercial properties that generate rental revenue under long-term lease agreements (primarily 15 to 20 years).
In addition, we seek to increase distributions to stockholders and FFO per share through both active portfolio management and the acquisition
of additional properties. Our portfolio management generally includes seeking:
• Contractual rent increases on existing leases;
• Rent increases at the termination of existing leases, when market conditions permit; and
• 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.
In acquiring additional properties, our strategy is primarily to acquire properties that are:
• Freestanding, single-tenant locations;
• Leased to regional and national commercial enterprises; and
• Leased under long-term, net-lease agreements.
At December 31, 2010, we owned a diversified portfolio:
• Of 2,496 properties;
• With an occupancy rate of 96.6%, or 2,412 properties occupied and only 84 properties available for lease;
• Leased to 122 different retail and other commercial enterprises doing business in 32 separate industries;
• Located in 49 states;
• With over 21.2 million square feet of leasable space; and
• With an average leasable space per property of approximately 8,500 square feet.
Of the 2,496 properties in the portfolio, 2,485, or 99.6%, are single-tenant properties, and the remaining 11 are multi-tenant, distribution and
office properties. At December 31, 2010, of the 2,485 single-tenant properties, 2,402 were leased with a weighted average remaining lease term
(excluding extension options) of approximately 11.4 years.
In addition, at December 31, 2010, our wholly-owned taxable REIT subsidiary, Crest Net Lease, Inc., or Crest, had an inventory of three properties
valued at $3.0 million, which are classified as held for investment. No Crest properties are classified as held for sale at December 31, 2010. 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, or the Code. In addition to the three properties, Crest also holds notes receivable of $22.1 million
at December 31, 2010.
We typically acquire properties under long-term leases with regional and national retailers and other commercial enterprises. Our acquisition
and investment activities generally focus on businesses providing goods and services that satisfy basic consumer and business needs.
Our net-lease agreements generally:
• Are for initial terms of 15 to 20 years;
• Require the tenant to pay minimum monthly rent 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), additional rent calculated
as a percentage of the tenants’ gross sales above a specified level, or fixed increases.
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.
Our eight senior officers owned 1.1% of our outstanding common stock with a market value of $44.5 million at February 1, 2011. Our directors
and eight senior officers, as a group, owned 1.3% of our outstanding common stock with a market value of $53.9 million at February 1, 2011.
Our common stock is listed on The New York Stock Exchange, or NYSE, under the ticker symbol “O” with a cusip number of 756109-104.
Our central index key number is 726728.
R e a l t y I n c o m e 51 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Business Description, cont’d.
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 2011, we had 79 employees as compared to 72 employees in February 2010.
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, Forms 3, 4, 5, current reports on Form 8-K, and amendments to those reports, as soon as reason-
ably 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.
RECENT DEvELOPMENTS
Increases in Monthly Distributions to Common Stockholders
We have continued our 42-year policy of paying distributions monthly. Monthly distributions per share increased in April 2010 by $0.0003125
to $0.1433125, in July 2010 by $0.0003125 to $0.143625, in October 2010 by $0.0003125 to $0.1439375 and in January 2011 by $0.0003125
to $0.14425. The increase in January 2011 was our 53rd consecutive quarterly increase and the 60th increase in the amount of our dividend since
our listing on the NYSE in 1994. In 2010, we paid three monthly cash distributions per share in the amount of $0.143, three in the amount of
$0.1433125, three in the amount of $0.143625 and three in the amount of $0.1439375, totaling $1.721625. In December 2010, January 2011
and February 2011, we declared distributions of $0.14425 per share, which were paid in January 2011 and will be paid in February 2011 and
March 2011, respectively.
The current monthly distribution of $0.14425 per share represents an annualized distribution of $1.731 per share, and an annualized distribution
yield of approximately 5.1% based on the last reported sale price of our common stock on the NYSE of $34.20 on December 31, 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 2010
During 2010, we invested $713.5 million in 186 new properties with an initial weighted average contractual lease rate of 7.9%. These 186
properties are located in 14 states, contain over 2.2 million leasable square feet, and are 100% leased with an average lease term of 15.7 years.
The 186 new properties we acquired are net-leased to commercial enterprises in the following 13 industries: apparel stores, automotive collision
services, automotive service, crafts and novelties, consumer electronics, convenience store, drug stores, grocery stores, health and fitness, office
supplies, restaurants, sporting goods and wine and spirits. There were no acquisitions by Crest in 2010.
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 rent) 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.
Included in the $713.5 million invested during 2010 are the following acquisitions:
• The acquisition and leaseback of approximately $304.1 million of winery and vineyard properties under 20-year, triple-net lease agreements
with Diageo Chateau & Estates Wine Company, guaranteed by Diageo plc, or, together with its subsidiaries, Diageo. The properties are
primarily located in California’s Napa Valley and include two wineries that produce wines for Diageo’s Sterling Vineyards, or Sterling, and
Beaulieu Vineyards, or BV, brands and 14 vineyards producing grapes for their Sterling, BV and other brands. The properties include
approximately 3,600 acres and 426,000 square feet of winery, production, storage, shipping and tourist buildings. Diageo will continue to
operate the wineries and vineyards. As a result of this acquisition of properties, Diageo has become our largest tenant based on rental
revenue. Headquartered in London, Diageo is a global premium drinks company with a well-known portfolio of international brands of spirits,
beer and wine. Diageo ordinary shares trade on the London Stock Exchange under the symbol “DGE.L” and on the NYSE under the
symbol “DEO.”
• The acquisition of 23 retail properties leased to 13 tenants in six states, for approximately $126.5 million, under long-term, net lease
agreements. The properties are in eight different industries, including apparel stores, consumer electronics, crafts and novelties, drug stores,
grocery stores, health and fitness, office supplies, and sporting goods. All of the properties acquired have in-place leases.
• The acquisition of 135 SuperAmerica convenience stores and one support facility, for approximately $247.6 million, under long-term, triple-
net lease agreements. The stores are located in Minnesota and Wisconsin, and average approximately 3,500 leasable square feet on
approximately 1.14 acres.
• The remaining 11 properties acquired totaled approximately $35.3 million.
R e a l t y I n c o m e 52 2 0 1 0 A n n u a l R e p o r t
Investments in Existing Properties
In 2010, we capitalized costs of $3.6 million on existing properties in our portfolio, consisting of $1.5 million for re-leasing costs and $2.1 million
for building improvements.
$425 Million Acquisition Credit Facility
In December 2010, we entered into a new $425 million acquisition credit facility that replaced our previous $355 million acquisition credit facility
that was scheduled to expire in May 2011. The initial term of the new credit facility expires in March 2014 and includes two, one-year extension
options. Under the new credit facility, our investment grade credit ratings provide for financing at London Interbank Offered Rate, commonly
referred to as LIBOR, plus 185 basis points with a facility commitment fee of 35 basis points, for all-in drawn pricing of 220 basis points over
LIBOR. We also have other interest rate options available to us. Our credit facility is unsecured and, accordingly, we have not pledged any assets
as collateral for this obligation. At December 31, 2010, there were no borrowings on our credit facility, but if there were, the effective borrowing rate
would have been 2.1%.
Issuance of Common Stock
In December 2010, we issued 7,360,000 shares of common stock at a price of $33.70 per share. The net proceeds of approximately $235.7 million
were used to repay borrowings of $179.8 million under our acquisition credit facility and to fund property acquisitions during December 2010. The
remaining net proceeds were used for general corporate purposes and working capital.
In September 2010, we issued 6,198,500 shares of common stock at a price of $33.40 per share. The net proceeds of approximately $196.9 million
were used to repay borrowings of $49.7 million under our acquisition credit facility and to fund $126.5 million of property acquisitions during
October 2010. The remaining net proceeds were used for general corporate purposes and working capital.
Note Issuance
In June 2010, we issued $250.0 million aggregate principal amount of 5.75% senior unsecured notes due January 2021, or the 2021 Notes.
The price to the investor for the 2021 Notes was 99.404% of the principal amount for an effective yield of 5.826%. The net proceeds of approximately
$246.1 million from this offering were used to repay borrowings under our acquisition credit facility, which were used to finance the acquisition of
the Diageo properties. Interest is paid semiannually on the 2021 Notes.
Net Income Available to Common Stockholders
Net income available to common stockholders was $106.5 million in 2010 versus $106.9 million in 2009, a decrease of $343,000. On a diluted
per common share basis, net income was $1.01 in 2010 as compared to $1.03 in 2009.
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 2010 was $8.7 million, as compared to $8.1 million during 2009.
Funds from Operations Available to Common Stockholders (FFO)
In 2010, our FFO increased by $3.3 million, or 1.7%, to $193.7 million versus $190.4 million in 2009. On a diluted per common share basis,
FFO was $1.83 in 2010 compared to $1.84 in 2009, a decrease 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.
Adjusted Funds from Operations Available to Common Stockholders (AFFO)
In 2010, our AFFO increased by $4.6 million, or 2.4%, to $197.3 million versus $192.7 million in 2009. On a diluted per common share basis,
AFFO was $1.86 in 2010 and 2009.
See our discussion of AFFO 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 and AFFO.
DISTRIBuTION POLICy
Distributions are paid monthly to our common, Class D preferred and Class E preferred stockholders if, and when, declared by our Board
of Directors.
R e a l t y I n c o m e 53 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Business Description, cont’d.
In order to maintain our tax 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
2010, our cash distributions totaled $206.8 million, or approximately 136.3% of our estimated REIT taxable income of $151.7 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 2010 cash distributions to common stockholders totaled $182.5 million, representing 94.2% of our funds
from operations available to common stockholders of $193.7 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 default, 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 rate of tax. 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, 2012). 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 26.8% of the distributions to
our common stockholders, made or deemed to have been made in 2010, 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.
BuSINESS PhILOSOPhy AND STRATEgy
Capital Philosophy
Historically, we have met our long-term capital needs by issuing 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, 2010, our total outstanding borrowings were $1.6 billion of
senior unsecured notes, or approximately 26.7% of our total market capitalization of $5.99 billion. There were no outstanding borrowings on our
credit facility at December 31, 2010.
R e a l t y I n c o m e 54 2 0 1 0 A n n u a l R e p o r t
We define our total market capitalization at December 31, 2010 as the sum of:
• Shares of our common stock outstanding of 118,058,988 multiplied by the last reported NYSE sales price of $34.20 per share on
December 31, 2010, or $4.04 billion;
• Aggregate liquidation value (par value of $25 per share) of the Class D preferred stock of $127.5 million;
• Aggregate liquidation value (par value of $25 per share) of the Class E preferred stock of $220 million; and
• Outstanding notes of $1.6 billion.
Investment Philosophy
We believe that owning an actively managed, diversified portfolio of commercial 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), additional rent calculated as a percentage of the tenants’ gross sales above a specified level, or fixed increases. 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 owners and operators of retail and other commercial
enterprises by acquiring, then leasing back, the real estate they consider important to the successful operation of their business. We categorize
tenants as: 1) venture market, 2) middle market, and 3) upper market. Venture companies typically offer a newer concept, generally in one geographic
region of the country and operate between five and 50 locations. Middle market companies typically have 50 to 500 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
tenants typically consist of companies with 500 or more locations, operating a proven, mature concept. Upper market tenants generally have
strong operating histories and access to several sources of capital.
We primarily focus on acquiring properties leased to middle market retail and other commercial enterprises that we believe are attractive for
investment because:
• They generally have overcome many of the operational and managerial obstacles that can adversely affect new venture companies;
• They typically require capital to fund expansion but have more limited financing options than upper market tenants;
• 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 grown;
• Their relatively large size allows them to spread corporate expenses across a greater number of locations; and
• Middle market tenants typically have the critical mass to survive during economic or market dislocations.
Historically, our investment focus has primarily been on retail and other commercial enterprises 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, 2010, approxi-
mately 78% of our rental revenue was derived from tenants with a service component in their business. 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-based businesses.
Credit Strategy
We primarily provide sale-leaseback financing to less than investment grade tenants. We typically acquire and lease back properties to regional and
national commercial enterprises and believe that within this market we can achieve an attractive risk-adjusted return. Since 1970, our overall weighted
average occupancy rate at the end of each year has been 98.2%, and our occupancy rate at the end of each year has never been below 96%.
We believe the principal financial obligations of most commercial enterprises 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 business, we believe the
risk of default on a tenants’ lease obligations is less than the tenants’ unsecured general obligations. It has been our experience that since tenants
must retain their profitable 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 tenant 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 tenants’ individual unit locations and considering whether to sell locations that are weaker performers.
R e a l t y I n c o m e 55 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Business Description, cont’d.
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:
•
Industry, company, market conditions and credit profile;
• Store profitability, if profitability data is available, and the importance of the location of the real estate to the operations of the company’s
business; and
• Overall real estate characteristics, including property value and comparative rental rates.
The typical profile of companies whose properties have been approved for acquisition are those with 50 or more locations. Generally the properties:
• Are located in highly visible areas;
• Have easy access to major thoroughfares; and
• Have attractive demographics.
Acquisition Strategy
We seek to invest in industries in which several, well-organized, regional and national retailers and other commercial enterprises are capturing
market share through service, quality control, economies of scale, strong consumer brands, advertising, and the selection of prime locations. We
execute our acquisition strategy by acting as a source of capital to regional and national commercial enterprises by acquiring and leasing back their
real estate 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 instrumental 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:
• Freestanding, commercially-zoned property with a single tenant;
• Properties that are important locations for regional and national commercial enterprises;
• Properties that we deem to be profitable for the tenants and/or can generally be characterized as important to the operations of the
company’s business;
• 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 real estate market, property prices generally continue to fluctuate. Likewise, the U.S. credit markets have experienced
significant price volatility, dislocations and liquidity disruptions, which sometimes impact our access to and cost of capital. We continue to monitor
the commercial 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 our Form 10-K for the fiscal year ended December 31, 2010.
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 our credit quality.
Our executives regularly review and analyze:
• The performance of the various industries of our tenants; and
• The operation, management, business planning, and financial condition of our 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.
R e a l t y I n c o m e 56 2 0 1 0 A n n u a l R e p o r t
At December 31, 2010, we classified real estate with a carrying amount of $3.6 million as held for sale on our balance sheet. Additionally, we
anticipate selling investment properties from 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 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.
$425 Million Acquisition Credit Facility
In December 2010, we entered into a new $425 million revolving, unsecured credit facility that replaced our previous $355 million acquisition
credit facility that was scheduled to expire in May 2011. The initial term of the new credit facility expires in March 2014 and includes two, one-year
extension options. Under the new credit facility, our investment grade credit ratings provide for financing at LIBOR, plus 185 basis points with a
facility commitment fee of 35 basis points, for all-in drawn pricing of 220 basis points over LIBOR. We also have other interest rate options available to
us. Our credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation. At December 31, 2010, we
had a borrowing capacity of $425 million available on our credit facility and no outstanding balance. If there were outstanding borrowings, the
effective borrowing rate would have been 2.1%.
We expect to use our credit facility to acquire additional 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 $200 million, to a total
borrowing capacity of $625 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
The borrowing rates under our credit facility are based upon our credit ratings. We are currently assigned the following investment grade 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.
Based on our current ratings, the current facility interest rate is LIBOR plus 185 basis points with a facility commitment fee of 35 basis points,
for all-in drawn pricing of 220 basis points over LIBOR. The credit facility provides that the interest rate can range between: (i) LIBOR plus 300
basis points if our credit facility is lower than BBB-/Baa3 and (ii) LIBOR plus 175 basis points if our credit rating is A-/A3 or higher. In addition, our
credit facility provides for a facility commitment fee based on our credit ratings, which ranges from: (i) 50 basis points for a rating lower than
BBB-/Baa3, and (ii) 30 basis points for a credit rating of A-/A3 or higher.
We also issue senior debt securities from time to time and our credit ratings can impact the interest rates charged in those transactions. If our
credit ratings or ratings outlook change, our cost to obtain debt financing could increase or decrease.
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.
R e a l t y I n c o m e 57 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Business Description, cont’d.
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 properties, whether purchased
individually or as part of larger portfolio purchases, 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 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 tenants, our method of purchasing the property and then
leasing it back, under a net-lease arrangement, allows the commercial enterprise to free up capital.
•
INVESTMENT IN NEW INDUSTRIES: We will seek to further diversify our portfolio among a variety of industries. We believe diversification
will allow us to invest in industries that currently are growing and have characteristics we find attractive. When analyzing new industries, we
seek to acquire properties which are critical to the success of a commercial enterprise, through its distribution of the product or service.
Other characteristics may include, but are not limited to, industries that are dominated by local store operators where regional and national
store operators and other commercial enterprises can increase market share and dominance by consolidating local operators and stream-
lining their operations, as well as capitalizing on major demographic shifts in a population base.
• DIVERSIFICATION: Diversification of the portfolio by 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,
2010, we owned a diversified property portfolio that consisted of 2,496 properties located in 49 states, leased to 122 different retail and
other commercial enterprises doing business in 32 industry segments. Each of the 32 industry segments, represented in our property portfolio,
individually accounted for no more than 19.1% of our rental revenue for the quarter ended December 31, 2010.
• MANAGEMENT SPECIALIZATION: We believe that our management’s specialization in acquiring and managing single-tenant properties,
operated under net-lease agreements, purchased individually or as part of a larger portfolio, 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 carry out our operations efficiently and economically.
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.
RISk FACTORS
For full description of the risk factors associated with the Company, see Item 1A “Risk Factors” in our Form 10-K for the fiscal year ended
December 31, 2010.
uNRESOLvED STAFF COMMENTS
There are no unresolved staff comments.
R e a l t y I n c o m e 58 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Property Portfolio Information
At December 31, 2010, we owned a diversified portfolio:
• Of 2,496 properties;
• With an occupancy rate of 96.6%, or 2,412 properties occupied and only 84 properties available for lease;
• Leased to 122 different retail and other commercial enterprises doing business in 32 separate industries;
• Located in 49 states;
• With over 21.2 million square feet of leasable space; and
• With an average leasable space per property of approximately 8,500 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,
2010. These properties are valued at $3.0 million and are classified as held for investment. No Crest properties are classified as held for sale at
December 31, 2010.
At December 31, 2010, of our 2,496 properties, 2,402 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), additional rent
calculated as a percentage of the tenants’ gross sales above a specified level, or fixed increases.
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), additional rent calculated as
a percentage of the tenants’ gross sales above a specified level, or fixed increases. 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.
R e a l t y I n c o m e 59 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Property Portfolio Information, cont’d.
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:
For the
Quarter Ended
December 31,
2010
Percentage of Rental Revenue(1)
For the years Ended
Dec 31,
2010
Dec 31,
2009
Dec 31,
2008
Dec 31,
2007
Dec 31,
2006
Dec 31,
2005
1.5%
1.2%
1.1%
1.1%
1.2%
1.7%
1.6%
Industries
Apparel stores
Automotive collision services
Automotive parts
Automotive service
Automotive tire services
Book stores
Business services
Child care
Consumer electronics
Convenience stores
Crafts and novelties
Distribution and office
Drug stores
Entertainment
Equipment rental services
Financial services
General merchandise
Grocery stores
Health and fitness
Home furnishings
Home improvement
Motor vehicle dealerships
Office supplies
Pet supplies and services
Private education
Restaurants
Shoe stores
Sporting goods
Theaters
Travel plazas
Video rental
Wine and spirits
Other
Totals
1.0
1.5
4.5
5.9
0.1
*
5.9
0.6
1.0
1.4
4.7
6.4
0.1
*
6.5
0.6
1.1
1.5
4.8
6.9
0.2
*
7.3
0.7
1.0
1.6
4.8
6.7
0.2
*
7.6
0.8
1.1
2.1
5.2
7.3
0.2
0.1
8.4
0.9
17.4
17.1
16.9
15.8
14.0
0.3
1.0
3.9
1.1
0.2
0.2
0.7
1.5
6.7
1.2
1.6
2.4
1.0
0.8
0.8
0.3
1.0
4.1
1.2
0.2
0.2
0.8
0.9
6.9
1.3
1.7
2.6
0.9
0.9
0.8
0.3
1.0
4.3
1.3
0.2
0.2
0.8
0.7
5.9
1.3
1.9
2.7
1.0
0.9
0.9
19.1
20.4
21.3
0.2
2.9
8.6
0.2
0.0
5.6
1.6
0.1
2.7
8.9
0.2
0.2
3.0
1.7
—
2.6
9.2
0.2
1.0
—
1.8
0.3
1.0
4.1
1.2
0.2
0.2
0.8
0.7
5.6
2.4
1.9
3.1
1.0
0.8
0.8
21.8
—
2.3
9.0
0.2
1.1
—
1.9
1.3
2.8
6.9
6.1
0.2
0.1
10.3
1.1
16.1
0.4
—
2.9
1.6
0.2
0.1
0.6
0.7
4.3
3.1
3.4
3.4
1.3
1.1
0.8
0.3
0.6
2.7
1.4
0.2
0.2
0.7
0.7
5.1
2.6
2.1
3.1
1.1
0.9
0.8
21.2
11.9
—
2.6
9.0
0.2
1.7
—
2.3
—
2.9
9.6
0.3
2.1
—
2.7
1.3
3.4
7.6
7.2
0.3
0.1
12.7
1.3
18.7
0.4
—
2.8
2.1
0.4
0.1
0.5
0.7
3.7
3.7
1.1
2.6
1.5
1.3
0.8
9.4
0.3
3.4
5.2
0.3
2.5
—
3.0
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.
R e a l t y I n c o m e 60 2 0 1 0 A n n u a l R e p o r t
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, 2010, classified according to the business types and the level of services they provide (dollars in thousands):
Industry
Tenants Providing Services
Automotive collision services
Automotive service
Child care
Entertainment
Equipment rental services
Financial services
Health and fitness
Private education
Theaters
Other
Tenants Selling goods and Services
Automotive parts (with installation)
Automotive tire services
Business services
Convenience stores
Distribution and office
Home improvement
Motor vehicle dealerships
Pet supplies and services
Restaurants
Travel plazas
Video rental
Tenants Selling goods
Apparel stores
Automotive parts
Book stores
Consumer electronics
Crafts and novelties
Drug stores
General merchandise
Grocery stores
Home furnishings
Home improvement
Office supplies
Pet supplies
Shoe stores
Sporting goods
Wine and spirits
Totals
Number of
Properties
Rental Revenue for
the Quarter Ended
December 31, 2010(1)
Percentage
of Rental
Revenue
14
240
250
8
2
12
34
11
34
13
618
25
154
1
720
4
1
17
12
631
1
15
1,581
11
43
1
9
5
52
33
21
42
28
11
3
1
21
16
$ 893
4,113
5,467
1,064
150
193
6,182
730
7,944
1,456
28,192
449
5,468
5
16,046
919
27
2,228
709
17,601
187
0
43,639
1,365
898
128
521
234
3,619
691
1,397
1,149
1,464
880
33
168
2,650
5,134
1.0%
4.5
5.9
1.1
0.2
0.2
6.7
0.8
8.6
1.6
30.6
0.5
5.9
*
17.4
1.0
*
2.4
0.8
19.1
0.2
0.0
47.3
1.5
1.0
0.1
0.6
0.3
3.9
0.7
1.5
1.2
1.6
1.0
*
0.2
2.9
5.6
297
2,496
20,331
$ 92,162
22.1
100.0%
* Less than 0.1%
(1) Includes rental revenue for all properties owned by Realty Income at December 31, 2010, including revenue from properties reclassified as discontinued operations of $98.
Excludes revenue of $80 for properties owned by Crest.
R e a l t y I n c o m e 61 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Property Portfolio Information, cont’d.
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 2,402 net leased, single-tenant properties as of December 31, 2010
(dollars in thousands):
Total Portfolio
Initial Expirations(3)
Subsequent Expirations(4)
Rental
Revenue
for the
Quarter
Ended
Dec 31,
2010(2)
$ 4,144
% of
Total
Rental
Revenue
4.6%
2,908
4,947
3,489
3,768
2,516
1,904
2,230
5,089
4,208
7,592
3,072
8,779
2,348
7,684
6,378
5,572
4,119
1,290
6,163
663
655
460
281
354
13
3.2
5.5
3.8
4.2
2.8
2.1
2.5
5.6
4.6
8.4
3.4
9.7
2.6
8.5
7.1
6.1
4.5
1.4
6.8
0.7
0.7
0.5
0.3
0.4
*
Total
Number
of Leases
Expiring(1)
164
127
147
111
147
130
51
46
98
86
177
100
253
64
208
109
169
81
49
43
27
2
7
3
2
1
year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2037
2043
Rental
Revenue
for the
Quarter
Ended
Dec 31,
2010
Number
of Leases
Expiring
% of
Total
Rental
Revenue
Number
of Leases
Expiring
Rental
Revenue
for the
Quarter
Ended
Dec 31,
2010
% of
Total
Rental
Revenue
58
37
65
41
78
111
40
38
90
75
176
99
251
64
203
107
168
79
48
43
27
2
7
3
2
—
$ 1,975
2.2%
106
$ 2,169
2.4%
1,031
2,961
1,861
2,205
2,107
1,681
2,027
4,659
3,605
7,538
3,024
8,706
2,348
7,557
6,319
5,555
4,069
1,275
6,163
663
655
460
281
354
—
1.1
3.3
2.0
2.5
2.3
1.9
2.3
5.1
4.0
8.3
3.3
9.6
2.6
8.4
7.0
6.1
4.4
1.4
6.8
0.7
0.7
0.5
0.3
0.4
—
90
82
70
69
19
11
8
8
11
1
1
2
—
5
2
1
2
1
—
—
—
—
—
—
1
1,877
1,986
1,628
1,563
409
223
203
430
603
54
48
73
—
127
59
17
50
15
—
—
—
—
—
—
13
2.1
2.2
1.8
1.7
0.5
0.2
0.2
0.5
0.6
0.1
0.1
0.1
—
0.1
0.1
*
0.1
*
—
—
—
—
—
—
*
Totals
2,402
$ 90,626
100.0%
1,912
$ 79,079
87.2%
490
$ 11,547
12.8%
* Less than 0.1%
(1) Excludes ten multi-tenant properties and 84 vacant unleased properties, one of which is a multi-tenant property. The lease expirations for properties under construction are based
on the estimated date of completion of those properties.
(2) Includes rental revenue of $98 from properties reclassified as discontinued operations and excludes revenue of $1,536 from ten multi-tenant properties and from 84 vacant and
unleased properties at December 31, 2010. Excludes revenue of $80 from properties owned by Crest.
(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.
R e a l t y I n c o m e 62 2 0 1 0 A n n u a l R e p o r t
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, 2010 (dollars in thousands):
State
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Totals/Average
Number of
Properties
Percent
Leased
Approximate
Leasable
Square Feet
Rental Revenue for
the Quarter Ended
December 31, 2010(1)
Percentage
of Rental
Revenue
62
2
82
17
82
51
23
17
169
131
—
12
84
81
21
31
22
32
3
28
64
52
150
72
61
2
19
14
14
33
9
39
94
6
136
35
18
98
3
99
10
129
213
4
4
104
34
2
27
1
2,496
97%
100
98
94
98
94
96
100
93
95
—
100
99
95
100
90
95
100
100
100
98
100
99
97
95
100
95
93
100
100
100
97
99
100
94
100
94
99
100
100
100
95
95
100
100
95
94
100
93
0
97%
420,200
128,500
509,300
92,400
1,675,500
471,400
269,100
33,300
1,621,000
905,500
—
80,700
998,500
729,900
290,600
562,500
110,600
184,900
22,500
266,600
575,400
257,300
894,700
360,700
634,900
30,000
196,300
153,200
109,900
261,300
58,400
495,000
531,700
36,600
846,200
755,300
297,300
677,200
11,000
372,500
89,800
592,400
2,357,200
25,200
12,700
636,500
276,500
23,000
269,200
5,400
21,215,800
$ 1,861
287
2,740
380
9,987
1,804
1,156
431
6,903
3,809
—
339
5,107
3,512
1,018
1,043
647
947
162
1,661
2,558
1,287
3,240
1,563
2,174
77
488
720
588
1,944
211
2,553
2,896
69
3,224
1,305
929
3,556
59
2,271
165
2,758
8,074
94
129
3,410
1,036
121
869
0
$ 92,162
2.0%
0.3
3.0
0.4
10.8
2.0
1.3
0.5
7.5
4.1
—
0.4
5.5
3.8
1.1
1.1
0.7
1.0
0.2
1.8
2.8
1.4
3.5
1.7
2.4
0.1
0.5
0.8
0.6
2.1
0.2
2.8
3.1
0.1
3.5
1.4
1.0
3.9
0.1
2.5
0.2
3.0
8.8
0.1
0.1
3.7
1.1
0.1
0.9
0.0
100.0%
(1) Includes rental revenue for all properties owned by Realty Income at December 31, 2010, including revenue from properties reclassified as discontinued operations of $98.
Excludes revenue of $80 from properties owned by Crest.
R e a l t y I n c o m e 63 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Forward-Looking Statements
This annual report 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 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 to differ materially 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.
R e a l t y I n c o m e 64 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
gENERAL
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 properties leased to retail and
other commercial enterprises. We have in-house acquisition, leasing, legal, credit research, real estate research, portfolio management and capital
markets expertise. Over the past 42 years, Realty Income and its predecessors have been acquiring and owning freestanding retail and other
commercial properties that generate rental revenue under long-term lease agreements (primarily 15 to 20 years).
In addition, we seek to increase distributions to stockholders and FFO per share through both active portfolio management and the acquisition
of additional properties.
At December 31, 2010, we owned a diversified portfolio:
• Of 2,496 properties;
• With an occupancy rate of 96.6%, or 2,412 properties occupied and only 84 properties available for lease;
• Leased to 122 different retail and other commercial enterprises doing business in 32 separate industries;
• Located in 49 states;
• With over 21.2 million square feet of leasable space; and
• With an average leasable space per property of approximately 8,500 square feet.
Of the 2,496 properties in the portfolio, 2,485, or 99.6%, are single-tenant properties, and the remaining 11 are multi-tenant, distribution and
office properties. At December 31, 2010, of the 2,485 single-tenant properties, 2,402 were leased with a weighted average remaining lease term
(excluding extension options) of approximately 11.4 years.
In addition, at December 31, 2010, our wholly-owned taxable REIT subsidiary, Crest Net Lease, Inc. (“Crest”), had an inventory of three properties
valued at $3.0 million, which are classified as held for investment. No Crest properties are classified as held for sale at December 31, 2010. 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 of $22.1 million
at December 31, 2010. Crest did not acquire any properties in 2010.
LIQuIDITy AND CAPITAL RESOuRCES
Capital Philosophy
Historically, we have met our long-term capital needs by issuing 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 invested on an accretive basis 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, 2010, our total outstanding borrowings were $1.6 billion of
senior unsecured notes, or approximately 26.7% of our total market capitalization of $5.99 billion. There were no outstanding borrowings on our
credit facility at December 31, 2010.
We define our total market capitalization at December 31, 2010 as the sum of:
• Shares of our common stock outstanding of 118,058,988 multiplied by the last reported NYSE sales price of $34.20 per share on
December 31, 2010, or $4.04 billion;
• Aggregate liquidation value (par value of $25 per share) of the Class D preferred stock of $127.5 million;
• Aggregate liquidation value (par value of $25 per share) of the Class E preferred stock of $220 million; and
• Outstanding notes of $1.6 billion.
Mortgage Debt
We have no mortgage debt on any of our properties.
R e a l t y I n c o m e 65 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations, cont’d.
$425 Million Acquisition Credit Facility
In December 2010, we entered into a new $425 million acquisition credit facility that replaced our previous $355 million acquisition credit facility
that was scheduled to expire in May 2011. The initial term of the new credit facility expires in March 2014 and includes two, one-year extension
options. Under the new credit facility, our investment grade credit ratings provide for financing at the London Interbank Offered Rate, commonly
referred to as LIBOR, plus 185 basis points with a facility commitment fee of 35 basis points, for all-in drawn pricing of 220 basis points over
LIBOR. The borrowing rate is not subject to a LIBOR floor. We also have other interest rate options available to us. At December 31, 2010, we had
a borrowing capacity of $425 million available on our credit facility and no outstanding balance. If there were outstanding borrowings, the effective
borrowing rate would have been 2.1%.
We expect to use our credit facility to acquire additional 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 $200 million, to a
total borrowing capacity of $625 million. Any increase in the borrowing capacity is subject to approval by the lending banks participating in our
credit facility.
Cash Reserves
We are organized to operate as an equity REIT that acquires and leases properties and distributes to stockholders, in the form of monthly cash
distributions, a substantial portion of our net cash flow generated from leases on our properties. We intend to retain an appropriate amount of cash
as working capital. At December 31, 2010, we had cash and cash equivalents totaling $17.6 million.
We believe that our cash and cash equivalents on hand, cash provided from operating activities and borrowing capacity is sufficient to meet our
liquidity needs for the foreseeable future. We intend, however, to use additional sources of capital to fund property acquisitions and to repay future
borrowings under our credit facility.
Acquisitions During 2010
During 2010, we invested $713.5 million in 186 new properties with an initial weighted average contractual lease rate of 7.9%. These 186 properties
are located in 14 states, contain over 2.2 million leasable square feet, and are 100% leased with an average lease term of 15.7 years. The 186
new properties we acquired are net-leased to commercial enterprises in the following 13 industries: apparel stores, automotive collision services,
automotive service, crafts and novelties, consumer electronics, convenience stores, drug stores, grocery stores, health and fitness, office supplies,
restaurants, sporting goods and wine and spirits. There were no acquisitions by Crest in 2010.
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 rent) 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.
Included in the $713.5 million invested during 2010 are the following acquisitions:
• The acquisition and leaseback of approximately $304.1 million of winery and vineyard properties under 20-year, triple-net lease agreements
with Diageo Chateau & Estates Wine Company, guaranteed by Diageo plc, or, together with its subsidiaries, Diageo. The properties are
primarily located in California’s Napa Valley and include two wineries that produce wines for Diageo’s Sterling Vineyards, or Sterling, and
Beaulieu Vineyards, or BV, brands and 14 vineyards producing grapes for their Sterling, BV and other brands. The properties include
approximately 3,600 acres and 426,000 square feet of winery, production, storage, shipping and tourist buildings. Diageo will continue to
operate the wineries and vineyards. As a result of this acquisition of properties, Diageo has become our largest tenant based on rental
revenue. Headquartered in London, Diageo is a global premium drinks company with a well-known portfolio of international brands of
spirits, beer and wine. Diageo ordinary shares trade on the London Stock Exchange under the symbol “DGE.L” and on the NYSE under
the symbol “DEO.”
• The acquisition of 23 retail properties leased to 13 tenants in six states, for approximately $126.5 million, under long-term, net lease
agreements. The properties are in eight different industries, including apparel stores, consumer electronics, crafts and novelties, drug
stores, grocery stores, health and fitness, office supplies, and sporting goods. All of the properties acquired have in-place leases.
• The acquisition of 135 SuperAmerica convenience stores and one support facility, for approximately $247.6 million, under long-term,
triple-net lease agreements. The stores are located in Minnesota and Wisconsin, and average approximately 3,500 leasable square feet
on approximately 1.14 acres.
• The remaining 11 properties acquired totaled approximately $35.3 million.
R e a l t y I n c o m e 66 2 0 1 0 A n n u a l R e p o r t
Impact of Real Estate and Credit Markets
In the commercial real estate market, property prices generally continue to fluctuate. Likewise, the U.S. credit markets have experienced
significant price volatility, dislocations and liquidity disruptions, which sometimes impact our access to and cost of capital. We continue to monitor
the commercial real estate and U.S. credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly. See
our discussion of “Risk Factors” in this annual report.
Increases in Monthly Distributions to Common Stockholders
We have continued our 42-year policy of paying distributions monthly. Monthly distributions per share increased in April 2010 by $0.0003125
to $0.1433125, in July 2010 by $0.0003125 to $0.143625, in October 2010 by $0.0003125 to $0.1439375 and in January 2011 by $0.0003125
to $0.14425. The increase in January 2011 was our 53rd consecutive quarterly increase and the 60th increase in the amount of our dividend since
our listing on the New York Stock Exchange, or NYSE, in 1994. In 2010, we paid three monthly cash distributions per share in the amount of
$0.143, three in the amount of $0.1433125, three in the amount of $0.143625 and three in the amount of $0.1439375, totaling $1.721625. In
December 2010, January 2011 and February 2011, we declared distributions of $0.14425 per share, which were paid in January 2011 and will
be paid in February 2011 and March 2011, respectively.
The monthly distribution of $0.14425 per share represents an annualized distribution of $1.731 per share, and an annualized distribution yield
of approximately 5.1% based on the last reported sale price of our common stock on the NYSE of $34.20 on December 31, 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.
Issuance of Common Stock
In December 2010, we issued 7,360,000 shares of common stock at a price of $33.70 per share. The net proceeds of approximately $235.7 million
were used to repay borrowings of $179.8 million under our acquisition credit facility and to fund property acquisitions during December 2010. The
remaining net proceeds were used for general corporate purposes and working capital.
In September 2010, we issued 6,198,500 shares of common stock at a price of $33.40 per share. The net proceeds of approximately $196.9 million
were used to repay borrowings of $49.7 million under our acquisition credit facility and to fund $126.5 million of property acquisitions during
October 2010. The remaining net proceeds were used for general corporate purposes and working capital.
Note Issuance
In June 2010, we issued $250.0 million aggregate principal amount of 5.75% senior unsecured notes due January 2021 (the “2021 Notes”).
The price to the investor for the 2021 Notes was 99.404% of the principal amount for an effective yield of 5.826%. The net proceeds of
approximately $246.1 million from this offering were used to repay borrowings under our acquisition credit facility, which were used to finance
the acquisition of the Diageo properties. Interest is paid semiannually on the 2021 Notes.
Universal Shelf Registration
In March 2009, we filed a shelf registration statement with the SEC, which expires in March 2012. In accordance with the SEC rules, the
amount of the 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 such
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.
Credit Agency Ratings
The borrowing rates under our credit facility are based upon our credit ratings. We are currently assigned the following investment grade
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.
R e a l t y I n c o m e 67 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations, cont’d.
Based on our current ratings, the current facility interest rate is LIBOR plus 185 basis points with a facility commitment fee of 35 basis points,
for all-in drawn pricing of 220 basis points over LIBOR. The credit facility provides that the interest rate can range between: (i) LIBOR plus 300
basis points if our credit facility is lower than BBB-/Baa3 and (ii) LIBOR plus 175 basis points if our credit rating is A-/A3 or higher. In addition,
our credit facility provides for a facility commitment fee based on our credit ratings, which ranges from: (i) 50 basis points for a rating lower than
BBB-/Baa3, and (ii) 30 basis points for a credit rating of A-/A3 or higher.
We also issue senior debt securities from time to time and our credit ratings can impact the interest rates charged in those transactions. If our
credit ratings or ratings outlook change, our cost to obtain debt financing could increase or decrease.
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.
Notes Outstanding
Our senior unsecured note obligations consist of the following as of December 31, 2010, sorted by maturity date (dollars in millions):
5.375% notes, issued in March 2003 and due in March 2013
5.5% notes, issued in November 2003 and due in November 2015
5.95% notes, issued in September 2006 and due in September 2016
5.375% notes, issued in September 2005 and due in September 2017
6.75% notes, issued in September 2007 and due in August 2019
5.75% notes, issued in June 2010 and due in January 2021
5.875% bonds, issued in March 2005 and due in March 2035
$ 100
150
275
175
550
250
100
$ 1,600
All of our outstanding notes and bonds have fixed interest rates. Interest on all of our senior note and bond obligations is paid semiannually. All
of these notes and bonds contain various covenants, including: (i) a limitation on incurrence of any debt which would cause our debt to total
adjusted assets ratio to exceed 60%; (ii) a limitation on incurrence of any secured debt which would cause our secured debt to total adjusted
assets ratio to exceed 40%; (iii) a limitation on incurrence of any debt which would cause our debt service coverage ratio to be less than 1.5 times;
and (iv) the maintenance at all times of total unencumbered assets not less than 150% of our outstanding unsecured debt. We have been in
compliance with these covenants since each of the notes and bonds was issued.
The following is a summary of the key financial covenants for our senior unsecured notes, as defined and calculated per the terms of our notes.
These calculations, which are not based on GAAP measurements, are presented to investors to show our ability to incur additional debt under the
terms of our notes only and are not measures of our liquidity or performance. The actual amounts as of December 31, 2010 are:
Note Covenants
Limitation on incurrence of total debt
Limitation on incurrence of secured debt
Debt service coverage (trailing 12 months)
Maintenance of total unencumbered assets
Required
≤ 60% of adjusted assets
≤ 40% of adjusted assets
≥ 1.5 x
≥ 150% of unsecured debt
Actual
38.2%
0.0%
3.5 x
262.0%
R e a l t y I n c o m e 68 2 0 1 0 A n n u a l R e p o r t
The following table summarizes the maturity of each of our obligations as of December 31, 2010 (dollars in millions):
Table of Obligations
year of
Maturity
2011
2012
2013
2014
2015
Thereafter
Totals
Credit
Facility
$ —
—
—
—
—
—
Notes
Interest(1)
$ —
$ 96.8
—
100.0
—
150.0
1,350.0
96.8
92.5
91.4
90.4
347.5
$ 815.4
$ —
$ 1,600.0
ground
Leases
Paid by
Our
Tenants(2)
$ 3.6
3.5
3.4
3.2
3.1
31.9
$ 48.7
Other(3)
$ 4.6
—
—
—
—
—
$ 4.6
Totals
$ 105.0
100.3
195.9
94.6
243.5
1,729.4
$ 2,468.7
(1) Interest on the credit facility and notes has been calculated based on outstanding balances as of December 31, 2010 through their respective maturity dates.
(2) Our tenants, who are generally sub-tenants under the ground leases, are responsible for paying the rent under these ground leases. In the event a tenant fails to pay the ground
lease rent, we are primarily responsible.
(3) “Other” consists of $420,000 of commitments under construction contracts and $4.2 million of contingent payments for tenant improvements and leasing costs.
Our credit facility and note obligations are unsecured. Accordingly, we have not pledged any assets as collateral for these obligations.
Preferred Stock Outstanding
In 2004, we issued 5.1 million shares of 7.375% Class D cumulative redeemable preferred stock. In May 2009, shares of Class D preferred
stock became redeemable at our option for $25 per share, plus any accrued and unpaid dividends. Dividends on shares of Class D preferred
stock are paid monthly in arrears.
In 2006, we issued 8.8 million shares of 6.75% Class E cumulative redeemable preferred stock. Beginning December 7, 2011, shares of
Class E preferred stock become redeemable at our option for $25 per share, plus any accrued and unpaid dividends. Dividends on shares of
Class E preferred stock are paid monthly in arrears.
We are current in our obligations to pay dividends on our Class D and Class E preferred stock.
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.
RESuLTS OF OPERATIONS
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with GAAP. Our consolidated financial statements are the basis for
our discussion and analysis of financial condition and results of operations. Preparing our consolidated financial statements requires us to make a
number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. We believe that
we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually
test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they
are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. This summary should be
read in conjunction with the more complete discussion of our accounting policies and procedures included in note 2 to our consolidated
financial statements.
In order to prepare our consolidated financial statements according to the rules and guidelines set forth by GAAP, many subjective judgments
must be made with regard to critical accounting policies. One of these judgments is our estimate for useful lives in determining depreciation
expense for our properties. Depreciation on a majority of our buildings and improvements is computed using the straight–line method over an
estimated useful life of 25 years. If we use a shorter or longer estimated useful life, it could have a material impact on our results of operations.
We believe that 25 years is an appropriate estimate of useful life.
R e a l t y I n c o m e 69 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations, cont’d.
When acquiring a property for investment purposes, we allocate the fair value of real estate acquired to: 1) land and 2) building and improvements,
based in each case on their estimated fair values.
For properties acquired with in-place operating leases, the fair value of real estate is allocated to: (1) land, (2) building and improvements, and
(3) identified intangible assets and liabilities, based in each case on their estimated fair values. Intangible assets and liabilities consist of above-
market and below-market leases, the value of in-place leases and tenant relationships.
Another significant judgment must be made as to if, and when, impairment losses should be taken on our properties when events or a change
in circumstances indicate that the carrying amount of the asset may not be recoverable. A provision is made for impairment if estimated future
operating cash flows (undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are less than the current
book value of the property. Key inputs that we estimate in this analysis include projected rental rates, capital expenditures, and property sales
capitalization rates. If a property is held for sale, it is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell. The
carrying value of our real estate is the largest component of our consolidated balance sheet. If events should occur that require us to reduce the
carrying value of our real estate by recording provisions for impairment, it could have a material impact on our results of operations.
The following is a comparison of our results of operations for the years ended December 31, 2010, 2009 and 2008.
Rental Revenue
Rental revenue was $344.1 million for 2010 versus $323.8 million for 2009, an increase of $20.3 million, or 6.3%. Rental revenue was
$323.2 million in 2008. The increase in rental revenue in 2010 compared to 2009 is primarily attributable to:
• The 186 properties acquired by Realty Income in 2010, which generated $15.9 million of rent in 2010;
• The 16 properties acquired by Realty Income in 2009, which generated $5.6 million of rent in 2010 compared to $490,000 in 2009,
an increase of $5.1 million;
• Same store rents generated on 2,131 properties during the entire years of 2010 and 2009, increased by $1.8 million, or 0.6%, to
$313.8 million from $312.0 million; and
• An increase in straight-line rent and other non-cash adjustments to rent of $442,000 in 2010 as compared to 2009; net of
• A net decrease of $3.1 million relating to the aggregate of (i) development properties acquired before 2009 that started paying rent in 2009,
(ii) properties that were vacant during part of 2010 or 2009, (iii) properties sold during 2010 and 2009 and (iv) lease termination settlements,
which, in aggregate, totaled $7.16 million in 2010 compared to $10.23 million in 2009.
Of the 2,496 properties in the portfolio at December 31, 2010, 2,485, or 99.6%, are single-tenant properties and the remaining 11 are
multi-tenant, distribution and office properties. Of the 2,485 single-tenant properties, 2,402, or 96.7%, were net leased with a weighted average
remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 11.4 years at December 31, 2010. Of
our 2,402 leased single-tenant properties, 2,217 or 92.3% were under leases that provide for increases in rents through:
• Primarily base rent increases tied to a consumer price index (typically subject to ceilings);
• Overage rent based on a percentage of the tenants’ gross sales;
• Fixed increases; or
• A combination of two or more of the above rent provisions.
Percentage rent, which is included in rental revenue, was $1.3 million in 2010, $1.3 million in 2009 and $1.2 million in 2008 (excluding percentage
rent reclassified to discontinued operations of $56,000 in 2010, $90,000 in 2009 and $61,000 in 2008). Percentage rent in 2010 was less than
1% of rental revenue, and we anticipate percentage rent to be less than 1% of rental revenue in 2011.
Our portfolio of real estate, leased primarily to regional and national commercial enterprises under net leases, continues to perform well and
provides dependable lease revenue supporting the payment of monthly dividends to our stockholders. At December 31, 2010, our portfolio of
2,496 properties was 96.6% leased with 84 properties available for lease as compared to 75 at December 31, 2009. It has been our experience
that approximately 2% to 4% of our property portfolio will be unleased at any given time; however, we cannot assure you that the number of
properties available for lease will not exceed these levels.
R e a l t y I n c o m e 70 2 0 1 0 A n n u a l R e p o r t
Depreciation and Amortization
Depreciation and amortization was $95.5 million in 2010 versus $90.5 million in 2009 and $89.1 million in 2008. The increases in depreciation
and amortization in 2010 and 2009 were primarily due to the acquisition of properties in 2010, 2009 and 2008, which was partially offset by property
sales in those same years. As discussed in the section entitled “Funds from Operations Available to Common Stockholders,” depreciation and
amortization is a non-cash item that is added back to net income available to common stockholders for our calculation of FFO and AFFO.
Interest Expense
Interest expense was $93.2 million in 2010 versus $85.5 million in 2009 and $94.0 million in 2008. The increase in interest expense from 2009
to 2010 was primarily due to an increase in borrowings attributable to the issuance of our $250 million of 5.75% senior unsecured notes in June
2010 and utilization of our credit facility in 2010, which was partially offset by lower average interest rates. The decrease in interest expense from
2008 to 2009 was primarily due to lower average outstanding balances and, to a lesser extent, lower interest rates. We redeemed, in November
2008, the $100 million outstanding principal amount of our 8.25% Monthly Income Senior Notes and, in January 2009, the $20 million outstanding
principal amount of our 8% Notes, both of which contributed to the decrease in average outstanding balances and lower average interest rates on
our debt in 2009.
In December 2010, as a result of entering into our $425 million credit facility, we incurred $4.2 million of credit facility origination costs that
were classified in “other assets” on our consolidated balance sheet at December 31, 2010, and are being amortized over the term of the credit
facility. The remaining credit facility origination costs that were incurred as a result of entering into our previous $355 million credit facility, which
were $452,000 at December 31, 2010, are included in “other assets” and are being amortized over the remaining term of our current $425 million
credit facility.
The following is a summary of the components of our interest expense (dollars in thousands):
Interest on our credit facility and notes
$ 89,916
$ 82,460
$ 91,213
2010
2009
2008
Interest included in discontinued operations from real estate
acquired for resale by Crest
Credit facility commitment fees
Amortization of credit facility origination costs and deferred
bond financing costs
Amortization of settlements on treasury lock agreement
Interest capitalized
Interest expense
(557)
1,017
2,871
—
(10)
(595)
990
2,678
—
(5)
(1,797)
795
3,078
759
(92)
$ 93,237
$ 85,528
$ 93,956
Credit facility and notes outstanding
Average outstanding balances (dollars in thousands)
Average interest rates
2010
$ 1,496,150
6.01%
2009
$ 1,350,791
6.10%
2008
$ 1,457,222
6.26%
At December 31, 2010, the weighted average interest rate on our notes payable of $1.6 billion was 6.05%. There was no outstanding balance
on our credit facility at December 31, 2010, but if there was, the effective borrowing rate would have been 2.11%.
Interest Coverage Ratio
Our interest coverage ratio for 2010 was 3.3 times, for 2009 was 3.5 times and for 2008 was 3.2 times. Interest coverage ratio is calculated as:
the interest coverage amount (as calculated in the following table) divided by interest expense, including interest recorded as discontinued operations.
We consider interest coverage ratio to be an appropriate supplemental measure of a company’s ability to meet its interest expense obligations. Our
calculation of interest coverage ratio may be different from the calculation used by other companies and, therefore, comparability may be limited.
This information should not be considered as an alternative to any GAAP liquidity measures.
R e a l t y I n c o m e 71 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations, cont’d.
The following is a reconciliation of net cash provided by operating activities on our consolidated statements of cash flow to our interest coverage
amount (dollars in thousands):
Net cash provided by operating activities
Interest expense
Interest expense included in discontinued operations(1)
Income taxes
Income taxes (benefit) included in discontinued operations(1)
Investment in real estate acquired for resale(1)
Proceeds from sales of real estate acquired for resale(1)
Collection of note receivables by Crest(1)
Crest provisions for impairment(1)
Gain on sales of real estate acquired for resale(1)
Amortization of share-based compensation
Changes in assets and liabilities:
Accounts receivable and other assets
Accounts payable, accrued expenses and other liabilities
Interest coverage amount
Divided by interest expense(2)
Interest coverage ratio
2010
$ 243,368
93,237
557
1,393
(344)
—
—
(138)
(807)
—
(6,166)
(5,270)
(12,517)
$ 313,313
$ 93,794
3.3
2009
$ 226,707
85,528
595
677
(645)
—
(1,987)
(129)
(277)
—
(4,726)
(3,607)
(856)
$ 301,280
$ 86,123
3.5
2008
$ 246,155
93,956
1,797
1,230
225
9
(31,455)
(87)
(3,374)
4,642
(5,049)
930
(1,676)
$ 307,303
$ 95,753
3.2
(1) Crest activities.
(2) Includes interest expense recorded to “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income.
Fixed Charge Coverage Ratio
Our fixed charge coverage ratio for 2010 was 2.7 times, for 2009 was 2.7 times and for 2008 was 2.6 times. Fixed charge coverage ratio is
calculated in exactly the same manner as interest coverage ratio, except that preferred stock dividends are also added to the denominator. We
consider fixed charge coverage ratio to be an appropriate supplemental measure of a company’s ability to make its interest and preferred stock
dividend payments. Our calculation of the fixed charge coverage ratio may be different from the calculation used by other companies and, therefore,
comparability may be limited. This information should not be considered as an alternative to any GAAP liquidity measures or information presented
in Exhibit 12.1 to this Annual Report.
Interest coverage amount divided by interest expense plus preferred stock dividends (dollars in thousands):
Interest coverage amount
Divided by interest expense plus preferred stock dividends(1)
Fixed charge coverage ratio
2010
$ 313,313
$ 118,047
2.7
2009
$ 301,280
$ 110,376
2.7
2008
$ 307,303
$ 120,006
2.6
(1) Includes interest expense recorded to “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income.
R e a l t y I n c o m e 72 2 0 1 0 A n n u a l R e p o r t
General and Administrative Expenses
General and administrative expenses increased by $4.4 million to $25.3 million in 2010 as compared to $20.9 million in 2009. General and
administrative expenses were $21.6 million in 2008. In 2010, general and administrative expenses as a percentage of total revenue were 7.3% as
compared to 6.4% in 2009 and 6.7% in 2008. General and administrative expenses increased during 2010 primarily because of increases in
employee costs, particularly in the acquisitions and research departments. In February 2011, we had 79 employees as compared to 72 employees
in February 2010. In accordance with GAAP, 2010 general and administrative expenses also include transaction costs of $368,000 related to the
acquisition of 186 new properties during 2010, as compared to $62,000 related to the acquisition of 16 new properties during 2009. Prior to 2009,
GAAP required these transaction costs to be capitalized as part of the property investments.
Property Expenses
Property expenses are broken down into costs associated with non-net leased multi-tenant properties, unleased single-tenant properties and
general portfolio expenses. Expenses related to the multi-tenant and unleased single-tenant properties include, but are not limited to, property
taxes, maintenance, insurance, utilities, property inspections, bad debt expense and legal fees. General portfolio costs include, but are not limited
to, insurance, legal, bad debt expense, property inspections and title search fees. At December 31, 2010, 84 properties were available for lease,
as compared to 75 at December 31, 2009 and 70 at December 31, 2008.
Property expenses were $7.3 million in 2010, $6.6 million in 2009 and $5.5 million in 2008. The increase in property expenses in 2010 is primarily
attributable to an increase in maintenance, utilities and property taxes associated with properties available for lease, partially offset by a decrease
in bad debt expense.
Income Taxes
Income taxes were $1.4 million in 2010 as compared to $677,000 in 2009 and $1.2 million in 2008. These amounts are for city and state
income and franchise taxes paid by Realty Income. Income taxes for 2009 are lower primarily a result of a prior year review of our state tax filings,
where we determined that it was appropriate to amend some prior year tax returns from which we realized a tax benefit of $308,000 in 2009.
In addition, Crest recorded state and federal income tax benefits of $344,000 in 2010 as compared to income tax benefits of $645,000 in 2009
and income tax expense of $225,000 in 2008. These amounts are included in “income from discontinued operations, real estate acquired for
resale by Crest” on our consolidated statements of income. The Crest 2009 tax benefit includes a benefit of $303,000 attributable to amendments
of certain prior year state tax returns.
Discontinued Operations
Crest acquires properties with the intention of reselling them rather than holding them as investments and operating the properties. Consequently,
we typically classify Crest’s assets as held for sale at the date of acquisition and do not depreciate them. As a result, the operations of Crest’s
property assets are typically classified as “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated
statements of income.
However, if we determine we have no plans to sell a property asset in the near term (i.e. within the next 12 months), and this property was
previously classified as held for sale, the property is reclassified as real estate held for investment. A property that is reclassified as held for investment
is measured and recorded at the lower of (i) its carrying amount before the property was classified as held for sale, adjusted for any depreciation
expense that would have been recognized had the property been continuously classified as held for investment, or (ii) the fair value at the date of
the subsequent decision not to sell.
At December 31, 2010, we determined that three property assets, acquired by Crest in 2006, no longer met the held for sale criteria because we
decided to lease rather than sell these properties in the near term. As a result, investment in real estate of $3.0 million was reclassified from real estate
held for sale to real estate held for investment on our consolidated balance sheet at December 31, 2010. The results of operations for these properties
are included in income from continuing operations on our consolidated statements of income. As a result of this reclassification, $911,000, $214,000
and $3.2 million in operating loss was reclassified from discontinued operations to continuing operations for 2010, 2009 and 2008, respectively.
R e a l t y I n c o m e 73 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations, cont’d.
The following is a summary of Crest’s “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated
statements of income (dollars in thousands, except per share data):
Crest’s income from discontinued operations,
real estate acquired for resale
Rental revenue
Interest revenue
Gain on sales of real estate acquired for resale
Interest expense
General and administrative expense
Property expenses
Provisions for impairment
Depreciation(1)
Income tax benefit (expense)
Income from discontinued operations,
real estate acquired for resale by Crest
Per common share, basic and diluted
2010
$ —
1,397
—
(557)
(226)
(12)
—
—
344
$ 946
$ 0.01
2009
$ 157
1,403
—
(595)
(336)
(24)
(78)
—
645
$ 1,172
$ 0.01
2008
$ 1,595
899
4,642
(1,797)
(511)
(13)
—
(771)
(225)
$ 3,819
$ 0.04
(1) Depreciation was recorded on one property that was classified as held for investment. This property was sold in 2008.
Operations from nine of our investment properties were classified as held for sale at December 31, 2010, plus properties sold in 2010, 2009
and 2008 have been classified as discontinued operations. The following is a summary of Realty Income’s “income from discontinued operations,
real estate held for investment” on our consolidated statements of income (dollars in thousands, except per share data):
Realty Income’s income from discontinued operations,
real estate held for investment
Gain on sales of investment properties
Rental revenue
Other revenue
Depreciation and amortization
Property expenses
Provisions for impairment
Income from discontinued operations, real estate held for investment
Per common share, basic and diluted
2010
$ 8,405
1,771
32
(636)
(937)
(213)
$ 8,422
$ 0.08
2009
$ 8,044
3,592
45
(1,428)
(963)
(110)
$ 9,180
$ 0.09
The following is a summary of our total income from discontinued operations (dollars in thousands, except per share data):
Total discontinued operations
Real estate acquired for resale by Crest
Real estate held for investment
Income from discontinued operations
Per common share, basic and diluted
2010
$ 946
8,422
$ 9,368
$ 0.09
2009
$ 1,172
9,180
$ 10,352
$ 0.10
The above per share amounts have each been calculated independently.
2008
$ 13,314
6,813
96
(1,929)
(573)
—
$ 17,721
$ 0.18
2008
$ 3,819
17,721
$ 21,540
$ 0.21
R e a l t y I n c o m e 74 2 0 1 0 A n n u a l R e p o r t
Crest’s Property Sales
During 2010, Crest did not sell any properties. During 2009, Crest sold two properties for $2.0 million, which resulted in no gain. In 2008, Crest
sold 25 properties for $50.7 million, which resulted in a gain of $4.6 million. During 2008, as part of two sales, Crest provided buyer financing of
$19.2 million. Crest’s gains on sales are reported before income taxes and are included in discontinued operations.
Gain on Sales of Investment Properties by Realty Income
During 2010, we sold 28 investment properties for $26.6 million, which resulted in a gain of $8.4 million. The results of operations for these
properties have been reclassified as discontinued operations. Additionally, we sold excess land from one property for $600,000, which resulted
in a gain of $271,000. This gain is included in “other revenue” on our consolidated statement of income for 2010 because this excess land was
associated with a property that continues to be owned as part of our core operations.
During 2009, we sold 25 investment properties for $20.3 million, which resulted in a gain of $8.0 million. The results of operations for these
properties have been reclassified as discontinued operations. Additionally, we received proceeds of $170,000 from the sale of excess land from
one property, which resulted in a gain of $15,000. This gain is included in “other revenue” on our consolidated statement of income for 2009
because this excess land was associated with a property that continues to be owned as part of our core operations.
During 2008, we sold 29 investment properties for $27.4 million, which resulted in a gain of $13.3 million. The results of operations for these
properties have been reclassified as discontinued operations. Additionally, we received proceeds of $439,000 from the sale of excess land from
one property, which resulted in a gain of $236,000. This gain is included in “other revenue” on our consolidated statement of income for 2008
because this excess land was associated with a property that continues to be owned as part of our core operations.
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, 2010, we classified real estate with a carrying amount of $3.6 million as held for sale on our balance sheet. Additionally, we
anticipate selling investment properties from 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.
Provisions for Impairment on Real Estate Acquired for Resale by Crest
During 2010, Crest recorded total provisions for impairment of $807,000 on three properties held for investment at December 31, 2010. These
provisions for impairment are included in continuing operations on our consolidated statement of income for 2010.
During 2009, Crest recorded total provisions for impairment of $199,000 on three properties classified as held for investment at December 31,
2010. These provisions for impairment are included in continuing operations on our consolidated statement of income for 2009. Additionally, in
2009, Crest recorded total provisions for impairment of $78,000 on two properties which were sold in 2009. These provisions for impairment are
included in “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated statement of income for 2009.
During 2008, Crest recorded total provisions for impairment of $3.4 million on three properties which were held for investment at December 31,
2010. These provisions for impairment are included in continuing operations on our consolidated statement of income for 2008.
Provisions for Impairment on Realty Income Investment Properties
During 2010, we recorded provisions for impairment of $213,000 on four properties, three which were sold in 2010 and the other is anticipated
to be sold in the first quarter of 2011. These provisions for impairment are included in “income from discontinued operations, real estate held for
investment” on our consolidated statement of income for 2010. During 2009, we recorded a provision for impairment of $110,000 on one property,
which is included in “income from discontinued operations, real estate held for investment” on our consolidated statement of income for 2009, and
the property was sold in 2010. No provisions for impairment were recorded in 2008.
Preferred Stock Dividends
Preferred stock cash dividends totaled $24.3 million in 2010, 2009 and 2008.
R e a l t y I n c o m e 75 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations, cont’d.
Net Income Available to Common Stockholders
Net income available to common stockholders was $106.5 million in 2010, a slight decrease of $343,000 as compared to $106.9 million in
2009. Net income available to common stockholders in 2008 was $107.6 million.
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.
Gain from the sale of investment properties and the sale of excess land recognized during 2010 was $8.7 million, as compared to a $8.1 million
gain recognized during 2009 and a $13.6 million gain recognized during 2008. Crest recognized no gain from the sale of properties during 2010 or
2009 as compared to $4.6 million during 2008.
FuNDS FROM OPERATIONS AvAILABLE TO COMMON STOCkhOLDERS (FFO)
FFO for 2010 increased by $3.3 million, or 1.7%, to $193.7 million, as compared to $190.4 million in 2009 and $185.5 million in 2008.
The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable GAAP measure) to
FFO. Also presented is information regarding distributions paid to common stockholders and the weighted average number of common shares
used for the basic and diluted computation per share (dollars in thousands, except per share amounts):
2008
$ 107,588
89,104
2,701
(319)
(236)
(13,314)
$ 185,524
$ 1.83
$ 1.83
$ 169,655
Net income available to common stockholders
Depreciation and amortization:
Continuing operations
Discontinued operations
Depreciation of furniture, fixtures and equipment
Gain on sales of land and investment properties:
Continuing operations
Discontinued operations
2010
$ 106,531
2009
$ 106,874
95,513
636
(291)
(271)
(8,405)
90,519
1,428
(318)
(15)
(8,044)
FFO available to common stockholders
$ 193,713
$ 190,444
FFO per common share:
Basic
Diluted
Distributions paid to common stockholders
FFO in excess of distributions paid to
common stockholders
Weighted average number of common shares
used for computation per share:
Basic
Diluted
$ 1.83
$ 1.83
$ 182,500
$ 1.84
$ 1.84
$ 178,008
$ 11,213
$ 12,436
$ 15,869
105,869,637
105,942,721
103,577,507
103,581,053
101,178,191
101,209,883
We define FFO, a non-GAAP measure, consistent with the National Association of Real Estate Investment Trust’s definition, as net income
available to common stockholders, plus depreciation and amortization of real estate assets, reduced by gains on sales of investment properties
and extraordinary items.
We consider FFO to be an appropriate supplemental measure of a REIT’s operating performance as it is based on a net income analysis of
property portfolio performance that adds back non-cash items such as depreciation. The historical accounting convention used for real estate
assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably
over time. Since real estate values historically rise and fall with market conditions, presentations of operating results for a REIT, using historical
accounting for depreciation, could be less informative. The use of FFO is recommended by the REIT industry as a supplemental performance
measure. In addition, FFO is used as a measure of our compliance with the financial covenants of our credit facility.
Presentation of this information is intended to assist the reader in comparing the operating performance of different REITs, although it should
be noted that not all REITs calculate FFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO is not
necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income as an indication of
our performance. In addition, FFO should not be considered as an alternative to reviewing our cash flows from operating, investing and financing
activities as a measure of liquidity, of our ability to make cash distributions or of our ability to pay interest payments.
R e a l t y I n c o m e 76 2 0 1 0 A n n u a l R e p o r t
ADJuSTED FuNDS FROM OPERATIONS AvAILABLE TO COMMON STOCkhOLDERS (AFFO)
AFFO for 2010 increased by $4.6 million, or 2.4%, to $197.3 million as compared to $192.7 million in 2009 and $192.0 million in 2008. We
consider AFFO to be an appropriate supplemental measure of our performance because it provides analysts and investors with an additional
indicator of our ability to pay dividends. Most companies in our industry use a similar measurement, but they may use the term “CAD” (for Cash
Available for Distribution) or “FAD” (for Funds Available for Distribution). AFFO further adjusts FFO by adding back non-cash items that reduce net
income in accordance with GAAP, and deducting such items as capitalized expenditures and straight-line rent revenue.
The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable GAAP measure) to
FFO and AFFO. Also presented is information regarding distributions paid to common stockholders and the weighted average number of common
shares used for the basic and diluted computation per share (dollars in thousands, except per share amounts):
Net income available to common stockholders
Cumulative adjustments to calculate FFO(1)
FFO available to common stockholders
Amortization of share-based compensation
Amortization of deferred note financing costs(2)
Amortization of settlements on treasury lock agreements(3)
Provisions for impairment
Capitalized leasing costs and commissions
Capitalized building improvements
Straight-line rent revenue(4)
Total AFFO available to common stockholders
AFFO per common share:
Basic
Diluted
Distributions paid to common stockholders
AFFO in excess of distributions paid to
common stockholders
Weighted average number of common shares
used for computation per share:
Basic
Diluted
2010
$ 106,531
87,182
193,713
6,166
1,548
—
1,020
(1,501)
(2,077)
(1,613)
2009
$ 106,874
83,570
190,444
4,726
1,363
—
387
(1,185)
(1,879)
(1,117)
2008
$ 107,588
77,936
185,524
5,049
1,748
759
3,374
(956)
(1,498)
(1,997)
$ 197,256
$ 192,739
$ 192,003
$ 1.86
$ 1.86
$ 182,500
$ 1.86
$ 1.86
$ 178,008
$ 1.90
$ 1.90
$ 169,655
$ 14,756
$ 14,731
$ 22,348
105,869,637
105,942,721
103,577,507
103,581,053
101,178,191
101,209,883
(1) See reconciling items for FFO presented on the previous page.
(2) Amortization of deferred note financing costs includes the amortization of costs incurred and capitalized when our notes were issued in January 1999, March 2003, November 2003,
March 2005, September 2005, September 2006, September 2007 and June 2010. These costs are being amortized over the lives of these notes. No costs associated with our
credit facility agreements or annual fees paid to credit rating agencies have been included.
(3) The settlement on the treasury lock agreements resulted from an interest rate risk prevention strategy that we used in 1997 and 1998, which correlated to pending issuances of
senior note securities. We have not employed this strategy since 1998.
(4) A negative amount indicates that our straight-line rent revenue was greater than our actual cash rent collected.
Presentation of the information regarding FFO and AFFO is intended to assist the reader in comparing the operating performance of different
REITs, although it should be noted that not all REITs calculate FFO and AFFO in the same way, so comparisons with other REITs may not be
meaningful. Furthermore, FFO and AFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered
as an alternative to net income as an indication of our performance. In addition, FFO and AFFO should not be considered as an alternative to
reviewing our cash flows from operating, investing, and financing activities. In addition, FFO and AFFO should not be considered as a measure
of liquidity, of our ability to make cash distributions, or of our ability to pay interest payments.
R e a l t y I n c o m e 77 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations, cont’d.
IMPACT OF INFLATION
Tenant leases generally provide for limited increases in rent as a result of increases in the tenants’ sales volumes, increases in the consumer
price index (typically subject to ceilings), and/or fixed increases. We expect that inflation will cause these lease provisions to result in rent increases
over time. During times when inflation is greater than increases in rent, as provided for in the leases, rent increases may not keep up with the rate
of inflation.
Of our 2,496 properties in our portfolio, approximately 96.2% or 2,402 are leased to tenants under net leases where the tenant is responsible
for property expenses. Net leases tend to reduce our exposure to rising property expenses due to inflation. Inflation and increased costs may have
an adverse impact on our tenants if increases in their operating expenses exceed increases in revenue.
IMPACT OF RECENT ACCOuNTINg PRONOuNCEMENTS
For information on the impact of recent accounting pronouncements on our business, see note 2 of the Notes to Consolidated Financial Statements.
QuANTITATIvE AND QuALITATIvE DISCLOSuRES ABOuT MARkET RISk
We are exposed to interest rate changes primarily as a result of our credit facility and long-term notes and bonds used to maintain liquidity and
expand our real estate investment portfolio and operations. Our interest rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flow and to lower our overall borrowing costs. To achieve these objectives we issue long-term notes and bonds,
primarily at fixed rates. We were not a party to any derivative financial instruments at December 31, 2010. We do not enter into any derivative
transactions for speculative or trading purposes.
The following table presents by year of expected maturity, the principal amounts, average interest rates and estimated fair values of our fixed
and variable debt as of December 31, 2010. This information is presented to evaluate the expected cash flows and sensitivity to interest rate
changes (dollars in millions):
Expected Maturity Data
year of maturity
Fixed rate debt
Average interest rate
on fixed rate debt
variable rate debt
Average interest rate
on variable rate debt
2011
2012
2013(1)
2014(2)
2015(3)
Thereafter(4)
Totals/Average
Fair Value(5)
$
—
—
100.0
—
150.0
1,350.0
$ 1,600.0
$ 1,707.1
—%
—
5.38
—
5.50
6.16
6.05%
$ —
—
—
—
—
—
$ —
$ —
—%
—
—
—
—
—
—%
(1) $100 million matures in March 2013.
(2) The credit facility expires in March 2014.
(3) $150 million matures in November 2015.
(4) $275 million matures in September 2016, $175 million matures in September 2017, $550 million matures in August 2019, $250 million matures in January 2021 and $100 million
matures in March 2035.
(5) We base the fair value of the fixed rate debt at December 31, 2010 on indicative market prices and recent trading activity of our notes payable.
The table incorporates only those exposures that exist as of December 31, 2010. It does not consider those exposures or positions that could
arise after that date. As a result, our ultimate realized gain or loss, with respect to interest rate fluctuations, would depend on the exposures that
arise during the period, our hedging strategies at the time, and interest rates.
All of our outstanding notes and bonds have fixed interest rates. Interest on our credit facility balance is variable. At December 31, 2010,
our credit facility balance was zero; however, we intend to borrow funds on our credit facility in the future. Based on a hypothetical credit facility
borrowing of $50 million, a 1% change in interest rates would change our interest costs by $500,000 per year.
R e a l t y I n c o m e 78 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
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,
2010
2009
2008
2007
2006
Total assets (book value)
Cash and cash equivalents
Lines of credit and notes payable
Total liabilities
Total stockholders’ equity
Net cash provided by operating activities
Net change in cash and cash equivalents
Total revenue
Income from continuing operations
Income from discontinued operations
Net income
Preferred stock cash dividends
Net income available to common
stockholders
Cash distributions paid to common
stockholders
Basic and diluted net income per
common share
$ 3,535,590
$ 2,914,787
$ 2,994,179
$ 3,077,352
$ 2,546,508
17,607
1,600,000
1,688,625
1,846,965
243,368
7,581
345,009
121,416
9,368
130,784
(24,253)
10,026
1,354,600
1,426,778
1,488,009
226,707
(36,789)
325,245
120,775
10,352
131,127
(24,253)
46,815
1,370,000
1,439,518
1,554,661
246,155
(146,286)
325,041
110,301
21,540
131,841
(24,253)
193,101
1,470,000
1,539,260
1,538,092
318,169
182,528
288,650
121,871
18,538
140,409
(24,253)
10,573
920,000
970,516
1,575,992
86,945
(55,131)
230,940
99,551
11,230
110,781
(11,362)
106,531
106,874
107,588
116,156
99,419
182,500
178,008
169,655
157,659
129,667
Cash distributions paid per common share
1.721625
1.01
1.03
1.706625
1.06
1.662250
1.16
1.560250
1.11
1.437250
Cash distributions declared per
common share
Basic weighted average number of
common shares outstanding
Diluted weighted average number
of common shares outstanding
1.722875
1.707875
1.667250
1.570500
1.447500
105,869,637
103,577,507
101,178,191
100,195,031
89,766,714
105,942,721
103,581,053
101,209,883
100,333,966
89,917,554
R e a l t y I n c o m e 79 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Controls and Procedures
ChANgES IN AND DISAgREEMENTS wITh ACCOuNTANTS ON ACCOuNTINg AND FINANCIAL DISCLOSuRE
We have had no disagreements with our independent registered public accounting firm on accounting matters or financial disclosure, nor
have we changed accountants in the two most recent fiscal years.
CONTROLS AND PROCEDuRES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
As of and for the year ended December 31, 2010, we carried out an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures, under the supervision and with the participation of management, including our Chief Executive Officer
and Chief Financial Officer. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and procedures were effective and were operating at a reasonable assurance level.
MANAgEMENT’S REPORT ON INTERNAL CONTROL OvER FINANCIAL REPORTINg
Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief
Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles, and includes those policies and procedures that:
(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of
the Company;
(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets
that could have a material effect on the financial statements.
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.
Management has used the framework set forth in the report entitled “Internal Control—Integrated Framework” published by the Committee of
Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over financial reporting.
Management has concluded that the Company’s internal control over financial reporting was effective as of the end of the most recent fiscal year.
KPMG LLP has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting.
Submitted on February 10, 2011 by,
Thomas A Lewis,
Chief Executive Officer and Vice Chairman
Paul M. Meurer,
Chief Financial Officer, Executive Vice President and Treasurer
R e a l t y I n c o m e 80 2 0 1 0 A n n u a l R e p o r t
Changes in Internal Controls
There have not been any significant changes in our internal controls or in other factors that could significantly affect these controls subsequent
to the date of their evaluation in the fourth quarter of 2010. As of December 31, 2010, there were no material weaknesses in our internal controls,
and therefore, no corrective actions were taken.
Limitations on the Effectiveness of Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment
and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management
override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal
control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible
to design into the process safeguards to reduce, though not eliminate, this risk.
Certifications
Tom Lewis, Realty Income’s Chief Executive Officer, certified to the NYSE in 2010, pursuant to Section 303A.12(a) of the NYSE’s Listing
Standards, that he was not aware of any violation of the NYSE corporate governance listing standards by Realty Income. Furthermore,
Realty Income filed with the SEC as exhibits to its Annual Report on Form 10-K for the year ended December 31, 2010, the certifications by
Tom Lewis and Paul M. Meurer, Realty Income’s Chief Executive Officer and Chief Financial Officer, respectively, required under Section 302
of the Sarbanes-Oxley Act.
R e a l t y I n c o m e 81 2 0 1 0 A n n u a l R e p o r t
REALTy INCOME CORPORATION AND SuBSIDIARIES
Market for Registrant’s Common Equity,
Related Stockholder Matters and
Issuer Purchases of Equity Securities
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
2010
First quarter
Second quarter
Third quarter
Fourth quarter
Total
2009
First quarter
Second quarter
Third quarter
Fourth quarter
Total
high
$ 31.18
34.53
34.79
35.97
$ 23.41
23.23
28.20
27.53
Low
Distributions Declared(1)
$ 25.30
28.42
29.12
32.92
$ 14.26
17.90
19.83
22.17
$ 0.4293125
0.4302500
0.4311875
0.4321250
$ 1.7228750
$ 0.4255625
0.4265000
0.4274375
0.4283750
$ 1.7078750
(1) Common stock cash distributions currently are declared monthly by us based on financial results for the prior months. At December 31, 2010, a distribution of $0.14425 per
common share had been declared and was paid in January 2011.
There were 8,396 registered holders of record of our common stock as of December 31, 2010. We estimate that our total number of
shareholders is approximately 100,000 when we include both registered and beneficial holders of our common stock.
During the fourth quarter of 2010, no shares of stock were withheld for state and federal payroll taxes on the vesting of stock awards, as
permitted under the 2003 Incentive Award Plan of Realty Income Corporation.
TOTAL RETuRN PERFORMANCE
220
200
180
160
140
120
l
e
u
a
V
x
e
d
n
I
100
u
80
60
u
l
s
n
u
n
s
l
u
l
n
s
u
n
s
l
u
l
n
s
u
Realty Income Corporation
n
Russell 2000
s
Realty Income Peer Group*
l
SNL Triplenet REIT Index
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
Index
12/31/05
12/31/06
12/31/07
Realty Income Corporation
Russell 2000
Realty Income Peer Group*
SNL Triplenet REIT Index
100.00
100.00
100.00
100.00
136.01
118.37
133.17
132.63
140.48
116.51
110.49
123.05
12/31/08
129.02
77.15
67.04
84.88
12/31/09
12/31/10
155.96
98.11
91.85
113.89
217.26
124.46
120.85
143.30
* Realty Income Peer Group consists of thirteen companies (excluding Realty Income) with an implied market capitalization between $3 billion-$5 billion as of September 30, 2010.
Period Ending
R e a l t y I n c o m e 82 2 0 1 0 A n n u a l R e p o r t
Company Information
Dawn Nguyen
Vice President,
Portfolio Management
Joel Tomlinson
Vice President,
Director of Acquisitions
Cary J. Wenthur
Vice President,
Acquisitions
Stephen D. Burchett
Associate Vice President,
Senior Legal Counsel
Jill M. Cossaboom
Associate Vice President,
Assistant Controller
Kristin K. Ferrell
Associate Vice President,
Portfolio Management
Teresa M. Glenn
Associate Vice President,
Human Resources & Operations
Sean P. Nugent
Associate Vice President,
Accounting Manager
Jenette S. O’Brien
Associate Vice President,
Senior Legal Counsel
Patrick Rea
Associate Vice President,
Property Management
DIRECTORS
Donald R. Cameron
Chairman of the Board
of Directors and President,
Cameron, Murphy & Spangler, Inc.
Thomas A. Lewis
Vice Chairman of the
Board of Directors and
Chief Executive Officer,
Realty Income Corporation
Kathleen R. Allen, Ph.D.
Director, Center of Technology
Commercialization,
Marshall School of Business
University of Southern California
Priya Cherian Huskins
Partner,
Woodruff-Sawyer & Co.
Michael D. McKee
Chief Executive Officer,
Bentall Kennedy
Gregory T. McLaughlin
President,
Tiger Woods Foundation
Ronald L. Merriman
Retired Vice Chair,
KPMG, LLP
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
KPMG LLP
San Diego, California
TRANSFER AGENT
Wells Fargo Shareowner Services
P.O. Box 64873
St. Paul, MN 55164
For shareholder administration
and account information please
visit Wells Fargo’s website at:
www.shareowneronline.com
or call this toll-free number:
1-877-218-2434 or email your
questions to:
stocktransfer@wellsfargo.com
FOR ADDITIONAL
CORPORATE INFORMATION
For automated shareholder information
call the Realty Income Investor
Hotline at: 888-811-2001
Visit the Realty Income corporate
website at: www.realtyincome.com
Contact your financial advisor, or
contact Realty Income at:
telephone: 760-741-2111
email: ir@realtyincome.com
Copies of Realty Income’s Annual
Report on Form 10-K are available
upon written request to:
Realty Income Corporation
Attention: Investor Relations
600 La Terraza Boulevard
Escondido, CA 92025
Realty Income’s Senior Management - front row: Tom Lewis, second row:
Rob Israel, Paul Meurer, Laura King, third row: Gary Malino, Richard Collins,
top row: John Case and Mike Pfeiffer
EXECUTIVE OFFICERS
Thomas A. Lewis
Vice Chairman
of the Board of Directors,
Chief Executive Officer
Gary M. Malino
President and
Chief Operating Officer
Paul M. Meurer
Executive Vice President,
Chief Financial Officer
and Treasurer
Michael R. Pfeiffer
Executive Vice President,
General Counsel and
Secretary
John P. Case
Executive Vice President,
Chief Investment Officer
Richard G. Collins
Executive Vice President,
Portfolio Management
ADDITIONAL OFFICERS
Robert J. Israel
Senior Vice President,
Research
Laura S. King
Senior Vice President,
Assistant General Counsel
and Assistant Secretary
Theresa M. Casey
Vice President,
Information Technologies
Elizabeth Cate
Vice President,
Portfolio Management
Gregory J. Fahey
Vice President,
Controller
Benjamin N. Fox
Vice President,
Director, Strategic Initiatives
Tere H. Miller
Vice President,
Corporate Communications
600 La Terraza Boulevard, Escondido, CA 92025-3873
www.realtyincome.com