R
E
A
L
T
Y
I
N
C
O
M
E
2
0
1
3
A
N
N
U
A
L
R
E
P
O
R
T
61%
Revenue
Growth
19%
FFO per share
Growth
21%
Dividend
Growth
5
Dividend
Increases
RECORD
2013
PERFORMANCE
$12.6
Billion
Enterprise Value
$4.7
Billion
Acquisitions
3,896
Properties
Owned
98.2%
Occupancy
2 0 1 3 A N N U A L R E P O R T
600 La Terraza Boulevard
Escondido, CA 92025-3873
www.realtyincome.com
E Printed on recyled paper with soy-based inks.
MISSION
We are The Monthly Dividend Company®. Over the past 45 years we
have paid our shareholders over $2.7 billion in monthly dividends
and we have increased dividends 74 times since our listing on the
New York Stock Exchange in 1994 (NYSE “O”). We are committed
to continuing to operate your company in a manner that supports
the ongoing payment of dividends that increase over time.
COMPANY DESCRIPTION
We have been acquiring freestanding commercial real estate since
1969. Our focus is on acquiring single-tenant commercial properties
leased to creditworthy tenants under 10 to 20-year net-lease
agreements. We hold these properties for their long-term lease
revenue production, which provides us with the cash flow we use
to pay dividends to our shareholders. Additionally, we employ
conservative balance sheet management to protect the integrity
of the cash flow to pay dividends and actively manage our
real estate portfolio in order to sustain high occupancy.
2014 MILESTONE
During 2014 we will celebrate our 20th year as a New York Stock
Exchange-traded public company and will have crossed the
threshold of paying dividends without interruption for 20 years.
TABLE OF CONTENTS
Historical Financial Performance
Letter to Shareholders
The Magic of Rising Dividends Over Time
2013 Annual Report: Form 10-K
Company Information
2
4
15
16
97
Company Information
Executive Officers
Additional Officers
Debra M. Bonebrake
Senior Vice President,
Industrial, Distribution
and Office
Gregory J. Fahey
Senior Vice President,
Controller
Robert J. Israel
Senior Vice President,
Research
Laura S. King
Senior Vice President,
Assistant General Counsel
and Assistant Secretary
Theresa M. Casey
Vice President,
IT Enterprise Software
Elizabeth Cate
Vice President,
Portfolio Management
Benjamin N. Fox
Vice President,
Asset Management
Tere H. Miller
Vice President,
Investor Relations
Dawn Nguyen
Vice President,
Portfolio Management
Clint Schmucker
Vice President,
Information Technology
Joel Tomlinson
Vice President,
Director of Acquisitions
Cary J. Wenthur
Vice President,
Senior Director of Acquisitions
Janeen Bedard
Associate Vice President,
Assistant to CEO for
Corporate Strategy
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
Shannon C. Jensen
Associate Vice President,
Senior Legal Counsel
Scott A. Kohnen
Associate Vice President,
Director of Research
Sean P. Nugent
Associate Vice President,
Assistant Controller
Jenette S. O’Brien
Associate Vice President,
Director of Investment
Property Sales
Patrick Rea
Associate Vice President,
Property Management
Independent Registered Public Accounting Firm
For Additional Corporate Information
KPMG LLP
San Diego, California
Wells Fargo Shareowner Services
Transfer Agent
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
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 92025-3873
R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T 9 7
Left to Right: Richard Collins, John Case, Paul Meurer, Gary Malino, Sumit Roy, Michael Pfeiffer
Gary M. Malino
President,
Michael R. Pfeiffer
Executive Vice President,
Chief Operating Officer
General Counsel and Secretary
Paul M. Meurer
Executive Vice President,
Chief Financial Officer
and Treasurer
Sumit Roy
Executive Vice President,
Chief Investment Officer
John P. Case
Chief Executive Officer
Member of the Board
of Directors
Richard G. Collins
Executive Vice President,
Portfolio Management
Directors
Michael D. McKee
Chairman of the Board of Directors and
Chief Executive Officer, Bentall Kennedy
John P. Case
Chief Executive Officer
Member of the Board of Directors
Thomas A. Lewis
Vice Chairman of the Board of Directors
Kathleen R. Allen, Ph.D.
Director, Center for Technology Commercialization,
Marshall School of Business
University of Southern California
A. Larry Chapman
Retired, Executive Vice President,
Head of Commercial Real Estate, Wells Fargo Bank
Priya Cherian Huskins
Partner, Woodruff-Sawyer & Co.
Gregory T. McLaughlin
Senior Vice President, PGA Tour
Ronald L. Merriman
Retired Vice Chair, KPMG, LLP
2013 PERFORMANCE HIGHLIGHTS
17.0% AFFO per share growth
21.2% dividend per share growth
$3.2 billion acquisition of ARCT
$1.5 billion property-level acquisitions
98.2% occupancy
CUMULATIVE PERFORMANCE HIGHLIGHTS SINCE 1994 LISTING
16.3% compounded average annual total return
74 dividend increases
Total enterprise growth to $12.6 billion from $347 million
Number of properties increased to 3,896 from 630
Occupancy rate never below 96%
R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T 1
Sterling Winery in Napa, California
A N N U A L I Z E D D I V I D E N D S A N D D I V I D E N D I N C R E A S E S ( 1 )
> 521 CONSECUTIVE DIVIDENDS PAID SINCE 1969
> 74 DIVIDEND INCREASES SINCE 1994 NYSE LISTING
> 65 CONSECUTIVE QUARTERLY INCREASES
$0.90
$0.93
$0.95
$0.96
$1.02
$1.08
$1.11
$1.14
$1.17
$1.20
$1.32
$1.40
$1.52
$1.64
$1.70
$1.72
$1.73
$1.75
$1.82
$2.19
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
(1) Annualized dividend amount reflects the December declared dividend rate per share multiplied by 12.
Quick Service Restaurant in Kansas City, Missouri
Wholesale Club in Sanford, Florida
2 R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T
Automotive Tire Service in Houston, Texas
Theater in Los Angeles, California
CO M PA R I S O N O F $ 1 0 0 I N V E S T E D I N R E A LT Y I N CO M E
I N 1 9 9 4 V S . M A J O R S TO C K I N D I C E S
$1,491
$692
$667
$577
$555
$1,700
$1,500
$1,300
$1,100
$900
$700
$500
$300
$100
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
REALTY INCOME CORPORATION
EQUITY REIT INDEX
DOW JONES INDUSTRIAL AVERAGE
STANDARD & POORS 500
NASDAQ COMPOSITE
Convenience Store in Yorktown, Virginia
R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T 3
R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T 1
Historical Financial Performance
For the Years Ended December 31,
2013
2012
2011
2010
2009
Total revenue(1)
$ 759,798,000
$ 483,557,000
$ 421,644,000
$ 346,437,000
$ 328,794,000
Net income available to common stockholders
$ 203,634,000
$ 114,538,000
$ 132,779,000
$ 106,531,000
$ 106,874,000
Funds from operations (“FFO”)(2)
$ 462,030,000
$ 268,761,000
$ 249,392,000
$ 193,926,000
$ 190,554,000
Adjusted funds from operations (“AFFO”)(2)
$ 463,139,000
$ 274,183,000
$ 253,372,000
$ 197,256,000
$ 192,739,000
Dividends paid to common stockholders
$ 409,222,000
$ 236,348,000
$ 219,297,000
$ 182,500,000
$ 178,008,000
Special dividend paid
AT YEAR END
Real estate at cost, before accumulated depreciation(3) $ 9,899,475,000
$ 5,920,685,000
$ 4,971,981,000
$ 4,112,862,000
$ 3,439,456,000
Number of properties
Gross leasable square feet
Properties acquired(4)
3,896
3,013
2,634
2,496
2,339
62,644,900
37,677,500
27,369,000
21,215,800
19,182,000
958
423
164
Cost of properties acquired(4)
$ 4,670,169,000
$ 1,164,924,000
$ 1,016,100,000
$ 713,534,000
$
57,937,000
Properties sold
Number of industries
Number of states
Portfolio occupancy rate
Remaining weighted average lease term in years
PER COMMON SHARE DATA(5)
Net income (diluted)
Funds from operations (“FFO”)(2)
Adjusted funds from operations (“AFFO”)(2)
Dividends paid
Special dividend
Annualized dividend amount(6)
Common shares outstanding
INVESTMENT RESULTS
Closing price on December 31,
Dividend yield(7)(8)(9)
Total return to stockholders(9)(10)
$
$
$
$
$
$
75
47
49
98.2%
10.8
44
44
49
97.2%
11.0
1.06
2.41
2.41
2.147
$
$
$
$
0.86
2.02
2.06
1.772
$
$
$
$
26
38
49
96.7%
11.3
1.05
1.98
2.01
1.737
2.186
$
1.821
$
1.746
1.731
$
1.716
207,485,073
133,452,411
133,223,338
118,058,988
104,286,705
37.33
$
40.21
$
34.96
34.20
$
25.91
5.3%
-1.8%
5.1%
20.1%
5.1%
7.3%
6.6%
38.6%
7.4%
19.3%
186
28
32
49
96.6%
11.4
1.01
1.83
1.86
1.722
$
$
$
$
16
25
30
49
96.8%
11.2
1.03
1.84
1.86
1.707
$
$
$
$
$
$
(1) Total revenue includes amounts reclassified to income from discontinued operations, but excludes gain on sales,
tenant reimbursements and 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. For 2012 and 2013, FFO has been adjusted to add back American Realty Capital Trust merger-related costs.
(3) Does not include properties held for sale.
(4) Includes properties acquired by Realty Income and Crest Net Lease.
Historical Financial Performance
For the Years Ended December 31,
2013
2012
2011
2010
2009
2008
2007
2006
2005
Total revenue(1)
$ 759,798,000
$ 483,557,000
$ 421,644,000
$ 346,437,000
$ 328,794,000
$ 331,465,000
$ 295,561,000
$ 240,626,000
$ 197,751,000
Net income available to common stockholders
$ 203,634,000
$ 114,538,000
$ 132,779,000
$ 106,531,000
$ 106,874,000
$ 107,588,000
$ 116,156,000
$
99,419,000
$
89,716,000
Funds from operations (“FFO”)(2)
$ 462,030,000
$ 268,761,000
$ 249,392,000
$ 193,926,000
$ 190,554,000
$ 185,524,000
$ 189,947,000
$ 155,815,000
$ 129,833,000
Adjusted funds from operations (“AFFO”)(2)
$ 463,139,000
$ 274,183,000
$ 253,372,000
$ 197,256,000
$ 192,739,000
$ 192,003,000
$ 193,079,000
$ 159,479,000
$ 130,843,000
Dividends paid to common stockholders
$ 409,222,000
$ 236,348,000
$ 219,297,000
$ 182,500,000
$ 178,008,000
$ 169,655,000
$ 157,659,000
$ 129,667,000
$ 108,575,000
Real estate at cost, before accumulated depreciation(3) $ 9,899,475,000
$ 5,920,685,000
$ 4,971,981,000
$ 4,112,862,000
$ 3,439,456,000
$ 3,408,910,000
$ 3,238,794,000
$ 2,743,973,000
$ 2,096,156,000
Cost of properties acquired(4)
$ 4,670,169,000
$ 1,164,924,000
$ 1,016,100,000
$ 713,534,000
$
57,937,000
$ 189,627,000
$ 533,726,000
$ 769,900,000
$ 486,553,000
3,896
3,013
2,634
2,496
2,339
2,348
2,270
1,955
1,646
62,644,900
37,677,500
27,369,000
21,215,800
19,182,000
19,106,700
18,504,800
16,740,100
13,448,600
958
423
164
186
16
108
357
378
156
75
47
49
98.2%
10.8
44
44
49
97.2%
11.0
1.06
2.41
2.41
2.147
$
$
$
$
0.86
2.02
2.06
1.772
$
$
$
$
26
38
49
96.7%
11.3
1.05
1.98
2.01
1.737
28
32
49
96.6%
11.4
1.01
1.83
1.86
1.722
$
$
$
$
25
30
49
96.8%
11.2
1.03
1.84
1.86
1.707
$
$
$
$
29
30
49
97.0%
11.9
1.06
1.83
1.90
1.662
1.731
$
1.716
$
1.701
$
$
$
$
$
10
30
49
97.9%
13.0
1.16
1.89
1.92
1.560
1.641
$
$
$
$
$
13
29
48
98.7%
12.9
1.11
1.73
1.77
1.437
1.518
$
$
$
$
$
23
29
48
98.5%
12.4
1.12
1.62
1.63
1.346
1.395
118,058,988
104,286,705
104,211,541
101,082,717
100,746,226
83,696,647
34.20
$
25.91
$
23.15
$
27.02
$
27.70
$
21.62
6.6%
38.6%
7.4%
19.3%
6.1%
-8.2%
5.6%
3.2%
6.7%
34.8%
5.3%
-9.2%
(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.
(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.
$
$
$
$
$
$
Annualized dividend amount(6)
2.186
$
1.821
$
1.746
Common shares outstanding
207,485,073
133,452,411
133,223,338
INVESTMENT RESULTS
Closing price on December 31,
Dividend yield(7)(8)(9)
Total return to stockholders(9)(10)
37.33
$
40.21
$
34.96
5.3%
-1.8%
5.1%
20.1%
5.1%
7.3%
Special dividend paid
AT YEAR END
Number of properties
Gross leasable square feet
Properties acquired(4)
Properties sold
Number of industries
Number of states
Portfolio occupancy rate
Remaining weighted average lease term in years
PER COMMON SHARE DATA(5)
Net income (diluted)
Funds from operations (“FFO”)(2)
Adjusted funds from operations (“AFFO”)(2)
Dividends paid
Special dividend
$
$
$
$
$
$
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
$ 177,606,000
$ 150,370,000
$ 137,600,000
$ 121,081,000
$ 116,310,000
$ 104,510,000
85,132,000
67,897,000
56,957,000
51,555,000
48,863,000
$
90,168,000
$
76,722,000
$ 120,554,000
$ 104,608,000
$ 126,424,000
$ 106,659,000
$
97,420,000
$
83,842,000
$
$
$
$
68,954,000
95,068,000
95,844,000
78,042,000
$
$
$
$
57,846,000
77,828,000
78,504,000
64,871,000
$
$
$
$
45,076,000
67,239,000
67,836,000
58,262,000
$
$
$
$
41,012,000
65,917,000
66,330,000
55,925,000
41,304,000
34,770,000
32,223,000
25,600,000
15,224,000
62,799,000
52,353,000
47,718,000
40,414,000
39,185,000
62,364,000
52,077,000
47,430,000
39,668,000
39,185,000
52,301,000
44,367,000
42,794,000
36,710,000
38,816,000
5,285,000
5,850,000
$ 1,691,283,000
$ 1,533,182,000
$ 1,285,900,000
$ 1,178,162,000
$ 1,073,527,000
$ 1,017,252,000
$ 889,835,000
$ 699,797,000
$ 564,540,000
$ 515,426,000
$ 450,703,000
1,533
1,404
1,197
1,124
1,068
1,076
826
740
685
630
11,986,100
11,350,800
9,997,700
9,663,000
9,013,200
8,648,000
7,824,100
6,302,300
5,226,700
4,673,700
4,064,800
194
302
111
117
22
110
$ 215,314,000
$ 371,642,000
$ 139,433,000
$ 156,472,000
$
98,559,000
$ 181,376,000
$ 193,436,000
$ 142,287,000
$
55,517,000
$
65,393,000
$
3,273,000
43
30
48
97.9%
12.0
1.15
1.53
1.61
1.241
$
$
$
$
35
28
48
98.1%
11.8
1.08
1.47
1.50
1.181
1.32
$
1.20
$
$
$
$
$
35
26
48
97.7%
10.9
1.01
1.40
1.41
1.151
1.17
$
$
$
$
$
35
25
48
98.2%
10.4
21
24
46
97.7%
9.8
0.99
1.33
1.34
1.121
$
$
$
$
0.84
1.26
1.27
1.091
$
$
$
$
3
24
45
98.4%
10.7
0.76
1.23
1.24
1.043
1.14
$
1.11
$
1.08
1.02
0.96
0.93
0.90
79,301,630
75,818,172
69,749,654
65,658,222
53,127,038
53,644,328
53,634,206
51,396,928
45,959,074
45,952,474
39,004,182
25.29
$
20.00
$
17.50
$
14.70
$
12.4375
$
10.3125
$
12.4375
$
12.719
$
11.9375
$
11.25
$
8.5625
6.2%
32.7%
6.7%
21.0%
7.8%
26.9%
9.0%
27.2%
10.6%
31.2%
8.4%
-8.7%
7.7%
5.5%
7.9%
14.5%
8.3%
15.4%
10.7%
42.0%
9.9%
28.5%
(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.
(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.
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
970
149
5
22
45
99.5%
10.2
0.78
1.18
1.17
0.983
$
$
$
$
$
$
$
$
$
$
$
$
96
10
14
43
99.2%
9.8
0.74
1.11
1.10
0.946
$
$
$
$
$
$
$
$
$
$
62
7
8
42
99.1%
9.5
0.70
1.04
1.03
0.931
0.23
0.945
$
$
$
$
$
$
$
$
$
$
$
58
3
7
42
99.3%
9.2
0.63
1.00
0.98
0.913
4
5
5
41
99.4%
9.5
0.39
0.98
0.98
0.300
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
$ 177,606,000
$ 150,370,000
$ 137,600,000
$ 121,081,000
$ 116,310,000
$ 104,510,000
$
90,168,000
$
76,722,000
68,954,000
57,846,000
45,076,000
41,012,000
$ 120,554,000
$ 104,608,000
95,068,000
77,828,000
67,239,000
65,917,000
$ 126,424,000
$ 106,659,000
95,844,000
78,504,000
67,836,000
66,330,000
$
97,420,000
$
83,842,000
78,042,000
64,871,000
58,262,000
55,925,000
$
$
$
$
$
$
$
$
$
$
$
$
$
85,132,000
41,304,000
62,799,000
62,364,000
52,301,000
$
$
$
$
$
67,897,000
34,770,000
52,353,000
52,077,000
44,367,000
$
$
$
$
$
$
56,957,000
32,223,000
47,718,000
47,430,000
42,794,000
5,285,000
$
$
$
$
$
51,555,000
25,600,000
40,414,000
39,668,000
36,710,000
$
$
$
$
$
$
48,863,000
15,224,000
39,185,000
39,185,000
38,816,000
5,850,000
$ 1,691,283,000
$ 1,533,182,000
$ 1,285,900,000
$ 1,178,162,000
$ 1,073,527,000
$ 1,017,252,000
$ 889,835,000
$ 699,797,000
$ 564,540,000
$ 515,426,000
$ 450,703,000
1,533
1,404
1,197
1,124
1,068
1,076
970
826
740
685
630
11,986,100
11,350,800
9,997,700
9,663,000
9,013,200
8,648,000
7,824,100
6,302,300
5,226,700
4,673,700
4,064,800
194
302
111
117
149
96
62
58
4
$ 215,314,000
$ 371,642,000
$ 139,433,000
$ 156,472,000
$
98,559,000
$ 181,376,000
$ 193,436,000
$ 142,287,000
$
55,517,000
$
65,393,000
$
3,273,000
5
22
45
99.5%
10.2
0.78
1.18
1.17
0.983
1.02
$
$
$
$
$
10
14
43
99.2%
9.8
0.74
1.11
1.10
0.946
0.96
$
$
$
$
$
$
7
8
42
99.1%
9.5
0.70
1.04
1.03
0.931
0.23
0.945
$
$
$
$
$
3
7
42
99.3%
9.2
0.63
1.00
0.98
0.913
0.93
$
$
$
$
$
5
5
41
99.4%
9.5
0.39
0.98
0.98
0.300
0.90
$
$
$
$
$
79,301,630
75,818,172
69,749,654
65,658,222
53,127,038
53,644,328
53,634,206
51,396,928
45,959,074
45,952,474
39,004,182
25.29
$
20.00
$
17.50
$
14.70
$
12.4375
$
10.3125
$
12.4375
$
12.719
$
11.9375
$
11.25
$
8.5625
6.2%
32.7%
6.7%
21.0%
7.8%
26.9%
9.0%
27.2%
10.6%
31.2%
8.4%
-8.7%
7.7%
5.5%
7.9%
14.5%
8.3%
15.4%
10.7%
42.0%
9.9%
28.5%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
43
30
48
97.9%
12.0
1.15
1.53
1.61
1.241
$
$
$
$
35
28
48
98.1%
11.8
1.08
1.47
1.50
1.181
35
26
48
97.7%
10.9
1.01
1.40
1.41
1.151
22
21
24
46
97.7%
9.8
35
25
48
98.2%
10.4
0.99
1.33
1.34
1.121
$
$
$
$
0.84
1.26
1.27
1.091
$
$
$
$
110
3
24
45
98.4%
10.7
0.76
1.23
1.24
1.043
1.32
$
1.20
1.17
1.14
$
1.11
$
1.08
$
$
$
$
$
$
Dear Fellow Shareholders,
I am privileged to have been selected
as your CEO in September of 2013,
and am pleased to report a record-
setting operating performance for the
year. I expect our company to continue
its excellent performance and positive,
long-term investment results for
shareholders.
While I may be a new face and name
to some of our investors, I have been
at Realty Income for four years, most
recently as president and chief
investment officer since March of 2013
and, prior to that, as chief investment
officer since the beginning of 2010. In
addition, before joining Realty Income,
I served as an external advisor to the
company for more than 10 years. I also
have 25 years of commercial real
estate experience. Based on my long
relationship with the company and
background in real estate, I am a firm
believer in Realty Income’s mission
and have been deeply involved in
executing our strategic plan in recent
years. Until becoming CEO, I led our
acquisitions efforts that contributed to
earnings growth of 30% to $2.41 per
share and dividend growth of 27% to
$2.19 per share during the last four
years. Additionally, we were able to
increase the overall credit quality of
the tenants in our portfolio while
realizing outstanding property
investment spreads (the initial lease
yields we receive on our properties
less our cost of capital to fund
property acquisitions), allowing us to
maintain a growing and durable cash
flow stream to support the dividend.
I am pleased to have been able to
contribute to the success of our
company over the past four years
and look forward to new opportunities
for success as your CEO.
DIFFERENT LEADER – SAME MISSION
The name on the door may have
changed, but the vision and mission of
Realty Income remain the same. Our
mission, as always, is to manage our
real estate assets so that they continue
to provide the lease revenue to
support monthly dividend payments.
Additionally, our goal is to increase the
amount of the dividends you receive,
over time, by increasing the amount of
lease revenue the existing portfolio
generates and by expanding the size
of our real estate portfolio. The
business plan we have pursued for the
past 45 years, which has allowed us to
continually achieve this mission, is the
same business plan that we intend to
execute going forward with me as your
CEO. Our business plan is relatively
simple, yet it provides us with the
flexibility to react to ongoing changes
4 R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T
in the economy and the real estate markets.
That plan is to:
Pay 12 monthly dividends
Raise the dividend
Maintain a conservative balance sheet
Maintain high occupancy
Acquire additional properties
Remain disciplined in our acquisition
underwriting approach
Continue to grow investor interest in
The Monthly Dividend Company®
Working with me to meet our business
plan objectives is a seasoned and
experienced executive team that has been
essential to our success and growth since
we became a public company in 1994.
This team, with an average tenure of
16 years, continues to provide the
management quality and depth of
experience crucial to our continued
successful operations.
HIGHLIGHTS OF 2013
We achieved outstanding operating
results in 2013. Simply put, we had the
best operating performance in our
company’s history. A few highlights
of our financial performance are:
Total revenue grew 57% to $760
million
Earnings, as measured by our Adjusted
Funds from Operations (AFFO),
increased 69% to $463 million
AFFO per share increased
17% to $2.41
Dividends paid per share grew
by just over 21%
TOTAL REVENUE (1)
FOR THE YEARS (DOLLARS IN MILLIONS)
$800
$700
$600
$500
$400
$300
$200
$100
4
9
5
9
6
9
7
9
8
9
9
9
0
0
1
0
2
0
3
0
4
0
5
0
6
0
7
0
8
0
9
0
0
1
1
1
2
1
3
1
9
4
$
2
5
$
7
5
$
8
6
$
5
8
$
5
0
1
$
6
1
1
$
1
2
1
$
8
3
1
$
0
5
1
$
8
7
1
$
8
9
1
$
1
4
2
$
6
9
2
$
2
3
3
$
9
2
3
$
6
4
3
$
2
2
4
$
4
8
4
$
0
6
7
$
(1) Includes amounts reclassified to income from discontinued operations,
but excludes gain on sales, tenant reimbursements, and revenue from Crest
Net Lease, a subsidiary of Realty Income.
AFFO PER COMMON SHARE
FOR THE YEARS
$2.40
$2.30
$2.20
$2.10
$2.00
$1.90
$1.80
$1.70
$1.60
$1.50
$1.40
$1.30
$1.20
$1.10
$1.00
4
9
5
9
6
9
7
9
8
9
9
9
0
0
1
0
2
0
3
0
4
0
5
0
6
0
7
0
8
0
9
0
0
1
1
1
2
1
3
1
8
9
.
0
$
8
9
.
0
$
3
0
.
1
$
0
1
.
1
$
7
1
.
1
$
4
2
.
1
$
7
2
.
1
$
4
3
.
1
$
1
4
.
1
$
0
5
.
1
$
1
6
.
1
$
3
6
.
1
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7
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.
1
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.
1
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1
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1
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8
.
1
$
1
0
.
2
$
6
0
.
2
$
1
4
.
2
$
R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T 5
Real Estate Acquisitions
The primary driver of these
tremendous financial results was real
estate acquisitions. During 2013 we
generated and reviewed $39 billion in
real estate acquisition opportunities,
the most in our 20-year history as a
public company. We selectively
acquired a record $1.5 billion of
properties that met our investment
criteria, approximately $300 million
more than we acquired in 2012. In
total, we completed investments in
459 properties.
We also made our first entity-level
acquisition in 2013, acquiring American
Realty Capital Trust (ARCT), a publicly
traded REIT that also focused on
triple-net lease properties, for
$3.2 billion. This transaction closed
in January of 2013, adding 515
freestanding commercial properties
to our company which have been
successfully integrated into our
real estate portfolio. This acquisition
was an excellent strategic fit
for us on numerous levels
allowing us to:
Increase our earnings (AFFO) by
approximately $0.15 per share
Increase our dividend by 19%
Further diversify our real estate
portfolio by tenant, industry,
geography, and property type,
while still maintaining our retail
property focus
Immediately achieve our goal to
improve the credit quality of our
real estate portfolio by adding a
significant number of investment-
grade rated tenants
Increase the size and scale of our
company by approximately 35%,
providing important competitive
advantages relative to our
operating efficiencies, acquisition
capabilities, and access to and cost
of capital.
To summarize our acquisition activity
in 2013, we collectively invested a total
of $4.7 billion in 974 properties and
increased our portfolio to a total of
3,896 properties. This record
acquisition volume nearly doubled the
amount of real estate on our balance
sheet to $10 billion, and benefited
multiple facets of our operations,
including tenant credit quality and
portfolio diversification. Approximately
70% of the revenue generated by the
properties acquired in 2013 is from
tenants with investment-grade credit
ratings. We also further diversified our
tenant base by adding 55 new tenants
to the portfolio, and increased the
proportion of non-retail property
types from 15% of rental revenue to
23% by the end of the year.
TENANT DIVERSIFICATION ( 1 )
(AT 12/31/13)
FedEx
Walgreens
Family Dollar
LA Fitness
AMC Theatres
Diageo
BJ’s Wholesale Clubs
Northern Tier Energy/Super America
Dollar General
Rite Aid
Regal Cinemas
CVS Pharmacy
The Pantry
Circle K
Walmart/Sam’s Club
5.2%
5.0%
4.8%
4.3%
3.1%
2.9%
2.9%
2.5%
2.4%
2.2%
2.1%
2.1%
1.8%
1.7%
1.6%
(1) Largest 15 tenants based on percentage of
total portfolio annualized rental revenue as
of December 31, 2013.
During 2013 we
generated and
reviewed $39 billion
in real estate acquisition
opportunities, the most
in our 20-year history
as a public company.
6 R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T
GROWING YOUR PORTFOLIO
NUMBER OF PROPERTIES AT THE END OF EACH YEAR
4,000
3,800
3,600
3,400
3,200
3,000
2,800
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
0
7
9
1
,
1
3
0
4
0
4
,
1
4
0
3
3
5
,
1
5
0
6
4
6
,
1
6
0
5
5
9
,
1
7
0
0
7
2
,
2
8
0
8
4
3
,
2
9
0
9
3
3
,
2
0
1
6
9
4
,
2
1
1
4
3
6
,
2
2
1
3
1
0
,
3
3
1
6
9
8
,
3
In addition, our largest industry now
represents 10.6% of rental revenue,
down from 14.9% in 2012, further
enhancing the stability of our lease
revenue by reducing the amount of
revenue from any single industry. We
are pleased with the enhancements in
our real estate portfolio as a result of
our targeted acquisitions.
Portfolio Management
This past year was also our most
active year yet in portfolio
management, in terms of our efforts
to sell properties that are less of a
strategic fit for us today, and re-deploy
capital into assets that better meet our
investment objectives. During 2013, we
sold 75 properties for approximately
$134 million, realizing an attractive
gain on these sales. By comparison,
we sold 44 properties in 2012 for
approximately $50 million. Our
portfolio management team also
re-leased to either existing tenants
or new tenants 136 properties with
expiring leases, resulting in increased
rents on these properties of
approximately 1%. These proactive
efforts have contributed to the
portfolio’s 98.2% occupancy at year
end, an increase from 97.2% at the end
of 2012. The internal growth in the
portfolio was also healthy with same
store rent increases of 1.4% during
2013, as compared to 0.1% in 2012.
We are pleased with the portfolio’s
performance.
R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T 7
Resources
We continued to supplement the
expertise of our existing staff during
2013 by adding new personnel to the
company to support our growth.
Specifically, we added key personnel
in our acquisitions, portfolio
management, research, legal,
technology, and accounting
departments. Recently, we added to
our non-retail asset capabilities by
hiring a senior vice president who
has extensive experience in industrial,
distribution and office properties to
oversee our efforts in these property
types. Additionally, the tremendous
growth of the last few years has
caused us to outgrow our existing
headquarters facility. Consequently,
we acquired a new headquarters
building which provides us with ample
space to expand, as needed. We hope
to move into our new headquarters
at the end of 2014. These additions
ensure we have the best people, the
highest quality information systems,
and the best working environment so
that our company continues to excel.
Our accomplishments in 2013 position
us to continue to meet our objective
of providing a sustainable monthly
dividend which can grow over time.
The increased diversification of the
overall portfolio, as well as the
improved credit quality of our tenant
base, serves to protect the revenue
supporting the dividend. In addition,
the outstanding growth in 2013 has
increased our size and scale, which
allows us to generate more real estate
acquisition opportunities that can
drive portfolio growth and future
increases in the monthly dividend.
THEN AND NOW
Our performance in 2013, as well as our
results since 2010, speak to the
execution of our strategic plan that
was conceived during the Great
Recession. At the time, we witnessed
a more challenging economy that in all
likelihood would remain under pressure
and be more volatile in the near-to-
intermediate term. This recession
created a tepid retail environment and
we observed a cautious consumer who
was moving away from discretionary
spending. We also saw internet sales
continuing to claim additional
consumer dollars, as various items
could more conveniently be accessed
online at lower price points. As a
result, our strategic plan focused
primarily on two main initiatives:
1) moving the portfolio up the “credit
curve” by adding tenants with stronger
credit profiles, including many with
investment-grade ratings, and
2) investing in new industries and
property types. The objective of our
revised investment focus was to
decrease our exposure to tenants
whose business may be more at-risk
during challenging economic cycles.
For example, such tenants could
include a tenant providing
discretionary, higher priced goods, a
tenant with considerable leverage on
its balance sheet, or a tenant selling
goods vulnerable to competition from
e-commerce. The intent was to
create an even more durable
cash flow stream from which
we pay the dividend.
In 2010, we began to aggressively
execute on this initiative. This was an
opportune time for our company, as
ever-decreasing interest rates and an
abundance of well-priced capital
These additions ensure
we have the best people,
the highest quality
information systems,
and the best working
environment so
that our company
continues to excel.
8 R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T
resulted in a period of high, relative
investment spreads on our acquisitions
that continued through 2013. We were
able to take advantage of these
favorable conditions by making
$4.4 billion in property-level
investments during this four-year
period at spreads well above our
historical average. It’s important to
note that 53% of these investments
were with investment-grade rated
tenants. To put that into perspective,
prior to 2010 only about 5% of our
acquisitions had been with investment-
grade rated tenants, at relatively
narrower spreads. We are pleased to
have achieved such attractive spreads
while executing our initiative to
enhance the credit quality of the
portfolio. We also carefully invested
in non-retail property types, further
diversifying the revenue stream.
Typically, our tenants leasing such
properties are investment-grade rated,
Fortune 1000 companies where the real
estate we own has notable strategic
importance to their business. Today,
23% of rental revenue is derived from
non-retail property types.
During this time, we also were actively
investing in our traditional non-
investment-grade rated retail tenant
properties. This is a property type
we know very well as we have been
investing in it for 45 years. About
$1.8 billion of the $4.4 billion we
invested from 2010 through 2013 was
in non-investment-grade rated retail
tenant assets, making this the most
active four-year period for acquisitions
of this type in our history. As is
customary, we applied our proven
underwriting approach to all
transactions, and pursued the
opportunities that met our established
initiatives. We looked for tenants
offering non-discretionary goods and
services and favored those with a high
service orientation to their business
to minimize the impact of internet
competition. We also focused on
retail tenants providing a discount
proposition to their customers, which
we believe is a sensible retail strategy
during uncertain economic times as
it allows these tenants to more
effectively compete with low online
pricing. We are pleased to have
capitalized on this window of
opportunity to achieve some of our
most accretive investment spreads,
all while delivering on our initiatives.
PROPERTY TYPE
DIVERSIFICATION (1)
Retail
77.4%
Industrial & Distribution 10.9%
Office
Manufacturing
Agriculture
Total
6.6%
2.6%
2.5%
100%
(1) Based on rental revenue for the
quarter ended 12/31/13
We are pleased to have
achieved such attractive
spreads while executing
our initiative to enhance
the credit quality of
the portfolio.
R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T 9
WHAT DO YOU OWN TODAY?
As a result of our success in executing our strategic plan, today our real estate
assets are more diversified than ever, and our overall tenant base has an
improved credit profile. Additionally, we have been able to accomplish this while
maintaining a conservative balance sheet to execute our strategy and utilizing
our low cost of capital advantage to achieve the widest investment spreads in
the company’s history. The most important outcome of our efforts has been
our ability to grow and enhance the security of the cash flow supporting the
monthly dividend. Let’s take a look at where we are today as we begin 2014
compared to where we were at the end of 2009 before implementing our
strategic plan:
O P E R AT I O N A L A R E A
1 2 / 3 1 / 0 9
1 2 / 3 1 / 1 3
B E N E F I T S
NUMBER OF PROPERTIES
2,339
3,896
Consistent growth in lease revenue
supporting dividend increases
PROPERTY DIVERSIFICATION
TENANTS
INDUSTRIES
118
30
205
47
PROPERTY TYPES
98% retail
77% retail
Diversified sources of lease revenue
with less reliance on any one tenant,
industry, or property type create
more stable cash flows lessening
the risk of disruption, leading to
greater dividend stability
INVESTMENT-GRADE TENANTS
2% of revenue
40% of revenue
Enhanced cash flow quality
TOP 15 TENANTS
53.0% of revenue
44.6% of revenue
PORTFOLIO OCCUPANCY
96.8%
98.2%
REAL ESTATE ASSETS
$3.4 billion
$9.9 billion
ENTERPRISE VALUE
$4.4 billion
$12.6 billion
EARNINGS GROWTH (AFFO)
$1.86 per share
$2.41 per share
Diversifying lease revenues
enhances dividend stability
Consistently high occupancy
supports dividend payments
Increased assets supporting
dividend growth
Greater size leads to increased
operating efficiencies and growth
opportunities as well as a reduced
cost of capital
Earnings increases drive
dividend increases
DIVIDEND GROWTH
$1.71 per share
$2.19 per share
Increased monthly dividend
As you can see, what you own today is a larger, stronger, and more diversified
real estate portfolio that continues to grow based on stringent investment
criteria and careful underwriting. The growth over the past four years has
been conservatively funded, primarily through equity issuances, with long-term,
fixed-rate debt issued when prudent, always with an eye towards maintaining
a conservative balance sheet and the integrity of the cash flow.
1 0 R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T
ECONOMIC AND COMPETITIVE
ENVIRONMENT TODAY
We continue to operate in a relatively
low interest rate environment, with
consumer spending that has marginally
increased, and gross domestic product
growth that is trending up while
unemployment numbers are trending
down (as of this writing). These trends,
however, are tenuous and uncertain,
so we are not sure how 2014 will
unfold from an economic standpoint.
While none of us can predict the
future, we believe we have created a
real estate portfolio that should, by
design, perform in virtually any
economic environment. Today,
40% of our revenue is derived from
investment-grade rated tenants,
and our conservatively underwritten
non-investment-grade retail tenant
property revenue has been resilient
throughout a variety of economic
environments over the past 45 years.
In addition, more than 90% of our
retail tenants today have a service,
non-discretionary, and/or a low price
point component to their business,
which we think is important to the
sustainability of their operations
and minimizes the impact from
e-commerce. Our track record of
maintaining high occupancy, which
has never been below 96%,
demonstrates the overall health of
our tenant base and the historical
reliability of our lease revenue.
In terms of the competitive
environment, the net lease sector,
in which we operate, has grown
tremendously in recent years. The net
lease sector has a total enterprise
value in excess of $75 billion and now
represents 7% of the total enterprise
value of all equity REITS, as compared
to 3% two years ago. While this
growth creates more investment
opportunities and greater investor
awareness of our company, it also
results in a more competitive sector,
which has tended to stabilize
PORTFOLIO OCCUPANCY AT THE END OF EACH YEAR
Our track record of
maintaining high
occupancy, which
has never been below
96%, demonstrates
the overall health
of our tenant base.
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
4
9
%
4
.
9
9
5
9
%
3
.
9
9
6
9
%
1
.
9
9
7
9
%
2
.
9
9
8
9
%
5
.
9
9
9
9
%
4
.
8
9
0
0
%
7
.
7
9
1
0
%
2
.
8
9
2
0
%
7
.
7
9
3
0
%
1
.
8
9
4
0
%
9
.
7
9
5
0
%
5
.
8
9
6
0
%
7
.
8
9
7
0
%
9
.
7
9
8
0
%
0
.
7
9
9
0
0
1
1
1
2
1
%
8
.
6
9
%
6
.
6
9
%
7
.
6
9
%
2
.
7
9
3
1
%
2
.
8
9
R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T 1 1
acquisitions pricing. We are fortunate
to be one of the most successful,
experienced and largest net lease
companies. As a result, we enjoy broad
and extensive relationships with many
tenants, as well as a deep pool of
owners, developers, and advisors in
the industry. These relationships result
in abundant and attractive property
acquisition opportunities for our
company, despite the competitive
landscape.
INVESTMENT RETURNS
During 2013, shareholders who owned
our common stock for the entire year
received $2.15 per share in dividends,
compared to $1.77 per share in 2012,
an increase of just over 21%, the largest
single-year increase in the company’s
history. This increase was the result of
four consecutive quarterly increases,
combined with a larger $0.35 per
share annualized dividend increase
provided to our shareholders in
February of 2013.
Despite the significant growth in the
dividend we paid to our shareholders
and our record-setting operating
performance, our share price ended
lower on the year, as compared to the
closing price on December 31, 2012,
and investors realized a total return
of -1.8%. It’s important to note that
year-end total return is based on a
company’s share price at a given point
in time. During 2013, the price of our
shares fluctuated between a high of
$55.48 and a low of $36.58, closing
at $37.33 on December 31, 2013. As
I write this letter in February of 2014,
the most recent closing price of our
shares is $44.42. Factors that can
play a role in the pricing of our shares
include, but are not limited to,
perceptions in the market place of
unfolding economic events, as well
as conditions in the stock market in
general. Interestingly therefore,
strong performance in the company’s
operations may not always correlate to
the movement of our stock price over
the short term. However, as the “Realty
Income Performance vs. Major Stock
Indices” chart on the next page
illustrates, over the long term, our
consistent and sound operating
performance has led to advances in
our share price over time, providing
our investors with a compounded
average annual total return since 1994
of 16.3%. We are proud of this result
which compares favorably to overall
market and industry returns.
OUTLOOK FOR 2014
The beginning of this year has been
busy for us. At the end of 2013 we
announced the signing of definitive
agreements to acquire $503 million
in assets from Inland Diversified
Real Estate Trust, a transaction that is
in the process of closing as I write this
letter. We have already provided 2014
guidance of $1.2 billion in property
acquisitions. We are excited about our
growth opportunities and maintaining
the momentum we have generated
over the last four years. While it may
be challenging to duplicate our
record-setting operating performance
in 2013, we continue to see one of the
best environments in our company’s
history in which to acquire properties
that will support our growth and
dividends. The acquisitions
environment remains robust and
we are able to source attractive
acquisitions at yields that continue
to be quite accretive to our earnings.
We will continue to invest in both
investment-grade rated tenant
properties and our traditional
non-investment-grade retail tenant
properties, applying our disciplined
underwriting approach as we have
done in the past. We currently have
more than $900 million available on
our $1.5 billion line of credit to fund
our acquisition activities and we
continue to have excellent access to
long-term and permanent capital.
CONSERVATIVE
CAPITAL STRUCTURE
(AT 12/31/13)
Common Equity: $7.8 billion / 62%
Debt: $4.2 billion / 33%
Preferred Stock: $629 million / 5%
Total Capitalization: $12.6 billion
We have provided
our investors with a
compounded average
annual total return
since 1994 of 16.3%.
1 2 R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T
REALTY INCOME PERFORMANCE VS. MAJOR STOCK INDICES
REALTY
INCOM E
EQUI TY REIT
INDEX (1 )
DOW JON ES
INDUSTRIAL
AV ERAGE
S&P 500
NASDAQ
COMPOSIT E
D IVI DEND
Y IELD
TOTAL
RETU RN ( 2 )
DI VI DEND
YIELD
TOTAL
RETURN (3 )
DIVIDEND
YIELD
TOTAL
RETURN (3 )
DIVIDEND
YIELD
TOTAL
RETURN (3 )
DIVIDEND
YIELD
TOTAL
RETU RN (4)
10/18–12/31
1994
10.5%
10.8%
7.7%
0.0%
2.9%
(1.6%)
2.9%
(1.2%)
0.5%
(1.7%)
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%
2011
5.0%
7.3%
3.8%
8.3%
2.8%
8.3%
2.3%
2.1%
1.3%
(1.8%)
2012
4.5%
20.1%
3.5%
19.7%
3.0%
10.2%
2.5%
16.0%
2.6%
15.9%
2013
5.8%
(1.8%)
3.9%
2.9%
2.3%
29.6%
2.0%
32.4%
1.4%
38.3%
COMPOUNDED AVERAGE
ANNUAL TOTAL RETURN (5)
16.3%
10.6%
10.3%
9.5%
9.2%
Note: All of these dividend yields are calculated as annualized dividends based on the last dividend paid in applicable
time period divided by the closing price as of period end. Dividend yield sources: NAREIT website and Bloomberg,
except for the 1994 NASDAQ dividend yield which was sourced from Datastream / Thomson Financial.
(1) FTSE NAREIT US Equity REIT Index, as per NAREIT website.
(2) Calculated as the difference between the closing stock price as of period end less the closing stock price as
of previous period, 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. Source: 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, 2013, and (except for NASDAQ) assuming
reinvestment of dividends. 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 L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T 1 3
R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T 1 3
Ultimately, our objective is to grow our
AFFO and dividends by adding these
attractive real estate assets at
favorable risk-adjusted returns and
investment spreads over our cost of
capital. In 2014, we will continue to:
Fulfill our mission of generating
reliable cash flows to pay monthly
dividends
Carefully underwrite tenants,
industries, and asset types we are
considering acquiring with a focus
on long-term revenue stream
viability
Focus on achieving sustainable
growth by acquiring high-quality
real estate assets in favorable
locations and strong markets that
provide us with an attractive
investment spread
Match-fund these acquisitions with
capital that is optimally priced and
conservatively structured
Actively manage our real estate
portfolio to maximize revenue
generation
Maintain a broad, talented and
experienced management team to
deliver in 2014 and beyond
IN CONCLUSION
I would be remiss if I didn’t take a
moment to acknowledge the
outstanding contributions to our
company by Tom Lewis, our former
CEO. Tom led Realty Income for
nearly 17 years as CEO and retired
in September of 2013. Under Tom’s
leadership, our company grew in total
enterprise value from $619 million to
over $12 billion, achieved dividend
growth of 127% from $0.96 per share
to $2.18 per share and provided
a compounded total average annual
return to shareholders of 15.4%.
I believe I speak for all shareholders in
thanking Tom for his superb service to
Realty Income. I look forward to
building on the impressive operating
results achieved under Tom’s
stewardship.
As always, what drives us is a
dedication to our mission to continue
to provide dependable monthly
dividends that grow over time to our
shareholders. Our decisions are based
on their impact on the durability and
growth of the dividend. This decision-
making methodology is part of the
DNA of the company, driving decisions
about what properties we acquire,
what tenants and industries we
approve, the types of capital we
deploy, and how we manage our real
estate portfolio. We realized
extraordinary growth in 2013 which
had one purpose – to grow and
maintain the reliability of the dividend.
We will move forward in 2014 with the
same degree of discipline and
singleness of purpose and look
forward to continuing to responsibly
grow your company.
With that said, we always remind our
investors how important it is to rely
on Realty Income for only a portion
of their income needs. There is no
guarantee that we will be as successful
in 2014 as we have been in the past,
though we remain confident in our
ability to continue to operate your
company in a manner that supports
the payment of monthly dividends
that increase over time. We thank you
for your continued support of The
Monthly Dividend Company® and look
forward to keeping you apprised of
our progress throughout the year.
Sincerely,
John P. Case
Chief Executive Officer
What drives us is a
dedication to our mission
to continue to provide
dependable monthly
dividends that grow
over time to our
shareholders.
1 4 R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T
THE MAGIC OF RISING DIVIDENDS OVER TIME
An important benefit to shareholders, who have held our shares for many years and enjoyed regular
dividend increases, is shown in the table below. This table shows that because of regular dividend
increases, your current yield on cost has increased over time. It also shows that many long-term
shareholders may have received enough in cash dividends from Realty Income that the equivalent
of their original investment dollars has been paid back to them.
YIELD ON COST BENEFITS
THE CUMULATIVE DIVIDEND EFFECT
1,000 Shares
Purchased on
Original
Investment
Investment
Value as of
12/31/2013
Original
Annual
Dividend
Income
Current
Annual
Dividend
Income (1)
Currrent
Yield on
Cost at
12/31/2013
Dividends
Received
Through
12/31/2013
Original
Yield
Percent of
Original
Investment
Returned
10/18/94
$8,000
$37,330
$900
$2,186
11.3%
27.3%
$26,106
326.3%
12/31/94
$8,563
$37,330
$900
$2,186
10.5%
25.5%
$25,806
301.4%
12/31/95
$11,250
$37,330
$930
$2,186
8.3%
19.4%
$24,894
221.3%
12/31/96
$11,938
$37,330
$945
$2,186
7.9%
18.3%
$23,847
199.8%
12/31/97
$12,719
$37,330
$960
$2,186
7.5%
17.2%
$22,901
180.1%
12/31/98
$12,438
$37,330
$1,020
$2,186
8.2%
17.6%
$21,919
176.2%
12/31/99
$10,313
$37,330
$1,080
$2,186
10.5%
21.2%
$20,876
202.4%
12/31/00
$12,438
$37,330
$1,110
$2,186
8.9%
17.6%
$19,785
159.1%
12/31/01
$14,700
$37,330
$1,140
$2,186
7.8%
14.9%
$18,664
127.0%
12/31/02
$17,500
$37,330
$1,170
$2,186
6.7%
12.5%
$17,512
100.1%
12/31/03
$20,000
$37,330
$1,200
$2,186
6.0%
10.9%
$16,331
12/31/04
$25,290
$37,330
$1,320
$2,186
5.2%
8.6%
$15,090
12/31/05
$21,620
$37,330
$1,395
$2,186
6.5%
10.1%
$13,744
12/31/06
$27,700
$37,330
$1,518
$2,186
12/31/07
$27,020
$37,330
$1,641
$2,186
12/31/08
$23,150
$37,330
$1,701
$2,186
12/31/09
$25,910
$37,330
$1,716
$2,186
12/31/10
$34,200
$37,330
$1,731
$2,186
12/31/11
$34,960
$37,330
$1,746
$2,186
12/31/12
$40,210
$37,330
$1,821
$2,186
12/31/13
$37,330
$37,330
$2,186
$2,186
5.5%
6.1%
7.3%
6.6%
5.1%
5.0%
4.5%
5.9%
7.9%
8.1%
9.4%
8.4%
6.4%
6.3%
5.4%
5.9%
$12,306
$10,746
$9,084
$7,377
$5,656
$3,919
$2,147
81.7%
59.7%
63.6%
44.4%
39.8%
39.2%
28.5%
16.5%
11.2%
5.3%
(1) Current annual dividend income based on annualized dividend per share at 12/31/13.
R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T 1 5
2013 Annual Report: Form 10-K
1 6 R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T
REALTY INCOME CORPORATION AND SUBSIDIARIES
Financial Information
Consolidated Balance Sheets ....................................................................................................... 18
Consolidated Statements of Income ............................................................................................. 19
Consolidated Statements of Equity .............................................................................................. 20
Consolidated Statements of Cash Flows ..................................................................................... 21
Notes to Consolidated Financial Statements ............................................................................... 22
Consolidated Quarterly Financial Data ......................................................................................... 47
Reports of Independent Registered Public Accounting Firm ....................................................... 48
Business Description .................................................................................................................... 50
Property Portfolio Information ....................................................................................................... 64
Forward-Looking Statements ........................................................................................................ 71
Management’s Discussion and Analysis of Financial Condition and Results of Operations ...... 72
General ........................................................................................................................................................... 72
Liquidity and Capital Resources ................................................................................................................... 72
Results of Operations .................................................................................................................................... 81
Funds from Operations Available to Common Stockholders (FFO) and Normalized Funds from
Operations Available to Common Stockholders (Normalized FFO) ...................................................... 88
Adjusted Funds from Operations Available to Common Stockholders (AFFO) ........................................ 90
Impact of Inflation .......................................................................................................................................... 91
Impact of Recent Accounting Pronouncements .......................................................................................... 91
Quantitative and Qualitative Disclosures About Market Risk ..................................................................... 91
Selected Financial Data ................................................................................................................ 93
Controls and Procedures .............................................................................................................. 94
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities, including Total Return Performance ........................... 96
17
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
At December 31, 2013 and 2012
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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
Acquired lease intangible assets, net
Goodwill
Other assets, net
Total assets
LIABILITIES AND EQUITY
Distributions payable
Accounts payable and accrued expenses
Acquired lease intangible liabilities, net
Other liabilities
Lines of credit payable
Term loan
Mortgages payable, net
Notes payable, net
Total liabilities
Commitments and contingencies
Stockholders' equity:
Preferred stock and paid in capital, par value $0.01 per share,
69,900,000 shares authorized and 25,150,000 shares issued and
outstanding as of December 31, 2013 and December 31, 2012
Common stock and paid in capital, par value $0.01 per share,
370,100,000 shares authorized, 207,485,073 shares issued and
outstanding as of December 31, 2013 and 133,452,411 shares issued
and outstanding at December 31, 2012
Distributions in excess of net income
Total stockholders' equity
Noncontrolling interests
Total equity
Total liabilities and equity
2013
2012
$
$
$
$
2,791,147
7,108,328
9,899,475
(1,114,888 )
8,784,587
12,022
8,796,609
10,257
39,323
935,459
15,660
127,133
9,924,441 $
1,999,820
3,920,865
5,920,685
(897,767 )
5,022,918
19,219
5,042,137
5,248
21,659
242,125
16,945
101,234
5,429,348
$
41,452
102,511
148,250
44,030
128,000
70,000
783,360
3,185,480
4,503,083
23,745
70,426
26,471
26,059
158,000
-
175,868
2,535,985
3,016,554
609,363
609,363
5,767,878
(991,794 )
5,385,447
35,911
5,421,358
9,924,441 $
2,572,092
(768,661 )
2,412,794
-
2,412,794
5,429,348
$
The accompanying notes to consolidated financial statements are an integral part of these statements.
18
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2013, 2012 and 2011
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUE
Rental
Tenant reimbursements
Other
Total revenue
EXPENSES
Depreciation and amortization
Interest
General and administrative
Property (including reimbursable)
Income taxes
Merger-related costs
Provisions for impairment
Total expenses
Income from continuing operations
Income from discontinued operations
2013
2012
2011
$
$
747,570
24,944
5,861
778,375
466,498
14,619
1,730
482,847
$
400,972
9,776
1,612
412,360
306,577
180,916
56,827
38,838
2,734
13,013
290
599,195
147,323
122,542
37,998
21,297
1,430
7,899
3,639
342,128
116,546
108,301
30,954
15,457
1,470
-
10
272,738
179,180
140,719
139,622
67,103
18,433
17,410
Net income
246,283
159,152
157,032
Net income attributable to noncontrolling interests
(719 )
-
-
Net income attributable to the Company
Preferred stock dividends
Excess of redemption value over carrying value of
preferred shares redeemed (see note 10)
245,564
(41,930 )
159,152
(40,918 )
157,032
(24,253 )
-
(3,696 )
-
Net income available to common stockholders
$
203,634 $
114,538 $
132,779
Amounts available to common stockholders per
common share:
Income from continuing operations:
Basic
Diluted
Net income:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
$
$
$
$
0.71
0.71
1.06
1.06
$
$
$
$
0.72
0.72
0.86
0.86
$
$
$
$
0.91
0.91
1.05
1.05
191,754,857
132,817,472
126,142,696
191,781,622
132,884,933
126,189,399
The accompanying notes to consolidated financial statements are an integral part of these statements.
19
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Equity
Years Ended December 31, 2013, 2012, and 2011
(DOLLARS IN THOUSANDS)
Shares of
preferred
stock
Shares of
common
stock
Preferred
stock and
paid in
capital
Common
Distributions
stock and
paid in
in excess of
capital net income
Total
stockholders'
equity
Noncontrolling
interests
Total
equity
13,900,000
-
-
118,058,988
-
-
$ 337,790
-
-
$ 2,066,287
-
-
$ (557,112 ) $ 1,846,965
157,032
(245,904 )
157,032
(245,904 )
$
-
-
-
$ 1,846,965
157,032
(245,904 )
-
14,925,000
-
489,236
-
489,236
-
489,236
Balance, December 31, 2010
Net Income
Distributions paid and payable
Shares issued in stock offerings,
net of offering costs of $25,200
Shares issued pursuant to
dividend reinvestment and
stock purchase plan, net
Share-based compensation
Balance, December 31, 2011
Net Income
Distributions paid and payable
Shares issued in stock offerings,
Shares issued pursuant to
dividend reinvestment and
stock purchase plan, net
Preferred shares redeemed
Share-based compensation
Balance, December 31, 2012
Net Income
Distributions paid and payable
Shares issued in stock offerings,
net of offering costs of $55,359
Shares issued in conjunction with
acquisition of ARCT, net of our
shares owned by ARCT
Issuance of preferred and
common units
Shares issued pursuant to
dividend reinvestment and
stock purchase plan, net
Share-based compensation
-
-
59,605
179,745
-
-
1,930
5,595
-
-
1,930
5,595
13,900,000
-
-
133,223,338
-
-
337,790
-
-
2,563,048
-
-
(645,984 )
159,152
(278,133 )
2,254,854
159,152
(278,133 )
net of offering costs of $13,773 16,350,000
-
395,377
-
-
395,377
-
-
-
-
-
-
-
-
-
1,930
5,595
2,254,854
159,152
(278,133 )
395,377
2,051
(127,500 )
6,993
-
(5,100,000 )
-
55,598
-
-
(123,804 )
173,475
-
2,051
-
6,993
-
(3,696 )
-
2,051
(127,500 )
6,993
25,150,000
-
-
133,452,411
-
-
609,363
-
-
2,572,092
-
-
(768,661 )
245,564
(468,697 )
2,412,794
245,564
(468,697 )
-
719
(1,371 )
2,412,794
246,283
(470,068 )
-
27,025,000
-
1,133,574
-
1,133,574
-
1,133,574
-
45,364,435
-
1,997,850
-
1,997,850
-
1,997,850
-
-
-
-
-
-
36,563
36,563
-
-
1,449,139
194,088
-
-
55,244
9,118
-
-
55,244
9,118
-
-
55,244
9,118
Balance, December 31, 2013
25,150,000 207,485,073 $ 609,363 $ 5,767,878 $ (991,794 ) $ 5,385,447 $
35,911 $ 5,421,358
The accompanying notes to consolidated financial statements are an integral part of these statements.
20
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2013, 2012 and 2011
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to net income:
Depreciation and amortization
Income from discontinued operations
Amortization of share-based compensation
Non-cash rental revenue adjustments
Amortization of net premiums on mortgages payable
Amortization of deferred financing costs
Gain on sale of real estate
Provisions for impairment on real estate held for investment
Other non-cash adjustments
Cash provided by discontinued operations:
Real estate
Proceeds from sale of real estate
Collection of notes receivable by Crest
Change in assets and liabilities, other than from the impact of our
acquisition of American Realty Capital Trust, Inc., or ARCT
Accounts receivable and other assets
Accounts payable, accrued expenses and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of investment properties, net of cash received
Improvements to real estate, including leasing costs
Proceeds from sales of real estate:
Continuing operations
Discontinued operations
Loans receivable
Restricted escrow deposits for Section 1031 tax-deferred exchanges
2013
2012
2011
$
246,283
$
159,152
$
157,032
306,577
(67,103 )
20,785
(5,554 )
(9,481 )
9,364
-
290
-
7,224
597
209
147,323
(18,433 )
10,001
(3,898 )
(665 )
6,849
-
3,639
(301 )
14,044
-
90
116,546
(17,410 )
7,873
(1,602 )
(189 )
5,265
(540 )
10
-
18,245
-
3,032
(3,131 )
12,846
518,906
483
8,185
326,469
2,511
8,179
298,952
(1,429,483 )
(8,507 )
(1,015,725 )
(6,554 )
(953,175 )
(4,172 )
8
126,785
(10,656 )
23
50,563
(34,876 )
2,078
22,049
(1,593 )
and pending acquisitions
Net cash used in investing activities
(10,158 )
(1,332,011 )
(1,805 )
(1,008,374 )
(50 )
(934,863 )
CASH FLOWS FROM FINANCING ACTIVITIES
Cash distributions to common stockholders
Cash dividends to preferred stockholders
Borrowings on line of credit
Payments on line of credit
Proceeds from notes and bonds payable issued
Principal payment on notes payable
Principal payments on mortgages payable
Proceeds from term loan
Repayment of ARCT line of credit
Repayment of ARCT term loan
Proceeds from common stock offerings, net
Proceeds from preferred stock offerings, net
Redemption of preferred stock
Distributions to noncontrolling interests
Debt issuance costs
Proceeds from dividend reinvestment and stock purchase plan, net
Other items, including shares withheld upon vesting
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
(409,222 )
(41,930 )
2,624,700
(2,654,700 )
750,000
(100,000 )
(32,603 )
70,000
(317,207 )
(235,000 )
1,133,574
-
-
(1,216 )
(10,666 )
55,806
(13,422 )
818,114
5,009
5,248
$
10,257 $
(236,348 )
(39,445 )
1,074,000
(1,153,400 )
800,000
-
(11,729 )
-
-
-
-
395,377
(127,500 )
-
(16,979 )
2,159
(3,147 )
682,988
1,083
4,165
5,248 $
(219,297 )
(24,253 )
612,800
(375,400 )
150,000
-
(279 )
-
-
-
489,236
-
-
-
(9,864 )
1,894
(2,368 )
622,469
(13,442 )
17,607
4,165
For supplemental disclosures, see note 17.
The accompanying notes to consolidated financial statements are an integral part of these statements.
21
REALTY INCOME CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2013, 2012 and 2011
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, 2013, we owned 3,896 properties, located in 49 states and Puerto Rico, containing over
62.6 million leasable square feet.
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
Federal Income Taxes. We have elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended, or the Code. We believe we have qualified and continue to qualify as a REIT. Under
the REIT operating structure, we are permitted to deduct dividends paid to our stockholders in
determining our taxable income. Assuming our dividends equal or exceed our net income, we 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 our taxable REIT subsidiaries, 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.
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 provisions 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 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, and was deemed to be liquidated for Federal income
tax purposes; the real property was deemed to be transferred to us with a carryover tax basis. As of
December 31, 2013, we have built-in gains of $59 million with respect to such properties. We do not
expect that we will be required to pay income tax on the built-in gains in these properties. 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 after 2013 but before August 28, 2017, in which
22
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, plus income attributable to dilutive shares outstanding, 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
Weighted average shares used for diluted net
2013
2012
2011
191,754,857
26,765
132,817,472
67,461
126,142,696
46,703
income per share computation
191,781,622
132,884,933
126,189,399
Unvested shares from share-based compensation that
were anti-dilutive
59,629
17,570
13,020
Partnership common units convertible to common shares
that were anti-dilutive
851,568 - -
Discontinued Operations. Operations from ten Realty Income investment properties, two properties
owned by our wholly owned taxable REIT subsidiary, Crest Net Lease, Inc., or Crest, and properties
previously sold, were reported as discontinued operations at December 31, 2013. Their respective results
of operations have been reclassified as income from discontinued operations on our consolidated
statements of income. We do not depreciate properties that are classified as held for sale.
If the property was previously reclassified as held for sale but the applicable criteria for this classification
are no longer met, the property is reclassified to 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.
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.
The interest expense amounts allocated to Crest are included in income from discontinued operations.
23
The following is a summary of income from discontinued operations on our consolidated statements of
income (dollars in thousands):
Income from discontinued operations
2013
2012
Gain on sales of investment properties
Rental revenue
Tenant reimbursements
Other revenue
Depreciation and amortization
Property expenses (including reimbursable)
Provisions for impairment
Crest's income from discontinued operations
Income from discontinued operations
Per common share, basic and diluted
$
$
$
64,743
6,040
146
418
(1,761 )
(916 )
(2,738 )
1,171
67,103
0.35
$
$
$
9,873
15,161
379
282
(3,916 )
(2,529 )
(1,500 )
683
18,433
0.14
$
$
$
2011
5,193
19,546
370
94
(5,568 )
(2,518 )
(395 )
688
17,410
0.14
Revenue Recognition and Accounts Receivable. All leases are accounted for as operating leases.
Under this method, leases 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. Contractually obligated reimbursements from tenants for recoverable
real estate taxes and operating expenses are included in tenant reimbursements in the period when such
costs are incurred.
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 collectability of accounts receivable and appropriate allowances to record. The allowance for
doubtful accounts was $498,000 at December 31, 2013 and $448,000 at December 31, 2012.
Other revenue, which comprises property-related revenue not included in rental revenue or tenant
reimbursements, was $5.9 million in 2013, $1.7 million in 2012 and $1.6 million in 2011.
Principles of Consolidation. The accompanying consolidated financial statements include the accounts
of Realty Income and other entities for which we make operating and financial decisions (i.e. control),
after elimination of all material intercompany balances and transactions. We consolidate entities that we
control and record a noncontrolling interest for the portion that we do not own. Noncontrolling interest
that was created or assumed as part of a business combination was recognized at fair value as of the
date of the transaction (see notes 4 and 12). We have no unconsolidated investments.
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 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, we allocate
the fair value of real estate acquired 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 or below-market lease value of in-place leases, the value of in-place
leases, and tenant relationships, as applicable. In addition, any assumed mortgages receivable or
payable and any assumed or issued noncontrolling interests are recorded at their estimated fair values.
24
Our estimated fair value determinations are based on management’s judgment, utilizing various factors,
including: (1) market conditions, (2) industry that the 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 valuations, prepared either internally or by an independent valuation firm.
Our methodologies for measuring fair value related to the allocation of the purchase price of real estate
acquisitions include both observable market data (and thus should be categorized as level 2 on FASB’s
three-level valuation hierarchy) and 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 with an in-place operating lease (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 fair value of these assets. Our fair value determinations are based on a real estate valuation for
each property, prepared either internally or by an independent valuation 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 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 fair value of in-place leases and
tenant relationships, as applicable. 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 and expected below-market renewal option periods.
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.
In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts
based on the present value of the estimated cash flows, which is calculated to account for either above or
below-market interest rates. These assumed mortgage payables are amortized as a reduction to interest
expense over the remaining term of the respective mortgages.
In allocating noncontrolling interests, amounts are recorded based on the fair value of units issued at the
date of acquisition, as determined by the terms of the applicable agreement.
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 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.
25
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
Tenant improvements and lease commissions The shorter of the term of the related lease or useful life
Acquired in-place leases
25 years or 35 years
4 to 15 years
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. 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
factors that we estimate in this analysis include projected rental rates, estimated holding periods, capital
expenditures and property sales capitalization rates. If a property is classified as held for sale, it is carried
at the lower of carrying cost or estimated fair value, less estimated cost to sell, and depreciation of the
property ceases.
In 2013, Realty Income recorded total provisions for impairment of $3.0 million. Provisions for impairment
of $2.7 million are included in income from discontinued operations on seven sold properties and one
property classified as held for sale, in the following industries: one in the automotive parts industry, one in
the automotive service industry, two in the child care industry, one in the grocery store industry, one in the
pet supplies and services industry, and two in the restaurant-casual dining industry. Additionally, during
2013, Realty Income recorded provisions for impairment of $290,000 on one property held for investment
in the automotive service industry. This provision for impairment is included in income from continuing
operations.
In 2013, Crest also recorded a provision for impairment of $308,000 on one sold property in the
restaurant-casual dining industry, which is included in income from discontinued operations.
In 2012, Realty Income recorded total provisions for impairment of $5.1 million. Provisions for impairment
of $1.5 million are included in income from discontinued operations on six properties in the following
industries: one in the automotive parts industry, one in the automotive tire services industry, one in the
automotive service industry, one in the child care industry, one in the convenience store industry, and one
in the home improvement industry. Additionally, during 2012, Realty Income recorded provisions for
impairment of $3.6 million on four properties held for investment at December 31, 2012, in the restaurant-
casual dining industry. These provisions for impairment are included in income from continuing
operations.
In 2011, Realty Income recorded total provisions for impairment of $405,000 on two properties in the
automotive service industry, one property in the motor vehicle dealerships industry, and one property in
the pet supplies and services industry. These provisions for impairment are included in income from
discontinued operations, except for $10,000 which is included in income from continuing operations.
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 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. Under the amendments
issued in conjunction with ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350), an entity,
through an assessment of qualitative factors, is not required to calculate the estimated fair value of a
26
reporting unit, in connection with the two-step goodwill impairment test, unless the entity determines that
it is more likely than not that its fair value is less than its carrying amount. We elected to continue testing
goodwill 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 2013, 2012 and 2011, we determined that the estimated fair values of our
reporting units exceeded their carrying values. We did not record any impairment on our existing goodwill
during 2013, 2012 or 2011.
Equity Offering Costs. Underwriting commissions and offering costs have been reflected as a reduction
of additional paid-in-capital on our consolidated balance sheets.
Noncontrolling Interests. Noncontrolling interests are reflected on our consolidated balance sheets as
a component of equity. Investments in noncontrolling interests are recorded initially at fair value based on
the price of the applicable units issued, and subsequently adjusted each period for distributions,
contributions and the allocation of net income attributable to the noncontrolling interests.
As consideration for two separate acquisitions during 2013, partnership units of Tau Operating
Partnership, L.P. and Realty Income, L.P. were issued to third parties. These common units (discussed
in footnote 12) do not have voting rights, are entitled to monthly distributions equal to the amount paid to
our common stockholders, and are redeemable in cash or our common stock, at our option and at a
conversion ratio of one to one, subject to certain exceptions. As the general partner for each of these
partnerships, we have operating and financial control over these entities, consolidate them in our financial
statements, and record the partnership units held by third parties as noncontrolling interests.
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.
Reclassifications. In order to conform to the 2013 presentation, certain of the 2012 and 2011 balances
have been reclassified on our consolidated financial statements, including the following:
- Discontinued operations, in order to report the results of properties that either have been sold or are
classified as held for sale; and
- Lease intangible assets and liabilities, which were previously reported as a component of other
assets, net, and other liabilities, net, are disclosed separately on our consolidated balance sheets
due to the significance of recent acquisitions.
Revisions. Certain of the 2012 and 2011 balances have been revised on our consolidated financial
statements as follows:
- Tenant reimbursements as a component of total revenue and reimbursable property expenses as a
component of total property expenses, which were previously reported on a net basis within
property expenses, are reported on a gross basis on our consolidated statements of income; and
- Unamortized original issuance discounts on our notes payable, which were previously reported as a
component of other assets, net, are reported net of our notes payable on our consolidated balance
sheets.
27
3.
Supplemental Detail for Certain Components of Consolidated Balance Sheets
A. Other assets, net, consist of the following (dollars in thousands) at:
Loans receivable
Deferred financing costs on notes payable, net
Notes receivable issued in connection with property sales
Prepaid expenses
Restricted escrow deposits
Credit facility origination costs, net
Impounds related to mortgages payable
Corporate assets, net
Deferred financing costs on mortgages payable, net
Deferred financing costs on term loan, net
Note receivable issued in connection with acquisition
Other items
B. Acquired lease intangible assets, net, consist of the following
(dollars in thousands) at:
Acquired in-place leases
Accumulated amortization of acquired in-place leases
Acquired above-market leases
Accumulated amortization of acquired above-market leases
C. Distributions payable consist of the following declared
distributions (dollars in thousands) at:
Common stock distributions
Preferred stock dividends
Noncontrolling interests distributions
D. Accounts payable and accrued expenses consist of the
following (dollars in thousands) at:
Notes payable - interest payable
Accrued costs on properties under development
Mortgages payable - accrued interest payable
Other items
E. Acquired lease intangible liabilities, net, consist of the
following (dollars in thousands) at:
Acquired below-market leases
Accumulated amortization of acquired below-market leases
F. Other liabilities consist of the following
(dollars in thousands) at:
Rent received in advance
Preferred units issued upon acquisition of ARCT
Security deposits
28
December 31,
2013
48,844
19,856
19,078
11,674
10,158
7,146
5,555
1,259
1,219
248
-
2,096
127,133
$
$
December 31,
2013
843,616
(95,084 )
207,641
(20,714 )
935,459
$
$
December 31,
2013
37,797
3,494
161
41,452
$
$
December 31,
2013
55,616
14,058
2,790
30,047
102,511
$
$
December 31,
2013
158,703
(10,453 )
148,250
$
$
$
December 31,
2013
31,144
6,750
6,136
44,030
$
$
December 31,
2012
35,126
15,672
19,300
9,489
1,805
8,188
-
909
1,541
-
8,780
424
101,234
$
$
December 31,
2012
235,914
(29,601 )
40,389
(4,577 )
242,125
$
$
December 31,
2012
20,251
3,494
-
23,745
$
$
December 31,
2012
40,061
8,595
648
21,122
70,426
$
$
December 31,
2012
28,975
(2,504 )
26,471
$
$
December 31,
2012
20,929
-
5,130
26,059
$
4.
American Realty Capital Trust
A. Acquisition
On January 22, 2013, we completed our acquisition of ARCT for approximately $3.2 billion. Each
outstanding share of ARCT common stock was converted into the right to receive a combination of: (i)
$0.35 in cash and (ii) 0.2874 shares of our common stock, resulting in the issuance of a total of
45,573,144 shares of our common stock to ARCT shareholders, valued at a per share amount of $44.04,
which was the closing price of our common stock on January 22, 2013. In connection with the closing of
the ARCT acquisition, we repaid and terminated the amounts then outstanding of approximately
$552.9 million under ARCT’s revolving credit facility and term loan.
The acquisition of ARCT provided benefits to Realty Income, including accretion to net earnings, growth
in the size of our real estate portfolio, diversification of industries and property type, and increase in the
percentage of investment grade tenants.
With this acquisition, we added 515 properties to our portfolio. The final allocation of the purchase price
reflects aggregate consideration of approximately $2.1 billion, as calculated below (in thousands):
Consideration associated with equity issued (1)
Cash consideration paid to previous owners of ARCT (2)
Total purchase consideration
$
$
2,027,753
56,216
2,083,969
(1) Includes the value associated with the issuance of the Tau Operating Partnership units discussed in 4.C. below.
(2) Includes a $55.5 million cash payment on 158,505,108 ARCT common shares outstanding at the acquisition date.
We have accounted for the ARCT acquisition in accordance with ASC 805, Business Combinations. The
following table summarizes our final purchase price allocation, which represents our acquisition date fair
values of the assets acquired and liabilities assumed (in thousands):
Assets:
Real estate
Acquired lease intangible assets
Cash and cash equivalents, accounts receivable, and other assets, net
Total Assets
Liabilities:
Lines of credit payable
Term loan
Mortgages payable
Acquired lease intangible liabilities
Accounts payable, accrued expenses, and other liabilities, net
Total Liabilities
Fair value of net assets acquired
$
$
2,674,464
561,289
41,371
3,277,124
317,207
235,000
538,960
79,690
22,298
1,193,155
2,083,969
The final allocation of the purchase price was based on our assessment of the fair value of the acquired
assets and liabilities using both Level 2 and 3 inputs.
Investments in Real Estate Properties. We determined the fair value generally by applying an income
approach methodology using both direct capitalization and discounted cash flow analysis. Key
assumptions include capitalization and discount rates. Our valuations were based, in part, on valuations
prepared by an independent valuation firm.
Acquired Lease Intangibles. The fair value of in-place leases was calculated based upon our estimate of
the costs to obtain tenants in each of the applicable markets. An asset or liability was recognized for
acquired leases with favorable or unfavorable rents based on our estimate of current market rents in each
29
of the applicable markets. Our valuations of the intangible assets were based, in part, on valuations
prepared by an independent valuation firm.
Debt. The fair value of debt was estimated based on contractual future cash flows discounted using
borrowing spreads and market interest rates that would be available to us for the issuance of debt with
similar terms and remaining maturities.
B. Transaction Costs
In connection with our acquisition of ARCT, we incurred total merger-related transaction costs of
approximately $21 million, which include, but are not limited to, advisor fees, legal fees, accounting fees,
printing fees and transfer taxes. During 2013, we incurred $13.0 million of the $21 million of total merger-
related transaction costs, which are included in income from continuing operations. In 2012, we incurred
$7.9 million of these total merger-related transaction costs.
C. Noncontrolling interests and preferred units
Consideration associated with equity issued includes the value of common and preferred partnership
units issued in Tau Operating Partnership, L.P., or Tau Operating Partnership, the consolidated
subsidiary which owns properties acquired through the ARCT acquisition. Since the date of acquisition,
Realty Income and its subsidiaries hold a 99.3% interest in the Tau Operating Partnership.
The common units do not have voting rights, are entitled to monthly distributions equal to the amount paid
to common stockholders of Realty Income, and are redeemable in cash or Realty Income common stock
at our option and at a conversion ratio of one to one. Noncontrolling interests with redemption provisions
that permit the issuer to settle in either cash or common stock, at the option of the issuer, were evaluated
to determine whether temporary or permanent equity classification on the balance sheet was appropriate.
We evaluated this guidance and determined that the common units meet the requirements to qualify for
presentation as permanent equity. See note 12 for the change in the carrying value of these common
units from January 22, 2013 through December 31, 2013.
The Tau Operating Partnership preferred units have also been recorded at fair value as of the date of
acquisition. Since they are redeemable at a fixed price on a determinable date, we have classified them
in other liabilities on our consolidated balance sheet. Payments on these preferred units are made
monthly at a rate of 2% per annum and are included in interest expense. As of December 31, 2013, the
preferred units have a carrying value of $6.75 million.
D. Litigation
In connection with our acquisition of ARCT, one action remains pending in the Supreme Court of the
State of New York for New York, New York under the consolidated caption In re American Realty Capital
Trust Shareholders Litigation, No. 65330-2012 (the “New York Action”). On November 9, 2012, the Court
granted defendants’ motion to stay the New York Action, which currently remains stayed. We believe this
pending matter will not have a material impact on our financial position or results of operations.
5.
Investments in Real Estate
We acquire the land, buildings and improvements that are necessary for the successful operations of
commercial tenants.
A. 2013 and 2012 Acquisitions
During 2013, Realty Income invested $1.51 billion in 459 new properties and properties under
development or expansion (in addition to our acquisition of ARCT, which is discussed in more detail in
note 4), with an initial weighted average contractual lease rate of 7.1%. The 459 new properties and
properties under development or expansion, are located in 40 states, will contain approximately
9.0 million leasable square feet, and are 100% leased with a weighted average lease term of 14.0 years.
The tenants occupying the new properties operate in 23 industries and the property types consist of
83.8% retail, 9.2% office, 4.9% industrial and distribution, and 2.1% manufacturing, based on rental
revenue. These investments are in addition to the $3.2 billion acquisition of 515 properties of American
30
Realty Capital Trust, Inc., or ARCT, which were added to our real estate portfolio during the first quarter of
2013. Our combined total investment in real estate assets during 2013 was $4.67 billion in 974 new
properties and properties under development or expansion. During 2013, none of our investments
caused any one tenant to be 10% or more of our total assets at December 31, 2013.
The 515 properties added to our real estate portfolio as a result of the ARCT acquisition, are located in 44
states and Puerto Rico, contain over 16.0 million leasable square feet, and are 100% leased with a
weighted average lease term of 12.2 years. The 69 tenants, occupying the 515 properties acquired,
operate in 28 industries and the property types consist of 54.0% retail, 32.6% industrial and distribution,
and 13.4% office, based on rental revenue. We recorded ARCT merger-related transaction costs of
$13.0 million in 2013 and $7.9 million in 2012.
Additionally, in September 2013, we purchased a property for $45.4 million in San Diego, California,
which will serve as our new corporate headquarters. We plan on relocating to this facility during the
second half of 2014.
The $4.67 billion invested during 2013 was allocated as follows: $805.5 million to land, $3.21 billion to
buildings and improvements, $772.7 million to intangible assets related to leases, $13.6 million to other
assets, net, and $128.6 million to intangible liabilities related to leases and other assumed liabilities. We
also recorded mortgage premiums of $28.4 million associated with the mortgages acquired. There was
no contingent consideration associated with these acquisitions.
The properties acquired during 2013 generated total revenues of $225.3 million and income from
continuing operations of $44.0 million.
The purchase price allocation for $120.8 million of the $4.67 billion invested by us in 2013 is based on a
preliminary measurement of fair value that is subject to change. The allocation for these properties
represents our current best estimate of fair value and we expect to finalize the valuations and complete
the purchase price allocations in 2014. In 2013, we finalized the purchase price allocations for
$106.4 million invested in the second half of 2012. There were no material changes to our consolidated
financial statements as a result of the finalization of purchase price allocations during 2013.
In comparison, during 2012, Realty Income invested $1.16 billion in 439 properties and properties under
development or expansion, with an initial weighted average contractual lease rate of 7.2%. The 439
properties and properties under development or expansion, are located in 38 states, will contain over
10.5 million leasable square feet, and are 100% leased with an average lease term of 13.8 years. The
tenants occupying the new properties operated in 23 industries and the property types consisted of 79.6%
retail, 11.3% industrial and distribution, 8.3% manufacturing, and 0.8% office, based on rental revenue.
The $1.16 billion invested during 2012 was allocated as follows: $289.2 million to land, $768.4 million to
buildings and improvements, $104.8 million to intangible assets, $34.9 million to other assets, net, and
$33.2 million to intangible and assumed liabilities. We also recorded mortgage premiums of $10.0 million.
The majority of our 2012 acquisitions were cash purchases, except for eight transactions that included the
assumption of $110.5 million of mortgages payable. There was no contingent consideration associated
with these acquisitions.
The properties acquired during 2012 generated total revenues of $23.9 million and income from
continuing operations of $9.8 million.
The estimated initial weighted average contractual lease rate for a property is generally computed as
estimated contractual net operating income, which, in the case of a net leased property, is equal to the
aggregate base rent under the lease for the first full year of each lease, divided by the total cost of the
property. Since it is possible that a tenant could default on the payment of contractual rent, we cannot
provide assurance that the actual return on the funds invested will remain at the percentages listed
above.
31
In the case of a property under development or expansion, the estimated initial weighted average
contractual lease rate is computed as follows: estimated net operating income (which is calculated by
multiplying the capitalization rate determined by the lease by our projected total investment in the
property, including land, construction and capitalized interest costs) for the first full year of each lease,
divided by such projected total investment in the property. Of the $4.67 billion we invested during 2013,
$39.6 million was invested in 21 properties under development or expansion with an estimated initial
weighted average contractual lease rate of 8.5%.
B. Acquisition Transaction Costs
Acquisition transaction costs (excluding ARCT merger-related costs) of $2.1 million and $2.4 million,
respectively, were recorded to general and administrative expense on our consolidated statements of
income for 2013 and 2012.
C. Investments in Existing Properties
During 2013, we capitalized costs of $8.5 million on existing properties in our portfolio, consisting of
$1.3 million for re-leasing costs and $7.2 million for building and tenant improvements. During 2012, we
capitalized costs of $6.6 million on existing properties in our portfolio, consisting of $1.62 million for re-
leasing costs and $4.93 million for building and tenant improvements.
D. Properties with Existing Leases
Of the $4.67 billion we invested during 2013, approximately $4.32 billion was used to acquire 799
properties with existing leases. Associated with these 799 properties, we recorded $602.8 million as the
intangible value of the in-place leases, $169.9 million as the intangible value of above-market leases and
$128.6 million as the intangible value of below-market leases. The value of the in-place and above-
market leases is recorded to acquired lease intangible assets, net on our consolidated balance sheet, and
the value of the below-market leases is recorded to acquired lease intangible liabilities, net on our
consolidated balance sheet
The values of the in-place leases are amortized as depreciation and amortization expense. The amounts
amortized to expense for all of our in-place leases, for 2013, 2012, and 2011, were $65.5 million,
$15.6 million, and $8.3 million, respectively.
The values of the above-market and below-market leases are amortized as rental revenue on our
consolidated statements of income. All of these amounts are amortized over the term of the respective
leases. The amounts amortized as a net decrease to rental revenue for capitalized above-market and
below-market leases, for 2013, 2012 and 2011, were $8.2 million, $1.8 million, and $1.1 million,
respectively.
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.
The following table presents the estimated impact during the next five years and thereafter related to the
net decrease to rental revenue from the amortization of the acquired above-market and below-market
lease intangibles and the increase to amortization expense from the amortization of the in-place lease
intangibles for properties owned at December 31, 2013 (in thousands):
2014
2015
2016
2017
2018
Thereafter
Totals
32
$
Net decrease
to rental
revenue
(7,708 )
(7,785 )
(7,797 )
(7,794 )
(7,535 )
(58 )
$
Increase to
amortization
expense
75,164
72,616
72,210
70,986
68,649
388,907
$
(38,677 )
$
748,532
E. Unaudited Pro Forma Information
The following pro forma total revenue and income from continuing operations, for 2013 and 2012,
assumes all of our 2013 acquisitions, including ARCT, occurred on January 1, 2012 (in millions). This pro
forma supplemental information does not include: (1) the impact of any synergies or lower borrowing
costs that we have or may achieve as a result of the acquisitions or any strategies that management has
or may consider in order to continue to efficiently manage our operations, and (2) ARCT’s historical
operational costs, including general and administrative costs and property expenses. Additionally, this
information does not purport to be indicative of what our operating results would have been, had the
acquisitions occurred on January 1, 2012, and may not be indicative of future operating results. For
purposes of calculating these pro-forma amounts, we assumed that merger-related costs of
approximately $12.5 million, which represent the merger-related costs incurred after consummation of our
ARCT acquisition, occurred on January 1, 2012. Other than these items specified above, no material,
non-recurring pro-forma adjustments were included in the calculation of this information.
Dollars in millions
Supplemental pro forma for the year ended December 31, 2013
Supplemental pro forma for the year ended December 31, 2012
6.
Credit Facility
Total
revenue
848.6
772.6
$
$
Income from
continuing
operations
223.3
212.8
$
$
In October 2013, we increased our unsecured acquisition credit facility from $1.0 billion to $1.5 billion.
The initial term of the credit facility expires in May 2016 and includes, at our election, a one-year
extension option. Under this credit facility, our current investment grade credit ratings provide for
financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 1.075% with a
facility commitment fee of 0.175%, for all-in drawn pricing of 1.25% over LIBOR. The borrowing rate is not
subject to an interest rate floor or ceiling. We also have other interest rate options available to us under
this credit facility. Our credit facility is unsecured and, accordingly, we have not pledged any assets as
collateral for this obligation.
At December 31, 2013, credit facility origination costs of $7.1 million are included in other assets, net, on
our consolidated balance sheet. These costs are being amortized over the remaining term of our current
$1.5 billion credit facility.
At December 31, 2013, we had a borrowing capacity of $1.372 billion available on our credit facility
(subject to customary conditions to borrowing) and an outstanding balance of $128.0 million, as
compared to an outstanding balance of $158.0 million at December 31, 2012.
The average interest rate on outstanding borrowings under our credit facilities was 1.3% during 2013,
1.6% during 2012, and was 2.1% during 2011. At December 31, 2013, the effective interest rate was
1.2%. Our current and prior credit facilities are and were subject to various leverage and interest
coverage ratio limitations. At December 31, 2013, we remain in compliance with these covenants.
7. Mortgages Payable
During 2013, we assumed mortgages totaling $630.0 million, excluding net premiums. The mortgages
are secured by the properties on which the debt was placed. Of the $630.0 million of mortgages assumed
during 2013, approximately $608.8 million is considered non-recourse with limited customary exceptions
for items such as bankruptcy, misrepresentation, fraud, misapplication of payments, environmental
liabilities, failure to pay taxes, insurance premiums, liens on the property and uninsured losses.
Approximately $6.6 million has full recourse to Realty Income, and the remaining $14.6 million of the
assumed debt is not guaranteed by and is non-recourse to Realty Income. We expect to pay off the
mortgages as soon as prepayment penalties have declined to a level that will make it economically
feasible to do so. We intend to continue to primarily identify property acquisitions that are free from
mortgage indebtedness. We repaid four mortgages in full during 2013, including one in August for
33
$11.7 million and three in December for $23.1 million. One of the mortgages repaid in December was
related to a mortgage previously assumed during 2013.
During 2013, aggregate net premiums totaling $28.4 million were recorded upon assumption of the
mortgages for above-market interest rates, as compared to net premiums totaling $10.0 million recorded
in 2012. Amortization of these net premiums is recorded as a reduction to interest expense over the
remaining term of the respective mortgages, using a method that approximates the effective-interest
method.
These mortgages contain customary covenants, such as limiting our ability to further mortgage each
applicable property or to discontinue insurance coverage, without the prior consent of the lender. At
December 31, 2013, we remain in compliance with these covenants.
As a result of assuming mortgages payable, we incurred deferred financing costs of $211,000 in 2013
and $1.1 million in 2012, which are classified as part of other assets, net, on our consolidated balance
sheets. The balance of these deferred financing costs was $1.2 million at December 31, 2013 and
$1.5 million at December 31, 2012 which is being amortized over the remaining term of each mortgage.
The following is a summary of all our mortgages payable as of December 31, 2013 and 2012,
respectively (dollars in thousands):
Average Average
Weighted Weighted Weighted
Average
Stated Effective Remaining
Interest Years Until
Rate(3) Maturity
4.3
4.8
Interest
Rate(2)
5.3%
5.8%
3.9%
4.4%
Number of
As Of Properties(1)
227
11
12/31/13
12/31/12
Remaining
Principal
Balance
$ 754,508
$ 165,927
Unamortized
Premium
Balance
$ 28,852
9,941
$
Mortgage
Payable
Balance
$ 783,360
$ 175,868
(1) At December 31, 2013, there were 47 mortgages on 227 properties, while at December 31, 2012, there were 13 mortgages on 11 properties. The
mortgages require monthly payments, with principal payments due at maturity. The mortgages are at fixed interest rates, except for: (1) a $23.6
million mortgage maturing on June 10, 2015 with a floating variable interest rate calculated as the sum of the current one month LIBOR plus 4.5%,
not to exceed an all-in interest rate of 5.5%, (2) a $8.3 million mortgage maturing on September 3, 2021, with a floating interest rate calculated as
the sum of the current one month LIBOR plus 2.4%, and (3) a $32.4 million mortgage maturing on April 10, 2017, which is fixed at 5.07% through
December 28, 2015, but is reset to the greater of 4.0%, or the two-year swap rate plus 2.75% thereafter. As part of the $8.3 million mortgage
payable assumed in 2012, we also acquired an interest rate swap which essentially fixes the interest rate on this mortgage payable at 6.0%. As part
of the $32.4 million mortgage payable assumed in 2013, we have the opportunity to prepay the mortgage at par on December 28, 2015, prior to the
variable interest rate reset. As part of two mortgages totaling $8.8 million that matured on December 28, 2013, we also acquired an $8.8 million
note receivable, upon which we received interest income at a stated rate of 8.1% through December 28, 2013.
(2) Stated interest rates ranged from 2.5% to 6.9% at December 31, 2013, while stated interest rates ranged from 2.6% to 8.3% at December 31, 2012.
(3) Effective interest rates ranged from 2.4% to 9.2% at December 31, 2013, while effective interest rates ranged from 2.7% to 8.3% at December 31,
2012.
The following table summarizes the maturity of mortgages payable, excluding net premiums of
$28.9 million, as of December 31, 2013 (dollars in millions):
Year of
Maturity
2014
2015
2016
2017
2018
Thereafter
Totals
8.
Term Loan
$
$
49.9
125.5
248.5
133.0
15.0
182.6
754.5
In January 2013, in conjunction with our acquisition of ARCT, we entered into a $70 million senior
unsecured term loan maturing January 21, 2018. Borrowing under the term loan bears interest at the
current one month LIBOR, plus 1.2%. In conjunction with this term loan, we also acquired an interest rate
34
swap, which essentially fixes our per annum interest rate on the term loan at 2.15%. The interest rate
swap has a nominal value at December 31, 2013. As a result of entering into our term loan, we incurred
deferred financing costs of $303,000, which are being amortized over the remaining term of the term loan.
The net balance of these deferred financing costs was $248,000, which are classified as part of other
assets, net, on our consolidated balance sheet at December 31, 2013.
9.
Notes Payable
A. General
Our senior unsecured notes and bonds consisted of the following, sorted by maturity date (dollars in
millions):
5.375% notes, issued in March 2003 and repaid 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
2.0% notes, issued in October 2012 and due in January 2018
6.75% notes, issued in September 2007 and due in August 2019
5.75% notes, issued in June 2010 and due in January 2021
3.25% notes, issued in October 2012 and due in October 2022
4.65% notes, issued in July 2013 and due in August 2023
5.875% bonds, $100 issued in March 2005 and $150 issued in
June 2011, both due in March 2035
Total principal amount
Unamortized original issuance discounts
$
December 31,
2013
-
150
275
175
350
550
250
450
750
$
December 31,
2012
100
150
275
175
350
550
250
450
-
250
3,200
(15 )
3,185
$
250
2,550
(14 )
2,536
$
The following table summarizes the maturity of our notes and bonds payable as of December 31, 2013,
excluding unamortized original issuance discounts (dollars in millions):
Year of Maturity
2014
2015
2016
2017
2018
Thereafter
Totals
Notes and
Bonds
-
150
275
175
350
2,250
3,200
$
$
As of December 31, 2013, the weighted average interest rate on our notes and bonds payable was 4.9%
and the weighted average remaining years until maturity was 7.6 years.
Interest incurred on all of the notes and bonds was $138.9 million for 2013, $110.4 million for 2012 and
$101.5 million for 2011. The interest rate on each of these notes and bonds is fixed.
Our outstanding notes and bonds are unsecured; accordingly, we have not pledged any assets as
collateral for these or any other obligations. Interest on all of the 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
35
than 150% of our outstanding unsecured debt. At December 31, 2013, we remain in compliance with
these covenants.
B. Note Repayment
In March 2013, we repaid the $100 million of outstanding 5.375% notes, plus accrued and unpaid
interest, using proceeds from our March 2013 common stock offering and our credit facility.
C. Note Issuances
In July 2013, we issued $750 million of 4.65% senior unsecured notes due August 2023, or the 2023
Notes. The price to the investors for the 2023 Notes was 99.775% of the principal amount for an effective
yield of 4.678% per annum. The total net proceeds of approximately $741.4 million from this offering
were used to repay all outstanding borrowings under our acquisition credit facility, and the remaining
proceeds were used for other general corporate purposes and working capital, including additional
property acquisitions. Interest is paid semiannually on the 2023 Notes.
In October 2012, we issued $350 million in aggregate principal amount of 2.00% senior unsecured notes
due January 2018, or the 2018 Notes, and $450 million in aggregate principal amount of 3.25% senior
unsecured notes due October 2022, or the 2022 Notes. The price to the investors for the 2018 Notes
was 99.910% of the principal amount for an effective yield of 2.017% per annum. The price to the
investors for the 2022 Notes was 99.382% of the principal amount for an effective yield of 3.323% per
annum. The total net proceeds of approximately $790.1 million from these offerings were used to repay
all outstanding borrowings under our acquisition credit facility, and the remaining proceeds were used for
general corporate purposes, including additional property acquisitions. Interest is paid semiannually on
both the 2018 and 2022 Notes.
10.
Issuance and Redemption of Preferred Stock
In 2006, we issued 8.8 million shares of 6.75% Monthly Income Class E Cumulative Redeemable
A.
Preferred Stock, or Class E preferred stock, at a price of $25.00 per share. Since December 2011, the
shares of Class E preferred stock are redeemable at our option, for $25.00 per share. During 2013, 2012
and 2011, 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, 2013, a monthly dividend of $0.140625 per share was
payable and was paid in January 2014.
B.
In February 2012, we issued 14.95 million shares of our 6.625% Monthly Income Class F
Cumulative Redeemable Preferred Stock, or Class F preferred stock, at a price of $25.00 per share,
including 1.95 million shares purchased by the underwriters upon the exercise of their overallotment
option. In April 2012, we issued an additional 1.4 million shares of our Class F preferred stock at a price
of $25.2863 per share. After aggregate underwriting discounts and other offering costs totaling
$13.8 million, we received total net proceeds of $395.4 million for the February and April offerings
combined, of which $127.5 million was used to redeem all of our outstanding 7.375% Monthly Income
Class D Cumulative Redeemable Preferred Stock, or Class D preferred stock, and the balance was used
to repay a portion of the borrowings under our credit facility. Beginning February 15, 2017, the shares of
Class F preferred stock are redeemable at our option, for $25.00 per share. The initial dividend of
$0.1702257 per share was paid on March 15, 2012 and covered 37 days. Thereafter, dividends of
$0.138021 per share are paid monthly in arrears on the Class F preferred stock. During 2012, we paid
ten monthly dividends to holders of our Class F preferred stock totaling $1.4124147, or $22.6 million.
During 2013, we paid twelve monthly dividends to holders of our Class F preferred stock totaling
$1.656252, or $27.1 million, and at December 31, 2013, a monthly dividend of $0.138021 per share was
payable and was paid in January 2014.
C. We redeemed all of the 5.1 million shares of our Class D preferred stock in March 2012 for $25.00
per share, plus accrued dividends. We incurred a charge of $3.7 million for 2012, representing the Class
D preferred stock original issuance costs that we paid in 2004.
36
We are current in our obligations to pay dividends on our Class E and Class F preferred stock.
11.
Issuance of Common Stock
In October 2013, we issued 9,775,000 shares of common stock at a price of $40.63 per share, including
1,275,000 shares purchased by the underwriters upon the exercise of their option to purchase additional
shares. After underwriting discounts and other estimated offering costs of $18.7 million, the net proceeds
of approximately $378.5 million were used to repay a portion of the borrowings under our acquisition
credit facility, which were used to fund property acquisitions.
In March 2013, we issued 17,250,000 shares of common stock at a price of $45.90 per share, including
2,250,000 shares purchased by the underwriters upon the exercise of their overallotment option. After
underwriting discounts and other offering costs of $36.7 million, the net proceeds of $755.1 million were
used to redeem our 5.375% notes in March 2013 and repay borrowings under our acquisition credit
facility, which were used to fund property acquisitions, including our acquisition of ARCT.
In connection with our January 2013 acquisition of ARCT, as described in note 4, we issued a total of
45,573,144 shares of our common stock to ARCT shareholders and we received 208,709 shares of our
common stock that were previously held by ARCT. The closing price per share of our common stock on
the date of the ARCT acquisition was $44.04. The total value of the 45,573,144 common shares was
approximately $2 billion.
12. Noncontrolling Interests
In June 2013, we completed the acquisition of a portfolio of properties by issuing units in a newly formed
entity, Realty Income, L.P. The units issued as consideration for the acquisition represent a 2.2%
ownership in Realty Income, L.P. at December 31, 2013. Realty Income holds the remaining 97.8%
interests in this entity, and consolidates the entity.
The Realty Income, L.P. units do not have voting rights, are entitled to monthly distributions equal to the
amount paid to common stockholders of Realty Income, and are redeemable in cash or Realty Income
common stock, at our option, and at a conversion ratio of one to one, subject to certain exceptions.
Noncontrolling interests with redemption provisions that permit the issuer to settle in either cash or
common stock, at the option of the issuer, were evaluated to determine whether temporary or permanent
equity classification on the balance sheet was appropriate. We evaluated this guidance and determined
that the units meet the requirements to qualify for presentation as permanent equity.
The following table represents the change in the carrying value of all noncontrolling interests, including
Tau Operating Partnership units which are discussed in note 4, through December 31, 2013 (dollars in
thousands):
Fair value of units issued
Distributions
Allocation of net income
Carrying value at December 31, 2013
Tau Operating
Partnership units(1)
13,962
$
(691 )
218
13,489
$
Realty Income, L.P.
$
$
units(2)
22,601
(680 )
501
22,422
Total
36,563
(1,371 )
719
35,911
$
$
(1) 317,022 Tau Operating Partnership units were issued on January 22, 2013 and remain outstanding as of
December 31, 2013.
(2) 534,546 Realty Income, L.P. units were issued on June 27, 2013 and remain outstanding as of December 31, 2013.
13. Distributions Paid and Payable
Common Stock
A.
We pay monthly distributions to our common stockholders. The following is a summary of monthly
distributions paid per common share for the years:
37
Month
January
February
March
April
May
June
July
August
September
October
November
December
Total
$
2013
0.1517500
0.1809167
0.1809167
0.1812292
0.1812292
0.1812292
0.1815417
0.1815417
0.1815417
0.1818542
0.1818542
0.1818542
$
2012
0.1455000
0.1455000
0.1455000
0.1458125
0.1458125
0.1458125
0.1461250
0.1461250
0.1511250
0.1514375
0.1514375
0.1514375
$
2011
0.1442500
0.1442500
0.1442500
0.1445625
0.1445625
0.1445625
0.1448750
0.1448750
0.1448750
0.1451875
0.1451875
0.1451875
$
2.1474587
$
1.7716250
$
1.7366250
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
Totals
2013
1.3153791
0.8320796
2.1474587
$
$
2012
1.3367481
0.4348769
1.7716250
$
$
2011
$ 1.3787863
0.3578387
$ 1.7366250
At December 31, 2013, a distribution of $0.1821667 per common share was payable and was paid in
January 2014. At December 31, 2012, a distribution of $0.15175 per common share was payable and
was paid in January 2013.
Class D Preferred Stock
B.
Prior to the redemption of the Class D preferred stock in March 2012, dividends of $0.1536459 per share
were paid monthly in arrears on the Class D preferred stock. We declared dividends to holders of our
Class D preferred stock totaling $2.0 million in 2012 and $9.4 million in 2011. For 2012 and 2011,
dividends paid per share in the amounts of $0.3841147 and $1.8437508, respectively, were characterized
as ordinary income for federal income tax purposes.
Class E Preferred Stock
C.
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 2013, 2012 and
2011. For 2013, 2012 and 2011, dividends paid per share in the amount of $1.6875 were characterized
as ordinary income for federal income tax purposes.
Class F Preferred Stock
D.
Dividends of $0.138021 per share are paid monthly in arrears on the Class F preferred stock. We
declared dividends to holders of our Class F preferred stock totaling $27.1 million in 2013 and
$22.6 million in 2012. For 2013 and 2012, dividends paid per share of $1.656252 and $1.4124147,
respectively, were characterized as ordinary income for federal income tax purposes.
14. Operating Leases
At December 31, 2013, we owned 3,896 properties in 49 states and Puerto Rico, plus an additional
A.
three properties owned by Crest. Of the 3,896 properties, 3,876, or 99.5%, are single-tenant properties,
and the remaining twenty are multi-tenant properties. At December 31, 2013, 70 properties were vacant
and available for lease or sale.
38
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) was $2.9 million for 2013,
$2.1 million for 2012 and $1.4 million for 2011, including amounts recorded to discontinued operations of
$115,000 in 2013, $163,000 in 2012 and $70,000 in 2011.
At December 31, 2013, minimum future annual rents to be received on the operating leases for the next
five years and thereafter are as follows (dollars in thousands):
2014
2015
2016
2017
2018
Thereafter
Total
$
$
809,394
796,822
782,480
763,348
740,078
5,074,496
8,966,618
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, 2013, 2012 or 2011.
15. Gain on Sales of Investment Properties
During 2013, we sold 75 investment properties for $134.2 million, which resulted in a gain of $64.7
million. The results of operations for these properties have been reclassified as discontinued operations
for all periods presented.
During 2012, we sold 44 investment properties for $50.6 million, which resulted in a gain of $9.9 million.
The results of operations for these properties have been reclassified as discontinued operations for all
periods presented.
During 2011, we sold 26 investment properties for $22.0 million, which resulted in a gain of $5.2 million.
The results of operations for these properties have been reclassified as discontinued operations for all
periods presented. Additionally, we sold excess real estate from five properties for $2.1 million, which
resulted in a gain of $540,000. This gain is included in other revenue on our consolidated statement of
income for 2011, because this excess real estate was associated with properties that continue to be
owned as part of our core operations.
During 2013, Crest sold one property for $597,000, which resulted in no gain. The results of operations
for this property have been reclassified as discontinued operations. During 2012 and 2011, Crest did not
sell any properties.
16. 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.
We believe that the carrying values reflected in our consolidated balance sheets reasonably approximate
the fair values for cash and cash equivalents, accounts receivable, escrow deposits, loans receivable,
lines of credit payable, term loan and all other liabilities, due to their short-term nature or interest rates
and terms that are consistent with market, except for our notes receivable issued in connection with
39
property sales or acquired in connection with an acquisition, mortgages payable (which includes net
mortgage premiums) and our senior notes and bonds payable, which are disclosed below (dollars in
millions):
At December 31, 2013
Notes receivable issued in connection with property sales
Mortgages payable assumed in connection with acquisitions
Notes payable, net of unamortized original issuance discounts
At December 31, 2012
Notes receivable issued in connection with property sales
Note receivable issued in connection with an acquisition
Mortgages payable assumed in connection with acquisitions
Notes payable, net of unamortized original issuance discounts
$
$
Carrying value per
balance sheet
19.1
783.4
3,185.5
Carrying value per
balance sheet
19.3
8.8
175.9
2,536.0
$
$
Estimated fair
value
21.1
780.0
3,340.7
Estimated fair
value
20.5
8.8
176.7
2,827.1
The estimated fair values of our notes receivable issued in connection with property sales or acquired in
connection with an acquisition, and our mortgages payable have been calculated by discounting the
future cash flows using an interest rate based upon the relevant Treasury yield curve, plus an applicable
credit-adjusted spread. Because this methodology includes unobservable inputs that reflect our own
internal assumptions and calculations, the measurement of estimated fair values related to our notes
receivable and mortgages payable, is categorized as level three on the three-level valuation hierarchy.
The estimated fair values of our senior notes and bonds payable is based upon indicative market prices
and recent trading activity of our senior notes and bonds payable. Because this methodology includes
inputs that are less observable by the public and are not necessarily reflected in active markets, the
measurement of the estimated fair values, related to our notes and bonds payable, is categorized as level
two on the three-level valuation hierarchy.
17. Supplemental Disclosures of Cash Flow Information
Cash paid for interest was $166.1 million in 2013, $112.5 million in 2012, and $102.0 million in 2011.
Interest capitalized to properties under development was $537,000 in 2013, $498,000 in 2012, and
$438,000 in 2011.
Cash paid for income taxes was $2.1 million in 2013, $1.0 million in 2012, and $871,000 in 2011.
The following non-cash activities are included in the accompanying consolidated financial statements:
A. Share-based compensation expense was $20.8 million for 2013, $10.0 million for 2012 and
$7.9 million for 2011.
B. See “Provisions for Impairment” in note 2 for a discussion of provisions for impairments recorded by
Realty Income and Crest.
C. During 2013, the following components were acquired in connection with our acquisition of ARCT: (1)
real estate investments and related intangible assets of $3.2 billion, (2) other assets of $19.5 million, (3)
lines of credit payable of $317.2 million, (4) a term loan for $235.0 million, (5) mortgages payable of
$539.0 million, (6) intangible liabilities of $79.7 million, (7) other liabilities of $29.0 million, and (8)
noncontrolling interests of $14.0 million.
40
D. During 2013, we acquired mortgages payable (excluding the mortgages payable discussed in items
C. and E.) to third-party lenders of $81.3 million and recorded $6.1 million of net premiums related to
property acquisitions. During 2012, we assumed $110.5 million of mortgages payable to third-party
lenders and recorded $10.0 million of net premiums. During 2011, we assumed $67.4 million of
mortgages payable to third-party lenders and recorded $820,000 of net premiums.
E. During 2013, we acquired $55.9 million of real estate through the assumption of a $32.4 million
mortgage payable, the issuance of 534,546 units by Realty Income, L.P. and cash of $1.0 million. We
recorded a mortgage discount of $386,000 related to this acquisition.
F. During 2013, we acquired real estate for $7.4 million via exchanges of our properties.
G. During 2013, we recorded receivables of $1.9 million for the taking of two investment properties as a
result of an eminent domain action. These receivables are included in other assets, net, on our
consolidated balance sheet at December 31, 2013.
H. Accrued costs on properties under development resulted in an increase in buildings and
improvements and accounts payable of $5.5 million, $3.8 million and $3.7 million at December 31, 2013,
2012 and 2011, respectively.
18. 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.
19. Common Stock Incentive Plan
In 2012, our Board of Directors adopted and stockholders approved the Realty Income Corporation 2012
Incentive Award Plan, or the 2012 Plan, to enable us to motivate, attract and retain the services of
directors, employees and consultants considered essential to our long-term success. The 2012 Plan
offers our directors, employees and consultants an opportunity to own stock in Realty Income or rights
that will reflect our growth, development and financial success. Under the terms of the 2012 plan, the
aggregate number of shares of our common stock subject to options, restricted stock, stock appreciation
rights, restricted stock units and other awards, will be no more than 3,985,734 shares. The 2012 Plan,
which has a term of 10 years from the date it was adopted by our Board of Directors, replaced the 2003
Incentive Award Plan of Realty Income Corporation (as amended and restated February 21, 2006), or the
2003 Plan, which was set to expire in March 2013. No further awards will be granted under the 2003
Plan. The disclosures below incorporate activity for both the 2003 Plan and the 2012 Plan.
The amount of share-based compensation costs recognized in general and administrative expense on
our consolidated statements of income was $20.8 million during 2013, $10.0 million during 2012, and
$7.9 million during 2011.
41
The following table summarizes our common stock grant activity under our 2012 Plan and the previous
2003 Plan. Our common stock grants vest over periods ranging from immediately to five years.
2013
2012
2011
Number of
shares
Weighted
average
price(1)
Number of
shares
Weighted
average
price(1)
Number of
shares
Weighted
average
price(1)
895,550
484,060
(654,650 )
(2,697 )
$
$
$
$
19.94
41.13
30.91
37.30
925,526
261,811
(290,877 )
(910 )
$
$
$
$
20.21
35.06
27.47
31.67
924,294
247,214
(245,487 )
(495 )
$
$
$
$
19.69
33.94
25.26
31.37
Outstanding nonvested
shares, beginning of year
Shares granted
Shares vested
Shares forfeited
Outstanding nonvested
shares, end of each period
722,263
$
23.37
895,550
$
19.94
925,526
$
20.21
(1) Grant date fair value.
During 2013, we issued 484,060 shares of common stock under the 2012 Plan. Of the 484,060 shares,
432,606 shares vest over the following service periods: 106,026 vested immediately, 62,989 vest over a
service period of one year, 12,000 vest over a service period of three years, 77,180 shares vest over a
service period of four years, and 174,411 vest over a service period of five years. Additionally, 51,454
shares of performance-based common stock was granted, of which 12,864 shares vested at the end of
2013 based on the achievement of certain 2013 performance metrics, and of which 12,864 may vest at
the end of 2014, 2015 and 2016, if certain performance metrics are reached.
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 typical 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.
After being employed for six full months, all non-executive employees receive 200 shares of nonvested
stock which vests over a five year period. Additionally, depending on certain company performance
metrics or attainment of individual achievements, non-executive employees may receive grants of
nonvested stock which vests over a five year period.
42
As of December 31, 2013, the remaining unamortized share-based compensation expense totaled
$16.9 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 2012 and 2003 Plans, 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
2013, 2012 or 2011.
As of December 31, 2013 and 2012, there were no remaining common stock options outstanding for any
of the periods presented.
20. Dividend Reinvestment and Stock Purchase Plan
In March 2011, we established a Dividend Reinvestment and Stock Purchase Plan, or the DRSPP, to
provide our common stockholders, as well as new investors, with a convenient and economical method of
purchasing our common stock and reinvesting their distributions. The DRSPP also allows our current
stockholders to buy additional shares of common stock by reinvesting all or a portion of their distributions.
The DRSPP authorizes up to 6,000,000 common shares to be issued. During 2013, we issued 1,449,139
shares and raised approximately $55.6 million under the DRSPP. These amounts include the shares
issued as part of the waiver approval process discussed below. During 2012, we issued 55,598 shares
and raised approximately $2.2 million under the DRSPP. During 2011, we issued 59,605 shares and
raised approximately $2.0 million under the DRSPP. From the inception of the DRSPP through
December 31, 2013, we have issued 1,564,342 shares and raised approximately $59.8 million, which
includes the amounts issued under the waiver discount program as described below.
In March 2013, we updated our DRSPP so that we are now paying for a majority of the plan-related fees,
which were previously paid by investors.
In November 2013, we revised our DRSPP to institute a waiver approval process allowing larger investors
or institutions, per a formal approval process, to purchase shares at a small discount, if approved by us.
In December 2013, we issued 1,308,490 shares and raised $49.7 million under this waiver approval
process.
21. 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 48 activity segments. 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, rental revenue is the only component of segment profit and loss we measure.
43
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, 2013 (dollars in thousands):
Assets, as of December 31:
Segment net real estate:
Automotive service
Automotive tire services
Beverages
Child care
Convenience stores
Dollar stores
Drug stores
Financial services
Food processing
Grocery stores
Health and fitness
Health care
Motor vehicle dealerships
Restaurants-casual dining
Restaurants-quick service
Sporting goods
Theaters
Transportation services
Wholesale club
29 other non-reportable segments
Total segment net real estate
Intangible assets:
Automotive service
Automotive tire services
Beverages
Convenience stores
Dollar stores
Drug stores
Financial services
Food processing
Grocery stores
Health and fitness
Health care
Motor vehicle dealerships
Restaurants-casual dining
Restaurants-quick service
Sporting goods
Theaters
Transportation services
Wholesale club
Other non-reportable segments
Goodwill:
Automotive service
Automotive tire services
Child care
Convenience stores
Restaurants-casual dining
Restaurants-quick service
Other non-reportable segments
Other corporate assets
Total assets
44
$
2013
2012
108,940
258,787
306,278
57,201
766,472
824,274
943,401
252,764
138,000
283,207
493,981
228,003
114,203
477,130
312,474
94,771
367,830
623,541
455,875
1,689,477
8,796,609
3,248
15,770
3,055
13,342
50,209
180,506
40,112
25,297
22,377
53,703
38,465
7,790
11,906
17,936
10,984
23,600
107,296
33,221
276,642
454
865
5,141
2,031
2,328
1,131
3,710
176,713
$
96,409
184,601
310,555
61,747
671,676
450,566
159,482
26,020
102,964
219,216
330,503
4,562
102,155
448,806
250,454
77,737
381,123
130,203
308,202
725,156
5,042,137
-
470
3,313
-
12,475
14,885
4,443
21,785
5,650
15,056
-
3,587
-
3,464
4,862
28,475
27,997
-
95,663
471
865
5,276
2,064
2,430
1,176
4,663
128,141
$
9,924,441
$
5,429,348
For the years ended December 31,
Segment rental revenue:
Automotive service
Automotive tire services
Beverages
Child care
Convenience stores
Dollar stores
Drug stores
Financial services
Food processing
Grocery stores
Health and fitness
Health care
Motor vehicle dealerships
Restaurants-casual dining
Restaurants-quick service
Sporting goods
Theaters
Transportation services
Wholesale club
29 other non-reportable segments
Total rental revenue
Tenant reimbursements
Other revenue
Total revenue
Revenue
2013
2012
2011
15,403
26,929
24,848
20,850
83,973
46,483
60,313
14,783
11,151
22,322
46,979
14,346
12,200
38,261
32,219
12,875
46,122
40,552
29,448
147,513
747,570
24,944
5,861
778,375
$
$
14,478
22,604
24,553
20,812
76,309
10,324
16,160
2,787
6,213
17,746
32,782
288
9,409
33,205
26,739
11,798
45,073
11,516
15,217
68,485
466,498
14,619
1,730
482,847
$
$
14,635
22,595
23,458
20,966
75,961
143
15,374
2,343
2,953
7,012
26,769
235
8,796
43,073
23,369
11,176
36,812
7,586
3,059
54,657
400,972
9,776
1,612
412,360
$
$
22. Commitments and Contingencies
In the ordinary course of 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, 2013, we had contingent obligations of $1.7 million for tenant improvements and leasing
costs. In addition, as of December 31, 2013, we had committed $23.7 million under construction
contracts, which is expected to be paid in the next twelve months.
We have certain properties that are subject to ground leases which are accounted for as operating
leases. At December 31, 2013, minimum future rental payments for the next five years and thereafter are
as follows (dollars in millions):
2014
2015
2016
2017
2018
Thereafter
Total
Ground Leases
Paid by
Realty Income (1)
$
1.0
1.0
1.0
1.0
1.0
9.4
14.4
$
Ground Leases
Paid by
Our Tenants (2)
$
$
12.6
12.7
12.7
12.8
12.8
144.5
208.1
$
$
Total
13.6
13.7
13.7
13.8
13.8
153.9
222.5
(1) Realty Income currently pays the ground lessors directly for the rent under the ground leases.
(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.
45
23. Subsequent Events
In January 2014 and February 2014, we declared the following dividends, which will be paid in February
2014 and March 2014, respectively:
-
-
-
$0.1821667 per share to our common stockholders;
$0.140625 per share to our Class E preferred stockholders; and
$0.138021 per share to our Class F preferred stockholders.
46
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)
2013 (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
First
Second
Third
Fourth
Quarter Quarter Quarter Quarter Year (2)
$ 175,057
66,701
41,468
33,883
33,005
40,221
73,226
62,735
$ 185,990
73,858
39,100
21,442
51,590
4,926
56,516
45,957
$ 201,629
80,774
49,703
26,002
45,150
6,757
51,907
41,089
$ 215,699
85,245
50,645
30,374
49,435
15,199
64,634
53,854
$ 778,375
306,577
180,916
111,702
179,180
67,103
246,283
203,634
Basic
Diluted
Dividends paid per common share
0.37
0.36
0.5135834
0.23
0.23
0.5436876
0.21
0.21
0.5446251
0.26
0.26
0.5455626
1.06
1.06
2.1474587
2012 (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
$ 114,529
34,111
28,952
15,165
36,301
2,962
39,263
26,071
$ 115,532
34,504
28,806
14,686
37,536
5,871
43,407
32,950
$ 119,984
36,952
29,720
19,878
33,434
4,024
37,458
26,976
$ 132,803
41,755
35,065
22,534
33,449
5,575
39,024
28,542
$ 482,847
147,323
122,542
72,263
140,719
18,433
159,152
114,538
Basic and diluted
0.20
0.25
0.20
0.21
0.86
Dividends paid per common share
0.4365000
0.4374375
0.4433750
0.4543125
1.7716250
(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. Additionally, measurement period adjustments were
made to the first two quarters of 2013 to adjust preliminary real estate values to reflect new information about facts
and circumstances that existed as of the acquisition date. Also, tenant reimbursements have been reported as a
component of total revenue and reimbursable property expense have been reported as a component of total
expenses. 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.
47
REALTY INCOME CORPORATION AND SUBSIDIARIES
Report 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, 2013 and 2012, and the related consolidated statements of income,
equity, and cash flows for each of the years in the three-year period ended December 31, 2013. These
consolidated financial statements are the responsibility of Realty Income Corporation’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, 2013
and 2012, and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2013, 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, 2013, based on criteria established in Internal Control – Integrated Framework (1992)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated February 14, 2014 expressed an unqualified opinion on the effectiveness of Realty Income
Corporation’s internal control over financial reporting.
San Diego, California
February 14, 2014
48
REALTY INCOME CORPORATION AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm, Continued
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,
2013, based on criteria established in Internal Control – Integrated Framework (1992) 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 Realty Income Corporation’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, 2013, based on criteria established in Internal Control –
Integrated Framework (1992) 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, 2013 and 2012, and the related consolidated statements of income, equity, and cash
flows for each of the years in the three-year period ended December 31, 2013, and our report dated
February 14, 2014 expressed an unqualified opinion on those consolidated financial statements.
San Diego, California
February 14, 2014
49
REALTY INCOME CORPORATION AND SUBSIDIARIES
Business Description
THE COMPANY
Realty Income Corporation, The Monthly Dividend Company®, or Realty Income, is a publicly traded real
estate company with the primary business objective of generating dependable monthly cash dividends
from a consistent and predictable level of cash flow from operations. Our monthly dividends are
supported by the cash flow from our portfolio of properties leased to commercial tenants. We have in-
house acquisition, leasing, legal, credit research, real estate research, portfolio management (including
property and asset management), and capital markets expertise. Over the past 45 years, Realty Income
and its predecessors have been acquiring and owning freestanding commercial properties that generate
rental revenue under long-term lease agreements.
Realty Income was founded in 1969, and in 1994 was listed on the New York Stock Exchange, or NYSE.
We elected to be taxed as a real estate investment trust, or REIT, requiring us to distribute dividends to
our stockholders aggregating at least 90% of our taxable income (excluding net capital gains).
We seek to increase distributions to stockholders and funds from operations, or FFO, per share through
both active portfolio management and the acquisition of additional properties.
Generally, our portfolio management efforts seek to achieve:
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.
At December 31, 2013, we owned a diversified portfolio:
Of 3,896 properties;
With an occupancy rate of 98.2%, or 3,826 properties leased and 70 properties available for lease;
Leased to 205 different commercial tenants doing business in 47 separate industries;
Located in 49 states and Puerto Rico;
With over 62.6 million square feet of leasable space; and
With an average leasable space per property of approximately 16,100 square feet, including
approximately 10,600 square feet per retail property.
Of the 3,896 properties in the portfolio, 3,876, or 99.5%, are single-tenant properties, and the remaining
twenty are multi-tenant properties. At December 31, 2013, of the 3,876 single-tenant properties, 3,807
were leased with a weighted average remaining lease term (excluding rights to extend a lease at the
option of the tenant) of approximately 10.8 years.
In acquiring additional properties, our strategy is primarily to acquire freestanding, single-tenant locations
under long-term, net lease agreements. Our acquisition and investment activities generally focus on
businesses providing goods and services that satisfy basic consumer and business needs. In general,
our net lease agreements:
Are for initial terms of 10 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.
50
Our nine senior officers owned 0.4% of our outstanding common stock with a market value of
$33.3 million at January 29, 2014. Our directors and nine senior officers, as a group, owned 0.6% of our
outstanding common stock with a market value of $51.7 million at January 29, 2014.
Our common stock is listed on the NYSE under the ticker symbol "O" with a cusip number of 756109-104.
Our central index key number is 726728.
Our 6.75% Monthly Income Class E Cumulative Redeemable Preferred Stock is listed on the NYSE under
the ticker symbol "OprE" with a cusip number of 756109-708.
Our 6.625% Monthly Income Class F Cumulative Redeemable Preferred Stock is listed on the NYSE
under the ticker symbol “OprF” with a cusip number of 756109-807.
In January 2014, we had 116 employees as compared to 97 employees in January 2013.
We maintain a corporate website at www.realtyincome.com. On our website we make available, free of
charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, Form 3s, Form 4s,
Form 5s, current reports on Form 8-K, and amendments to those reports, as soon as reasonably
practicable after we electronically file these reports with the Securities and Exchange Commission, or
SEC. None of the information on our website is deemed to be part of this report.
RECENT DEVELOPMENTS
Increases in Monthly Dividends to Common Stockholders
We have continued our 45-year policy of paying monthly dividends. In addition, we increased the
dividend five times during 2013.
2013 Dividend increases
1st increase
2nd increase
3rd increase
4th increase
5th increase
Month
Paid
Jan 2013
Feb 2013
Apr 2013
Jul 2013
Oct 2013
Dividend
per share
Increase
per share
$ 0.1517500 $ 0.0003125
0.1809167 0.0291667
0.1812292 0.0003125
0.1815417 0.0003125
0.1818542 0.0003125
The dividends paid per share during 2013 as compared to 2012 increased 21.2%, which is the largest
annual increase in the company’s history. The 2013 dividends paid per share totaled $2.1474587 as
compared to $1.7716250 in 2012, an increase of $0.3758337.
In December 2013, we declared an increased dividend of $0.1821667 per share, which was paid in
January 2014. The increase in January 2014 was our 65th consecutive quarterly increase and the 74th
increase in the amount of the dividend since our listing on the NYSE in 1994. In January 2014 and
February 2014, we declared dividends of $0.1821667 per share, which will be paid in February 2014 and
March 2014, respectively.
The monthly dividend of $0.1821667 per share represents a current annualized dividend of $2.186 per
share, and an annualized dividend yield of approximately 5.9% based on the last reported sale price of
our common stock on the NYSE of $37.33 on December 31, 2013. Although we expect to continue our
policy of paying monthly dividends, we cannot guarantee that we will maintain our current level of
dividends, that we will continue our pattern of increasing dividends per share, or what our actual dividend
yield will be in any future period.
51
Acquisitions During 2013
During 2013, we invested $1.51 billion in 459 new properties and properties under development or
expansion, with an initial weighted average contractual lease rate of 7.1%. The 459 new properties and
properties under development or expansion are located in 40 states, will contain approximately 9.0 million
leasable square feet, and are 100% leased with a weighted average lease term of 14.0 years. The
tenants occupying the new properties operate in 23 industries and the property types consist of 83.8%
retail, 9.2% office, 4.9% industrial and distribution, and 2.1% manufacturing, based on rental revenue.
These investments are in addition to the $3.2 billion acquisition of 515 properties of American Realty
Capital Trust, Inc., or ARCT, which were added to our real estate portfolio during the first quarter of 2013.
Our combined total investment in real estate assets during 2013 was $4.67 billion in 974 new properties
and properties under development or expansion. During 2013, none of our real estate investments
caused any one tenant to be 10% or more of our total assets at December 31, 2013.
In conjunction with our acquisition of ARCT, each outstanding share of ARCT common stock was
converted into the right to receive a combination of: (i) $0.35 in cash and (ii) 0.2874 shares of our
common stock, resulting in the issuance of a total of approximately 45.6 million shares of our common
stock to ARCT shareholders, valued at a per share amount of $44.04, which was the closing sale price of
our common stock on January 22, 2013. In connection with the closing of this acquisition, we terminated
and repaid the amounts then outstanding of approximately $552.9 million under ARCT’s revolving credit
facility and term loan. In connection with our acquisition of ARCT, we assumed approximately
$516.3 million of mortgages payable. We incurred merger costs of $13.0 million and $7.9 million,
respectively, in 2013 and 2012. The total merger costs were approximately $21 million.
Our acquisition of ARCT provided benefits to Realty Income, including accretion to net earnings, growth
in the size of our real estate portfolio, diversification of industries and property type, and increase in the
percentage of investment grade tenants.
The 515 properties added to our real estate portfolio as a result of the ARCT acquisition, are located in 44
states and Puerto Rico, contain over 16.0 million leasable square feet and are 100% leased with a
weighted average lease term of 12.2 years. The 69 tenants, occupying the 515 properties acquired,
operate in 28 industries and the property types consist of 54.0% retail, 32.6% industrial and distribution,
and 13.4% office, based on rental revenue.
The estimated initial weighted average contractual lease rate for a property is generally computed as
estimated contractual net operating income, which, in the case of a net leased property, is equal to the
aggregate base rent under the lease for the first full year of each lease, divided by the total cost of the
property. Since it is possible that a tenant could default on the payment of contractual rent, we cannot
provide assurance that the actual return on the funds invested will remain at the percentages listed
above.
In the case of a property under development or expansion, the estimated initial weighted average
contractual lease rate is computed as follows: estimated net operating income (which is calculated by
multiplying the capitalization rate determined by the lease by our projected total investment in the
property, including land, construction and capitalized interest costs) for the first full year of each lease,
divided by such projected total investment in the property. Of the $4.67 billion we invested during 2013,
$39.6 million was invested in 21 properties under development or expansion, with an estimated initial
weighted average contractual lease rate of 8.5%. We may continue to pursue development or expansion
opportunities under similar arrangements in the future.
John P. Case Appointed Chief Executive Officer (CEO)
In September 2013, we announced that our Board of Directors appointed John P. Case as CEO of the
company. Mr. Case, who had previously served as President and Chief Investment Officer, succeeded
Tom A. Lewis, who retired as our CEO. Mr. Lewis had been our CEO since 1997. Mr. Case is only the
third CEO in Realty Income’s 45-year history.
52
PORTFOLIO DISCUSSION
Leasing Results
At December 31, 2013, we had 70 properties available for lease out of 3,896 properties in our portfolio,
which represents a 98.2% occupancy rate. Since December 31, 2012, when we reported 84 properties
available for lease and a 97.2% occupancy rate, we:
Leased 27 properties;
Sold 19 properties available for lease; and
Have 32 new properties available for lease.
During 2013, 136 properties with expiring leases were leased to either existing or new tenants. The
annual rent on these leases was $16.1 million, as compared to the previous rent on these same
properties of $16.0 million. At December 31, 2013, our average annualized rental revenue was
approximately $13.21 per square foot on the 3,807 leased properties in our portfolio. At December 31,
2013, we classified 12 properties with a carrying amount of $12.0 million as held for sale on our balance
sheet.
Investments in Existing Properties
In 2013, we capitalized costs of $8.5 million on existing properties in our portfolio, consisting of
$1.3 million for re-leasing costs and $7.2 million for building and tenant improvements. In 2012, we
capitalized costs of $6.6 million on existing properties in our portfolio, consisting of $1.62 million for re-
leasing costs and $4.93 million for building and tenant improvements.
As part of our re-leasing costs, we pay leasing commissions and sometimes provide tenant rent
concessions. Leasing commissions are paid based on the commercial real estate industry standard and
any rent concessions provided are minimal. We do not consider the collective impact of the leasing
commissions or tenant rent concessions to be material to our financial position or results of operations.
The majority of our building and tenant improvements are related to roof repairs, HVAC improvements,
and parking lot resurfacing and replacements. It is not customary for us to offer significant tenant
improvements on our properties as tenant incentives. The amounts of our capital expenditures can vary
significantly, depending on the rental market, tenant credit worthiness, and the willingness of tenants to
pay higher rents over the terms of the leases.
Amendment to Credit Facility
In October 2013, we amended our credit facility by increasing the borrowing capacity by $500 million to
$1.5 billion. All other material business terms of the credit facility remain unchanged.
Note Issuance
In July 2013, we issued $750 million of 4.65% senior unsecured notes due August 2023, or the 2023
Notes. The price to the investors for the 2023 Notes was 99.775% of the principal amount for an effective
yield of 4.678% per annum. The total net proceeds of approximately $741.4 million from this offering
were used to repay all outstanding borrowings under our acquisition credit facility, and the remaining
proceeds were used for general corporate purposes, including additional property acquisitions. Interest is
paid semiannually on the 2023 Notes.
Accelerated Stock Vesting
The Compensation Committee of our Board of Directors approved, effective July 1, 2013, the accelerated
vesting of each restricted stock award that had originally been granted with ten-year vesting to five years.
On July 1, 2013, 212,827 restricted shares vested as a result of this acceleration, resulting in additional
compensation expense of $3.7 million during 2013.
53
Issuance of Common Stock
In October 2013, we issued 9,775,000 shares of common stock at a price of $40.63 per share, including
1,275,000 shares purchased by the underwriters upon the exercise of their option to purchase additional
shares. After underwriting discounts and other estimated offering costs of $18.7 million, the net proceeds
of approximately $378.5 million were used to repay a portion of the borrowings under our acquisition
credit facility, which were used to fund property acquisitions.
In March 2013, we issued 17,250,000 shares of common stock at a price of $45.90 per share. After
underwriting discounts and other offering costs of $36.7 million, the net proceeds of $755.1 million were
used to redeem our 5.375% notes in March 2013 and repay borrowings under our acquisition credit
facility, which were used to fund property acquisitions, including our acquisition of ARCT.
In connection with our January 2013 acquisition of ARCT, we issued a total of 45,573,144 shares of our
common stock to ARCT shareholders and redeemed 208,709 shares of our common stock that were
previously held by ARCT.
Dividend Reinvestment and Stock Purchase Plan
In March 2011, we established a Dividend Reinvestment and Stock Purchase Plan, or the DRSPP, to
provide our common stockholders, as well as new investors, with a convenient and economical method of
purchasing our common stock and reinvesting their distributions. The DRSPP also allows our current
stockholders to buy additional shares of common stock by reinvesting all or a portion of their distributions.
The DRSPP authorizes up to 6,000,000 common shares to be issued. During 2013, we issued 1,449,139
shares and raised approximately $55.6 million under the DRSPP.
Note Repayment
In March 2013, we repaid the $100 million of outstanding 5.375% notes, plus accrued and unpaid
interest, using proceeds from our March 2013 common stock offering and our credit facility.
Term Loan
In January 2013, in conjunction with our acquisition of ARCT, we entered into a $70 million senior
unsecured term loan maturing January 21, 2018, to partially repay the then outstanding ARCT term loan.
Borrowing under the term loan bears interest at LIBOR, plus 1.20%. In conjunction with this term loan,
we also acquired an interest rate swap which essentially fixes our per annum interest rate on the term
loan at 2.15%.
Noncontrolling Interests
As consideration for two separate acquisitions during 2013, partnership units of Tau Operating
Partnership, L.P. and Realty Income, L.P. were issued to third parties. These units (discussed in the
following paragraphs below) do not have voting rights, are entitled to monthly distributions equal to the
amount paid to our common stockholders, and are redeemable in cash or our common stock, at our
option and at a conversion ratio of one to one, subject to certain exceptions. As the general partner for
each of these partnerships, we have operating and financial control over these entities, consolidate them
in our financial statements, and record the partnership units held by third parties as noncontrolling
interests.
Issuance of Common and Preferred Partnership Units
In connection with our acquisition of ARCT in January 2013, we issued 317,022 common partnership
units and 6,750 preferred partnership units. These common units are entitled to monthly distributions
equivalent to the per common share amounts paid to the common stockholders of Realty Income. The
preferred units have a par value of $1,000, and are entitled to monthly payments at a rate of 2% per
annum, or $135,000 per year.
54
In June 2013, we issued 534,546 common partnership units of Realty Income, L.P. These common units
are entitled to monthly distributions equivalent to the per common share amount paid to the common
stockholders of Realty Income.
Universal Shelf Registration
In February 2013, we filed a shelf registration statement with the SEC, which is effective for a term of
three years and will expire in February 2016. This replaces our prior shelf registration statement. In
accordance with 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 (1) common stock, (2) preferred stock, (3) debt securities, (4)
depositary shares representing fractional interests in shares of preferred stock, (5) warrants to purchase
debt securities, common stock, preferred stock or depositary shares, and (6) 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.
Net Income Available to Common Stockholders
Net income available to common stockholders was $203.6 million in 2013, compared to $114.5 million in
2012, an increase of $89.1 million. On a diluted per common share basis, net income was $1.06 in 2013,
as compared to $0.86 in 2012, an increase of $0.20, or 23.3%. Net income available to common
stockholders for 2013 includes $13.0 million of merger-related costs for the acquisition of ARCT, which
represents $0.07 on a diluted per common share basis, and $3.7 million for accelerated vesting of
restricted shares that occurred in July 2013 from ten-year vesting to five years, which represents $0.02 on
a diluted per common share basis. Net income available to common stockholders for 2012 includes
$7.9 million of merger-related costs for the acquisition of ARCT, which represents $0.06 on a diluted per
common share basis, and a $3.7 million charge for the excess of redemption value over carrying value of
the shares of our 7.375% Monthly Income Class D Cumulative Redeemable Preferred Stock, or Class D
preferred stock, which represents $0.03 on a diluted per common share basis.
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.
Gains from the sale of properties during 2013 were $64.7 million, as compared to gains from the sale of
properties of $9.9 million during 2012.
Funds from Operations Available to Common Stockholders (FFO) and Normalized Funds from
Operations Available to Common Stockholders (Normalized FFO)
In 2013, our FFO increased by $188.1 million, or 72.1%, to $449.0 million versus $260.9 million in 2012.
On a diluted per common share basis, FFO was $2.34 in 2013, compared to $1.96 in 2012, an increase
of $0.38, or 19.4%. FFO in 2013 includes $13.0 million of merger-related costs, which represents $0.07
on a diluted per common share basis, and $3.7 million for accelerated vesting of restricted shares that
occurred in July 2013 from ten-year vesting to five years, which represents $0.02 on a diluted per
common share basis. FFO for 2012 includes $7.9 million of merger-related costs, which represents $0.06
on a diluted per common share basis, and includes a $3.7 million charge for the excess of redemption
value over carrying value of the shares of our Class D preferred stock, which represents $0.03 on a
diluted per common share basis.
We define normalized FFO as FFO excluding the merger-related costs for our acquisition of ARCT. In
2013, our normalized FFO increased by $193.2 million, or 71.9%, to $462.0 million, versus $268.8 million
in 2012. On a diluted common share basis, normalized FFO was $2.41 in 2013, compared to $2.02 in
2012, an increase of $0.39, or 19.3%.
55
See our discussion of FFO and normalized FFO (which are not financial measures under U.S. generally
accepted accounting principles, or GAAP), 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 normalized FFO.
Adjusted Funds from Operations Available to Common Stockholders (AFFO)
In 2013, our AFFO increased by $188.9 million, or 68.9%, to $463.1 million versus $274.2 million in 2012.
On a diluted per common share basis, AFFO was $2.41 in 2013, compared to $2.06 in 2012, an increase
of $0.35, or 17.0%.
See our discussion of AFFO (which is not a financial measure under GAAP), 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,
normalized FFO and AFFO.
DIVIDEND POLICY
Distributions are paid monthly to holders of shares of our common stock, 6.75% Monthly Income Class E
Cumulative Redeemable Preferred Stock, or Class E preferred stock, and 6.625% Monthly Income Class
F Cumulative Redeemable Preferred Stock, or Class F preferred stock, if, and when, declared by our
Board of Directors.
Distributions are paid monthly to the limited partners holding common units of Tau Operating Partnership,
L.P. and Realty Income, L.P., each on a per unit basis that is generally equal to the amount paid per
share to our common stockholders.
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 taxable income
(excluding net capital gains), and we are subject to income tax to the extent we distribute less than 100%
of our taxable income (including net capital gains). In 2013, our cash distributions to preferred and
common stockholders totaled $451.2 million, or approximately 161.4% of our estimated taxable income of
$279.6 million. Our estimated taxable income reflects non-cash deductions for depreciation and
amortization. Our estimated taxable income is presented to show our compliance with REIT dividend
requirements and is not a measure of our liquidity or operating performance. We intend to continue to
make distributions to our stockholders that are sufficient to meet this dividend requirement and that will
reduce or eliminate 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 2013 cash
distributions to common stockholders totaled $409.2 million, representing 88.4% of our adjusted funds
from operations available to common stockholders of $463.1 million.
The Class E preferred stockholders receive cumulative distributions at a rate of 6.75% per annum on the
$25.00 per share liquidation preference (equivalent to $1.6875 per annum per share). The Class F
preferred stockholders receive cumulative distributions at a rate of 6.625% per annum on the $25.00 per
share liquidation preference (equivalent to $1.65625 per annum per share). Dividends on our Class E and
Class F 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, normalized FFO, AFFO, cash flow from operations, financial
condition, capital requirements, the annual distribution requirements under the REIT provisions of the
Internal Revenue Code of 1986, as amended, or the Code, our debt service requirements and any other
factors our Board of Directors may deem relevant. In addition, our credit facility contains financial
covenants that could limit the amount of distributions paid 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.
56
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" is generally 20%. In general, dividends payable by REITs are not eligible for the
reduced tax rate on qualified dividend income, except to the extent that certain holding requirements have
been met with respect to the REIT’s stock and the REIT’s dividends are attributable to dividends received
from certain taxable corporations (such as our taxable REIT subsidiaries) or 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).
Distributions in excess of earnings and profits generally will be treated as a non-taxable reduction in the
stockholders' basis in their stock, but not below zero. Distributions in excess of that basis generally will be
taxable as a capital gain to stockholders who hold their shares as a capital asset. Approximately 38.7% of
the distributions to our common stockholders, made or deemed to have been made in 2013, were
classified as a return of capital for federal income tax purposes. We estimate that in 2014, between 15%
and 30% of the distributions 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. 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.
Our primary cash obligations, for the current year and subsequent years, are included in the “Table of
Obligations,” which is presented in the section entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” We expect to fund our operating expenses and other
short-term liquidity requirements, including property acquisitions and development costs, payment of
principal and interest on our outstanding indebtedness, property improvements, re-leasing costs and cash
distributions to common and preferred stockholders, primarily through cash provided by operating
activities, borrowing on our $1.5 billion credit facility and occasionally through public securities offerings.
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, 2013, our total outstanding borrowings of senior unsecured notes, term loan,
mortgages payable and credit facility borrowings were $4.18 billion, or approximately 33.2% of our total
market capitalization of $12.59 billion.
We define our total market capitalization at December 31, 2013 as the sum of:
Shares of our common stock outstanding of 207,485,073, plus total common units of 851,568,
multiplied by the last reported sales price of our common stock on the NYSE of $37.33 per share on
December 31, 2013, or $7.78 billion;
Aggregate liquidation value (par value of $25.00 per share) of the Class E preferred stock of
$220.0 million;
Aggregate liquidation value (par value of $25.00 per share) of the Class F preferred stock of
$408.8 million;
57
Outstanding borrowings of $128.0 million on our credit facility;
Outstanding mortgages payable of $783.4 million, which includes net mortgage premiums of
$28.9 million;
Outstanding borrowings of $70.0 million on our term loan; and
Outstanding senior unsecured notes and bonds of $3.2 billion, which excludes unamortized original
issuance discounts of $14.5 million.
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 of our properties typically pay rent increases based on: 1) increases in
the consumer price index (typically subject to ceilings), 2) additional rent calculated as a percentage of
the tenants' gross sales above a specified level, or 3) fixed increases. We believe that a portfolio of
properties owned under long-term net leases 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, we generally focus on providing capital to owners and
operators of commercial tenants by acquiring the real estate they consider important to the successful
operation of their business.
We primarily focus on acquiring properties with many of the following attributes:
Tenants with reliable and sustainable cash flow;
Tenants with revenue and cash flow from multiple sources;
Tenants that are willing to sign a long-term lease (10 or more years);
Tenants that are large owners and users of real estate;
Real estate that is critical to the tenant’s ability to generate revenue (i.e. they need the property in
which they operate in order to conduct their business);
Real estate with property valuations at or below replacement cost;
Properties with rental or lease payments that are at or below market rents; and
Property transactions where we can achieve an attractive spread over our cost of capital.
From a retail perspective, our investment focus has primarily been on businesses 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, 2013, approximately 59.1% of our
retail rental revenue was derived from tenants with a service component in their business. We believe
these service-oriented businesses would generally be difficult to duplicate over the Internet and that our
properties continue to perform well relative to competition from Internet-based businesses.
Diversification is also a key objective of our investment strategy. We believe that diversification of the
portfolio by tenant, industry, property type, and geographic location leads to more predictable investment
results for our shareholders by reducing vulnerability that can come with any single concentration. Our
investment efforts have led to a diversified property portfolio that, as of December 31, 2013, consisted of
3,896 properties located in 49 states and Puerto Rico, leased to 205 different commercial tenants doing
business in 47 industry segments. Each of the 47 industry segments, represented in our property
portfolio, individually accounted for no more than 10.6% of our rental revenue for the quarter ended
December 31, 2013.
58
Credit Strategy
We typically acquire and lease properties to tenants in transactions where we can achieve an attractive
risk-adjusted return. Since 1970, our occupancy rate at the end of each year has never been below 96%.
We believe the principal financial obligations for most of our tenants 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 or which are critical to the tenant’s ability to
generate revenue, we believe the risk of default on a tenant’s lease obligations is less than the tenant’s
unsecured general obligations. It has been our experience that since tenants must retain their profitable
and critical locations in order to survive; in the event of reorganization they are less likely to reject a lease
for a profitable or critical 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 real
estate leases can be further mitigated by monitoring the performance of the tenants' individual locations
and considering whether to sell locations that are weaker performers.
In order to qualify for inclusion in our portfolio, new property acquisitions must meet stringent investment
and credit requirements. The properties must generate attractive current yields and the tenant must meet
our credit profile. We have established a four-part analysis that examines each potential investment
based on:
Industry, company, market conditions and credit profile;
Store profitability for retail locations, if profitability data is available;
The importance of the real estate location to the operations of the company’s business; and
Overall real estate characteristics, including property value and comparative rental rates.
Prior to entering into any transaction, our investment professionals, assisted by our research department,
conduct a review of a tenant’s credit quality. The information reviewed may include reports and filings,
including any public credit ratings, financial statements, debt and equity analyst reports, and reviews of
corporate credit spreads, stock prices, market capitalization and other financial metrics. We conduct
additional due diligence, including additional financial reviews of the tenant and a more comprehensive
review of the business segment and industry in which the tenant operates. We continue to monitor our
tenants’ credit quality on an ongoing basis by reviewing the available information previously discussed,
and providing summaries of these findings to management.
Acquisition Strategy
We seek to invest in industries in which several, well-organized, regional and national commercial tenants
are capturing market share through service, quality control, economies of scale, strong consumer brands,
advertising, and the selection of prime locations. Our acquisition strategy is to act as a source of capital to
regional and national commercial tenants by acquiring and leasing back their real estate locations. In
addition, we frequently acquire large portfolios of properties net leased to multiple tenants in a variety of
industries. We have an internal team dedicated to sourcing such opportunities, often using our
proprietary relationships with various tenants, owners/developers, and advisors to uncover and secure
transactions. We also undertake thorough research and analysis to identify what we consider to be
appropriate industries, tenants and property locations for investment. This research expertise is
instrumental to uncovering net lease opportunities in markets where our real estate financing program
adds value. In selecting potential investments, we generally seek to acquire real estate that has the
following characteristics:
Properties that are freestanding, commercially-zoned with a single tenant;
Properties that are important locations for regional and national commercial tenants;
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
59
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.
Portfolio Management Strategy
The active management of the property portfolio is also 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.
We 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.
At December 31, 2013, we classified real estate with a carrying amount of $12.0 million as held for sale
on our balance sheet. In 2014, we intend to continue our active disposition efforts to further enhance our
real estate portfolio and anticipate approximately $50 million in property sales for all of 2014. 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 at our estimated
values or be able to invest the property sale proceeds in new properties.
Impact of Real Estate and Credit Markets
In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during
certain periods, the U.S. credit markets have experienced significant price volatility, dislocations and
liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the
commercial real estate and U.S. credit markets carefully and, if required, will make decisions to adjust our
business strategy accordingly.
Universal Shelf Registration
In February 2013, we filed a shelf registration statement with the SEC, which is effective for a term of
three years and will expire in February 2016. This replaces our prior shelf registration statement. In
accordance with 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 (1) common stock, (2) preferred stock, (3) debt securities, (4)
depositary shares representing fractional interests in shares of preferred stock, (5) warrants to purchase
debt securities, common stock, preferred stock or depositary shares, and (6) 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.
$1.5 Billion Acquisition Credit Facility
In October 2013, we increased our unsecured acquisition credit facility from $1.0 billion to $1.5 billion.
The initial term of the credit facility expires in May 2016 and includes, at our election, a one-year
extension option. Under this credit facility, our current investment grade credit ratings provide for
financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 1.075% with a
facility commitment fee of 0.175%, for all-in drawn pricing of 1.25% over LIBOR. The borrowing rate is not
subject to an interest rate floor or ceiling. We also have other interest rate options available to us under
60
this credit facility. Our credit facility is unsecured and, accordingly, we have not pledged any assets as
collateral for this obligation.
At December 31, 2013, we had a borrowing capacity of $1.372 billion available on our credit facility
(subject to customary conditions to borrowing) and an outstanding balance of $128.0 million. The interest
rate on borrowings outstanding under our credit facility, at December 31, 2013, was 1.2% per annum.
We must comply with various financial and other covenants in our credit facility. At December 31, 2013,
we remain in compliance with these covenants.
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 regularly review our credit facility
and may seek to extend or replace our credit facility, to the extent we deem appropriate.
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 the refinancing will enable us to issue
equity or debt securities upon acceptable terms.
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, 2013, we had cash and cash equivalents totaling $10.3 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 next twelve months. We intend,
however, to use permanent or long-term capital to fund property acquisitions and to repay future
borrowings under our credit facility.
Credit Agency Ratings
The borrowing interest rates under our credit facility are based upon our ratings assigned by credit rating
agencies. We are currently assigned the following investment grade corporate credit ratings on our senior
unsecured notes and bonds: Fitch Ratings has assigned a rating of BBB+ with a “stable” outlook,
Moody’s Investors Service has assigned a rating of Baa1 with a “stable” outlook, and Standard & Poor’s
Ratings Group has assigned a rating of BBB+ with a “stable” outlook.
Based on our current ratings, the credit facility interest rate is LIBOR plus 1.075% with a facility
commitment fee of 0.175%, for all-in drawn pricing of 1.25% basis points over LIBOR. The credit facility
provides that the interest rate can range between: (i) LIBOR plus 1.85% if our credit facility is lower than
BBB-/Baa3 and (ii) LIBOR plus 1.00% 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 range from: (i) 0.45% for a rating
lower than BBB-/Baa3, and (ii) 0.15% for a credit rating of A-/A3 or higher.
We also issue senior debt securities 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.
61
Notes Outstanding
As of December 31, 2013, we had $3.2 billion of senior unsecured note and bond obligations, excluding
unamortized original issuance discounts of $14.5 million. All of our outstanding notes and bonds have
fixed interest rates. Interest on all of our senior note and bond obligations is paid semiannually.
Mortgage Debt
As of December 31, 2013, we had $754.5 million of mortgages payable, all of which were assumed in
connection with our property acquisitions. Included in this amount is $514.4 million of mortgages payable
assumed in connection with the ARCT acquisition. Additionally, at December 31, 2013, we had net
premiums totaling $28.9 million on these mortgages, of which $16.2 million is in connection with the
ARCT acquisition.
Term Loan
In January 2013, in conjunction with our acquisition of ARCT, we entered into a $70 million senior
unsecured term loan maturing in January 2018. Borrowing under the term loan bears interest at LIBOR,
plus 1.20%. In conjunction with this term loan, we also acquired an interest rate swap which essentially
fixes our per annum interest rate on the term loan at 2.15%.
No Unconsolidated Investments
We have no unconsolidated investments, nor do we engage in trading activities involving energy or
commodity contracts.
Corporate Responsibility
Realty Income is committed to providing an enjoyable, diverse and safe working atmosphere for our
employees, to upholding our responsibilities as a public company operating for the benefit of our
shareholders and to being mindful of the environment. As The Monthly Dividend Company®, we believe
our primary responsibility is to provide a dividend return to our shareholders. How we manage and use
the physical, human and financial resources that enable us to acquire and own the real estate, which
provides us with the lease revenue to pay monthly dividends, demonstrates our commitment to corporate
responsibility.
Social Responsibility and Ethics. We are committed to being socially responsible and conducting our
business according to the highest ethical standards. Our employees enjoy compensation that is in line
with those of our peers and competitors, including generous healthcare benefits for employees and their
families; participation in a 401K plan with a matching contribution by Realty Income; competitive vacation
and time-off benefits; paid maternity leave and an infant-at-work program for new parents. Our
employees also have access to members of our Board of Directors to report anonymously, if desired, any
suspicion of misconduct, by any member of our senior management or executive team. We also have a
long-standing commitment to equal employment opportunity and adhere to all Equal Employer
Opportunity Policy guidelines.
We apply the principles of full and fair disclosure in all of our business dealings, as outlined in our
Corporate Code of Business Ethics. We are also committed to dealing fairly with all of our customers,
suppliers and competitors.
Corporate Governance. We believe that nothing is more important than a company’s reputation for
integrity and serving as a responsible fiduciary for its shareholders. We are committed to managing the
company for the benefit of our shareholders and are focused on maintaining good corporate governance.
Practices that illustrate this commitment include:
Our Board of Directors is comprised of eight directors, six of which are independent, non-employee
directors
Our Board of Directors is elected on an annual basis
We employ a majority vote standard for elections
62
Our Compensation Committee of the Board of Directors works with independent consultants, in
conducting annual compensation reviews for our key executives, and compensates each individual
based on reaching certain performance metrics that determine the success of our company
We adhere to all other corporate governance principles outlined in our “Corporate Governance
Guidelines” document.
Environmental Practices. Our focus on energy related matters is demonstrated by how we manage our
day-to-day activities in our corporate headquarters building. In our headquarters building we promote
energy conservation and encourage the following practices:
Powering down office equipment at the end of the day
Setting fax and copier machines to “energy saver mode”
Encouraging employees to reduce paper usage whenever possible, by storing documents
electronically and using “duplex” copy mode;
Employing an automated “lights out” system that is activated 24/7; and
Programming HVAC to only operate during normal business operating hours
In addition, our headquarters building was constructed according to the State of California energy
standards and we have installed solar panels on our roof to fulfill our energy requirements. All of the
windows on our building are dual-paned to increase energy efficiency and reduce our carbon footprint.
With respect to recycling and reuse practices, we encourage the use of recycled products and the
recycling of materials during our operations. Recycling bins are placed in all areas where materials are
regularly disposed of and at the individual desks of our employees. Cell phones, wireless devices and
office equipment is recycled or donated whenever possible. We also continue to pursue a paperless
environment since this reduces costs and saves trees. As a result, we encourage file-sharing networks
and environments to produce and edit documents in order to reduce the dissemination of hard copy
documents, and have implemented an electronic invoice approval system.
With respect to the properties that we own, these properties are net-leased to our tenants who are
responsible for maintaining the buildings and are in control of their energy usage and environmental
sustainability practices.
Risk Factors
For full descriptions 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, 2013.
Unresolved Staff Comments
There are no unresolved staff comments.
63
REALTY INCOME CORPORATION AND SUBSIDIARIES
Property Portfolio Information
At December 31, 2013, we owned a diversified portfolio:
Of 3,896 properties;
With an occupancy rate of 98.2%, or 3,826 properties leased and 70 properties available for lease;
Leased to 205 different commercial tenants doing business in 47 separate industries;
Located in 49 states and Puerto Rico;
With over 62.6 million square feet of leasable space; and
With an average leasable space per property of approximately 16,100 square feet, including
approximately 10,600 square feet per retail property.
At December 31, 2013, of our 3,896 properties, 3,807 were leased under net lease agreements. A net
lease typically requires the tenant to be responsible for minimum monthly rent and certain property
operating expenses including property taxes, insurance and maintenance. In addition, our tenants are
typically subject to 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.
As a result of our 2013 acquisitions, the following industry table has been modified from similar tables we
have prepared in the past to reflect the changes below:
Five new industries were added: (1) “government services,” (2) “health care,” (3) “jewelry,” (4) “other
manufacturing,” and (5) “electrical utilities”; and
Some properties previously included in the “other” industry were reclassified to both the “health care”
and “government services” industries to better reflect the industry in which the tenant operates.
64
Industry Diversification
The following table sets forth certain information regarding Realty Income's property portfolio classified
according to the business of the respective tenants, expressed as a percentage of our total rental
revenue:
For the
Quarter Ended
Percentage of Rental Revenue(1)
For the Years Ended
December 31,
2013
Dec 31,
2013
Dec 31,
2012
Dec 31,
2011
Dec 31,
2010
Dec 31,
2009
Dec 31,
2008
Retail industries
Apparel stores
Automotive collision services
Automotive parts
Automotive service
Automotive tire services
Book stores
Child care
Consumer electronics
Convenience stores
Crafts and novelties
Dollar stores
Drug stores
Education
Entertainment
Equipment services
Financial services
General merchandise
Grocery stores
Health and fitness
Health care
Home furnishings
Home improvement
Jewelry
Motor vehicle dealerships
Office supplies
Pet supplies and services
Restaurants - casual dining
Restaurants - quick service
Shoe stores
Sporting goods
Theaters
Transportation services
Wholesale clubs
Other
1.7 %
0.8
1.4
1.9
3.3
*
2.5
0.3
10.6
0.5
7.1
9.7
0.4
0.6
0.1
1.4
1.2
2.8
6.8
1.0
0.8
1.5
0.1
1.6
0.4
0.8
4.7
4.3
0.1
1.6
5.6
0.1
4.3
*
1.9 %
0.8
1.2
2.1
3.6
*
2.8
0.3
11.2
0.5
6.2
8.1
0.4
0.6
0.1
1.5
1.1
2.9
6.3
1.1
0.9
1.6
0.1
1.6
0.5
0.8
5.1
4.4
0.1
1.7
6.2
0.1
3.9
0.1
1.7 %
1.1
1.0
3.1
4.7
0.1
4.5
0.5
16.3
0.3
2.2
3.5
0.7
0.9
0.1
0.2
0.6
3.7
6.8
-
1.0
1.5
-
2.1
0.8
0.6
7.3
5.9
0.1
2.5
9.4
0.2
3.2
0.1
1.4 %
0.9
1.2
3.7
5.6
0.1
5.2
0.5
18.5
0.2
-
3.8
0.7
1.0
0.2
0.2
0.6
1.6
6.4
-
1.1
1.7
-
2.2
0.9
0.7
10.9
6.6
0.2
2.7
8.8
0.2
0.7
0.1
1.2 %
1.0
1.4
4.7
6.4
0.1
6.5
0.6
17.1
0.3
-
4.1
0.8
1.2
0.2
0.2
0.8
0.9
6.9
-
1.3
2.0
-
2.6
0.9
0.9
13.4
7.7
0.1
2.7
8.9
0.2
-
0.3
1.1 %
1.1
1.5
4.8
6.9
0.2
7.3
0.7
16.9
0.3
-
4.3
0.9
1.3
0.2
0.2
0.8
0.7
5.9
-
1.3
2.2
-
2.7
1.0
0.9
13.7
8.3
-
2.6
9.2
0.2
-
1.1
1.1 %
1.0
1.6
4.8
6.7
0.2
7.6
0.8
15.8
0.3
-
4.1
0.8
1.2
0.2
0.2
0.8
0.7
5.6
-
2.4
2.1
-
3.2
1.0
0.8
14.3
8.2
-
2.3
9.0
0.2
-
1.2
Retail industries
80.0 %
79.8 %
86.7 %
88.6 %
95.4 %
98.3 %
98.2 %
65
Industry Diversification (continued)
For the
Quarter Ended
Percentage of Rental Revenue(1)
For the Years Ended
December 31,
2013
Dec 31,
2013
Dec 31,
2012
Dec 31,
2011
Dec 31,
2010
Dec 31,
2009
Dec 31,
2008
1.3 %
3.0
0.6
1.0
0.1
0.2
0.1
0.5
0.5
1.4
1.3
0.8
0.2
0.1
0.2
0.6
0.9
0.1
0.8
0.6
5.3
0.4
1.2 %
3.3
0.6
1.0
0.1
0.2
*
0.4
0.5
1.5
1.4
0.8
0.2
0.1
0.2
0.6
0.9
0.2
0.9
0.7
5.3
0.1
0.9 %
5.1
0.1
0.1
-
0.1
-
0.3
0.4
1.3
0.1
*
-
*
0.1
-
0.7
0.1
-
0.8
2.2
1.0
0.5 %
5.6
-
-
-
-
-
0.2
0.3
0.7
0.1
*
-
-
-
-
0.4
0.1
-
0.7
1.6
1.2
- %
3.0
-
-
-
-
-
-
-
-
0.1
-
-
-
-
-
-
-
-
-
-
1.5
- %
-
-
-
-
-
-
-
-
-
0.1
-
-
-
-
-
-
-
-
-
-
1.6
- %
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1.8
Non-retail industries
Aerospace
Beverages
Consumer appliances
Consumer goods
Crafts and novelties
Diversified industrial
Electric Utilities
Equipment services
Financial services
Food processing
Government services
Health care
Home furnishings
Insurance
Machinery
Other manufacturing
Packaging
Paper
Shoe stores
Telecommunications
Transportation services
Other
Non-retail industries
20.0 %
20.2 %
13.3 %
11.4 %
4.6 %
1.7 %
1.8 %
Totals
100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
100.0 % 100.0 %
* Less than 0.1%
(1) Includes rental revenue for all properties owned by Realty Income at the end of each period presented, including revenue from
properties reclassified as discontinued operations. Excludes revenue from properties owned by Crest Net Lease, Inc., or Crest.
66
Property Type Diversification
The following table sets forth certain property type information regarding Realty Income’s property
portfolio as of December 31, 2013 (dollars in thousands):
Property Type
Retail
Industrial and distribution
Office
Manufacturing
Agriculture
Number of
Properties
3,747
79
42
13
15
Approximate
Leasable
Rental Revenue for
the Quarter Ended
Percentage of
Rental
Square Feet
39,979,700
15,661,100
3,104,400
3,715,200
184,500
$
(1)
December 31, 2013
158,804
22,374
13,450
5,254
5,202
Revenue
77.4 %
10.9
6.6
2.6
2.5
Totals
3,896
62,644,900
$
205,084
100.0 %
(1) Includes rental revenue for all properties owned by Realty Income at December 31, 2013, including revenue
from properties reclassified as discontinued operations of $279. Excludes revenue of $23 from properties
owned by Crest.
Tenant Diversification
The largest tenants based on percentage of total portfolio rental revenue at December 31, 2013 include the
following:
FedEx
Walgreens
Family Dollar
LA Fitness
AMC Theatres
Diageo
BJ's Wholesale Clubs
Northern Tier Energy/Super America
5.2 %
5.0 %
4.8 %
4.3 %
3.1 %
2.9 %
2.9 %
2.5 %
Dollar General
Rite Aid
Regal Cinemas
CVS Pharmacy
The Pantry
Circle K
Walmart/Sam's Club
2.4 %
2.2 %
2.1 %
2.1 %
1.8 %
1.7 %
1.6 %
67
Service Category Diversification for our Retail Properties
The following table sets forth certain information regarding the 3,747 retail properties, included in the
3,896 total properties, owned by Realty Income at December 31, 2013, classified according to the
business types and the level of services they provide at the property level (dollars in thousands):
Number of
Retail
Properties
Retail Rental Revenue
for the Quarter Ended
December 31, 2013 (1)
Percentage of
Retail Rental
Revenue
Tenants Providing Services
Automotive collision services
Automotive service
Child care
Education
Entertainment
Equipment services
Financial services
Health and fitness
Health care
Theaters
Transportation services
Other
Tenants Selling Goods and Services
Automotive parts (with installation)
Automotive tire services
Convenience stores
Motor vehicle dealerships
Pet supplies and services
Restaurants - casual dining
Restaurants - quick service
Tenants Selling Goods
Apparel stores
Automotive parts
Book stores
Consumer electronics
Crafts and novelties
Dollar stores
Drug stores
General merchandise
Grocery stores
Home furnishings
Home improvement
Jewelry
Office supplies
Shoe stores
Sporting goods
Wholesale clubs
Total Retail Properties
29
226
220
14
9
2
106
71
26
44
1
10
758
46
183
775
18
13
316
389
1,740
22
68
1
7
10
662
203
52
63
60
29
4
11
1
25
31
1,249
3,747
$
$
1,663
3,971
5,136
790
1,199
150
2,814
13,974
955
11,539
206
143
42,540
1,049
6,775
21,704
3,196
671
9,090
8,789
51,274
3,491
1,743
104
594
1,002
14,524
18,377
2,475
5,751
1,631
2,078
142
865
168
3,293
8,752
64,990
158,804
1.0 %
2.5
3.2
0.5
0.8
0.1
1.8
8.8
0.6
7.3
0.1
0.1
26.8
0.7
4.3
13.7
2.0
0.4
5.7
5.5
32.3
2.2
1.1
0.1
0.4
0.6
9.1
11.6
1.6
3.6
1.0
1.3
0.1
0.5
0.1
2.1
5.5
40.9
100.0 %
(1) Includes rental revenue for all retail properties owned by Realty Income at December 31, 2013, including revenue
from properties reclassified as discontinued operations of $279. Excludes revenue of $46,280 from non-retail
properties and $23 from properties owned by Crest.
68
Lease Expirations
The following table sets forth certain information regarding Realty Income's property portfolio regarding
the timing of the lease term expirations (excluding rights to extend a lease at the option of the tenant) on
our 3,807 net leased, single-tenant properties as of December 31, 2013 (dollars in thousands):
Total Portfolio
Initial Expirations(3)
Subsequent Expirations(4)
Rental
Revenue
for the
Quarter
Ended
Dec 31,
% of
Total
Rental
Number
of Leases
2013 (2) Revenue Expiring
Rental
Revenue
for the
Quarter
Ended
Dec 31,
% of
Total
Rental
Number
of Leases
Rental
Revenue
for the
Quarter
Ended
Dec 31,
% of
Total
Rental
2013 Revenue Expiring
2013 Revenue
Number
Approx.
of Leases
Leasable
Expiring (1) Sq. Feet
Year
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029 - 2043
157
174
200
177
278
193
110
189
224
355
140
288
231
443
283
365
1,116,500
961,500
1,214,900
2,038,400
3,621,900
3,017,500
3,404,600
5,314,200
7,270,400
6,133,200
2,105,200
3,734,800
3,396,200
4,177,700
5,758,000
$
4,005
4,111
4,618
6,058
11,276
10,496
8,844
13,616
14,508
19,731
7,016
16,633
12,133
14,591
15,911
7,951,300 38,832
2.0 %
2.0
2.3
3.0
5.6
5.1
4.4
6.7
7.2
9.7
3.5
8.3
6.0
7.2
7.8
19.2
$
1,960
56
1,808
67
2,807
121
3,052
46
7,920
162
9,599
161
8,468
99
13,105
181
14,273
216
19,076
342
7,016
140
16,510
283
12,049
228
14,551
441
15,858
281
358 38,652
1.0 %
0.9
1.4
1.5
3.9
4.7
4.2
6.4
7.1
9.4
3.5
8.2
6.0
7.2
7.8
19.1
101
107
79
131
116
32
11
8
8
13
-
5
3
2
2
7
$ 2,045
2,303
1,811
3,006
3,356
897
376
511
235
655
-
123
84
40
53
180
1.0 %
1.1
0.9
1.5
1.7
0.4
0.2
0.3
0.1
0.3
-
0.1
*
*
*
0.1
Totals
3,807
61,216,300 $ 202,379
100.0 %
3,182 $ 186,704
92.3 %
625
$ 15,675
7.7 %
* Less than 0.1%
(1) Excludes 19 multi-tenant properties and 70 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 $279 from properties reclassified as discontinued operations and excludes revenue of $2,705 from 19 multi-
tenant properties and from 70 vacant and unleased properties at December 31, 2013. Excludes revenue of $23 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.
69
Geographic Diversification
The following table sets forth certain state-by-state information regarding Realty Income's property
portfolio as of December 31, 2013 (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
Puerto Rico
Number of
Properties
104
2
110
36
161
69
22
16
279
209
--
13
155
100
35
76
45
75
9
32
82
103
155
96
122
2
30
22
18
62
24
81
129
7
200
112
24
147
3
127
11
156
393
13
6
127
38
12
39
3
4
Percent
Leased
97 %
100
96
94
99
99
95
100
99
97
--
100
100
98
97
99
98
97
100
100
96
98
100
97
98
50
100
100
100
98
100
95
99
100
98
100
100
99
100
98
100
97
98
100
100
97
100
100
95
100
100
Approximate
Leasable
Rental Revenue for
the Quarter Ended
Square Feet December 31, 2013 (1)
2,846
$
307
5,510
1,180
22,672
2,969
2,071
418
12,029
8,368
--
456
12,244
4,954
3,301
3,370
2,920
2,456
837
3,711
3,205
3,229
7,416
3,177
7,343
13
1,296
1,279
1,224
2,608
589
10,153
4,795
138
11,294
3,601
1,620
6,957
107
4,140
244
5,145
19,493
1,326
522
6,465
1,609
883
2,382
63
149
791,800
128,500
1,187,400
619,200
4,705,200
792,100
462,100
29,500
2,951,000
2,689,400
--
91,800
4,215,700
1,055,400
2,751,700
1,583,300
808,700
836,700
126,400
654,100
728,200
938,600
1,153,300
1,307,200
2,307,000
30,000
660,200
413,000
290,900
452,700
184,600
2,007,900
1,259,300
66,000
4,795,700
1,467,200
455,200
1,745,400
21,300
897,500
133,500
2,653,200
6,760,200
749,000
100,700
2,531,900
415,300
261,200
1,329,300
21,100
28,300
Percentage of
Rental
Revenue
1.4 %
0.1
2.7
0.6
11.1
1.4
1.0
0.2
5.9
4.1
--
0.2
6.0
2.4
1.6
1.6
1.4
1.2
0.4
1.8
1.6
1.6
3.6
1.5
3.6
*
0.6
0.6
0.6
1.3
0.3
5.0
2.3
0.1
5.5
1.8
0.8
3.4
*
2.0
0.1
2.5
9.5
0.6
0.3
3.2
0.8
0.4
1.2
*
0.1
Totals\Average
3,896
98 %
62,644,900
$
205,084
100.0 %
* Less than 0.1%
(1) Includes rental revenue for all properties owned by Realty Income at December 31, 2013, including revenue from
properties reclassified as discontinued operations of $279. Excludes revenue of $23 from properties owned by Crest.
70
REALTY INCOME CORPORATION AND SUBSIDIARIES
Forward-Looking Statements
This annual report on Form 10-K, including the documents incorporated by reference herein, 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; and
Future expenditures for development projects.
Future events and actual results, financial and otherwise, may differ materially from the results discussed
in the forward-looking statements. In particular, some of the factors that could cause actual results to
differ materially are:
Our continued qualification as a real estate investment trust;
General business and economic conditions;
Competition;
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 or which may occur in the future; 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.
71
REALTY INCOME CORPORATION AND SUBSIDIARIES
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
Realty Income, The Monthly Dividend Company®, is a publicly traded real estate company with the
primary business objective of generating dependable monthly cash dividends from a consistent and
predictable level of cash flow from operations. Our monthly dividends are supported by the cash flow
from our portfolio of properties leased to commercial tenants. We have in-house acquisition, leasing,
legal, credit research, real estate research, portfolio management and capital markets expertise. Over the
past 45 years, Realty Income and its predecessors have been acquiring and owning freestanding
commercial properties that generate rental revenue under long-term lease agreements.
Realty Income was founded in 1969, and in 1994 was listed upon the NYSE. We elected to be taxed as a
real estate investment trust, or REIT, requiring us to distribute dividends to our stockholders aggregating
at least 90% of our taxable income (excluding net capital gains).
We seek to increase distributions to stockholders and funds from operations, or FFO, per share through
both active portfolio management and the acquisition of additional properties.
At December 31, 2013, we owned a diversified portfolio:
Of 3,896 properties;
With an occupancy rate of 98.2%, or 3,826 properties leased and 70 properties available for lease;
Leased to 205 different commercial tenants doing business in 47 separate industries;
Located in 49 states and Puerto Rico;
With over 62.6 million square feet of leasable space; and
With an average leasable space per property of approximately 16,100 square feet, including
approximately 10,600 square feet per retail property.
Of the 3,896 properties in the portfolio, 3,876, or 99.5%, are single-tenant properties, and the remaining
are multi-tenant properties. At December 31, 2013, of the 3,876 single-tenant properties, 3,807 were
leased with a weighted average remaining lease term (excluding rights to extend a lease at the option of
the tenant) of approximately 10.8 years.
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. 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.
Our primary cash obligations, for the current year and subsequent years, are included in the “Table of
Obligations,” which is presented later in this section. We expect to fund our operating expenses and other
short-term liquidity requirements, including property acquisitions and development costs, payment of
principal and interest on our outstanding indebtedness, property improvements, re-leasing costs and cash
distributions to common and preferred stockholders, primarily through cash provided by operating
activities, borrowing on our $1.5 billion credit facility and periodically through public securities offerings.
72
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, 2013, our total outstanding borrowings of senior unsecured notes and bonds,
term loan, mortgages payable and credit facility borrowings were $4.18 billion, or approximately 33.2% of
our total market capitalization of $12.59 billion.
We define our total market capitalization at December 31, 2013 as the sum of:
Shares of our common stock outstanding of 207,485,073, plus total common units of 851,568,
multiplied by the closing sales price of our common stock on the NYSE of $37.33 per share on
December 31, 2013, or $7.78 billion;
Aggregate liquidation value (par value of $25.00 per share) of the Class E preferred stock of
$220.0 million;
Aggregate liquidation value (par value of $25.00 per share) of the Class F preferred stock of
$408.8 million;
Outstanding borrowings of $128.0 million on our credit facility;
Outstanding mortgages payable of $783.4 million, which includes net mortgage premiums of
$28.9 million;
Outstanding borrowings of $70.0 million on our term loan; and
Outstanding senior unsecured notes and bonds of $3.2 billion, excluding unamortized original
issuance discounts of $14.5 million.
Mortgage Debt
As of December 31, 2013, we had $754.5 million of mortgages payable, all of which were assumed in
connection with our property acquisitions. Included in this amount is $514.4 million of mortgages payable
assumed in connection with the ARCT acquisition. Additionally, at December 31, 2013, we had net
premiums totaling $28.9 million on these mortgages, of which $16.2 million is in connection with the
ARCT acquisition.
We expect to pay off the mortgages payable as soon as prepayment penalties have declined to a level
that will make it economically feasible to do so. We intend to continue to primarily identify property
acquisitions that are free from mortgage indebtedness. During 2013, we made $41.4 million of principal
payments, which includes $11.7 million to pay off one mortgage in August 2013 and $23.1 million to pay
off three mortgages in December 2013.
Term Loan
In January 2013, in conjunction with our acquisition of ARCT, we entered into a $70 million senior
unsecured term loan maturing in January 2018. Borrowing under the term loan bears interest at LIBOR,
plus 1.20%. In conjunction with this term loan, we also acquired an interest rate swap which essentially
fixes our per annum interest rate on the term loan at 2.15%.
$1.5 Billion Acquisition Credit Facility
In October 2013, we increased our unsecured acquisition credit facility from $1.0 billion to $1.5 billion.
The initial term of the credit facility expires in May 2016 and includes, at our election, a one-year
extension option. Under this credit facility, our current investment grade credit ratings provide for
financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 1.075% with a
facility commitment fee of 0.175%, for all-in drawn pricing of 1.25% over LIBOR. The borrowing rate is not
subject to an interest rate floor or ceiling. We also have other interest rate options available to us under
this credit facility. Our credit facility is unsecured and, accordingly, we have not pledged any assets as
collateral for this obligation.
73
At December 31, 2013, we had a borrowing capacity of $1.372 billion available on our credit facility
(subject to customary conditions to borrowing) and an outstanding balance of $128.0 million. The interest
rate on borrowings outstanding under our credit facility, at December 31, 2013, was 1.2% per annum.
We must comply with various financial and other covenants in our credit facility. At December 31, 2013,
we remain in compliance with these covenants. 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 regularly review our credit facility and may seek to extend or replace our credit
facility, to the extent we deem appropriate.
At February 12, 2014, we had an outstanding balance on our credit facility of $583.0 million.
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 the refinancing will enable us to issue
equity or debt securities upon acceptable terms.
Notes Outstanding
As of December 31, 2013, we had $3.2 billion of senior unsecured note and bond obligations, excluding
unamortized original issuance discounts of $14.5 million. All of our outstanding notes and bonds have
fixed interest rates. Interest on all of our senior note and bond obligations is paid semiannually.
In July 2013, we issued $750 million of 4.65% senior unsecured notes due August 2023, or the 2023
Notes. The price to the investors for the 2023 Notes was 99.775% of the principal amount for an effective
yield of 4.678% per annum. The total net proceeds of approximately $741.4 million from this offering was
used to repay all outstanding borrowings under our acquisition credit facility, and the remaining proceeds
were used for other general corporate purposes and working capital, including additional property
acquisitions.
In March 2013, we repaid the $100 million of outstanding 5.375% notes, plus accrued and unpaid
interest, using proceeds from our March 2013 common stock offering and 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, 2013, we had cash and cash equivalents totaling $10.3 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 next twelve months. We intend,
however, to use permanent or long-term capital to fund property acquisitions and to repay future
borrowings under our credit facility.
Acquisitions During 2013
During 2013, Realty Income invested $1.51 billion in 459 new properties and properties under
development or expansion (in addition to our acquisition of ARCT, which is discussed in more detail
below), with an initial weighted average contractual lease rate of 7.1%. The 459 new properties and
properties under development or expansion, are located in 40 states, will contain approximately
9.0 million leasable square feet, and are 100% leased with a weighted average lease term of 14.0 years.
The tenants occupying the new properties operate in 23 industries and the property types consist of
83.8% retail, 9.2% office, 4.9% industrial and distribution, and 2.1% manufacturing, based on rental
revenue. These investments are in addition to the $3.2 billion acquisition of 515 properties of American
Realty Capital Trust, Inc., or ARCT, which were added to our real estate portfolio during the first quarter of
2013. Our combined total investment in real estate assets during 2013 was $4.67 billion in 974 new
74
properties and properties under development or expansion. During 2013, none of our real estate
investments caused any one tenant to be 10% or more of our total assets at December 31, 2013.
Additionally, in September 2013, we purchased a property for $45.4 million in San Diego, California,
which will serve as our new corporate headquarters. We plan on relocating to this facility during the
second half of 2014.
In conjunction with our acquisition of ARCT, each outstanding share of ARCT common stock was
converted into the right to receive a combination of: (i) $0.35 in cash and (ii) 0.2874 shares of our
common stock, resulting in the issuance of a total of approximately 45.6 million shares of our common
stock to ARCT shareholders, valued at a per share amount of $44.04, which was the closing sale price of
our common stock on January 22, 2013. In connection with the closing of this acquisition, we terminated
and repaid the amounts then outstanding of approximately $552.9 million under ARCT’s revolving credit
facility and term loan. In connection with our acquisition of ARCT, we assumed approximately
$516.3 million of mortgages payable. We incurred merger costs of $13.0 million and $7.9 million,
respectively, in 2013 and 2012. The total merger costs were approximately $21 million.
The acquisition of ARCT provided benefits to Realty Income, including accretion to net earnings, growth
in the size of our real estate portfolio, diversification of industries and property type, and increase in the
percentage of investment grade tenants.
The 515 properties added to our real estate portfolio as a result of the ARCT acquisition, are located in 44
states and Puerto Rico, contain over 16.0 million leasable square feet and are 100% leased with a
weighted average lease term of 12.2 years. The 69 tenants, occupying the 515 properties acquired,
operate in 28 industries and the property types consist of 54.0% retail, 32.6% industrial and distribution,
and 13.4% office, based on rental revenue.
The estimated initial weighted average contractual lease rate for a property is generally computed as
estimated contractual net operating income, which, in the case of a net leased property, is equal to the
aggregate base rent under the lease for the first full year of each lease, divided by the total cost of the
property. Since it is possible that a tenant could default on the payment of contractual rent, we cannot
provide assurance that the actual return on the funds invested will remain at the percentages listed
above.
In the case of a property under development or expansion, the estimated initial weighted average
contractual lease rate is computed as follows: estimated net operating income (which is calculated by
multiplying the capitalization rate determined by the lease by our projected total investment in the
property, including land, construction and capitalized interest costs) for the first full year of each lease,
divided by such projected total investment in the property. Of the $4.67 billion we invested during 2013,
excluding the new corporate headquarters, $39.6 million was invested in 21 properties under
development or expansion, with an estimated initial weighted average contractual lease rate of 8.5%. We
may continue to pursue development or expansion opportunities under similar arrangements in the future.
John P. Case Appointed Chief Executive Officer (CEO)
In September 2013, we announced that our Board of Directors appointed John P. Case as CEO of the
company. Mr. Case, who had previously served as President and Chief Investment Officer, succeeded
Tom A. Lewis, who retired as our CEO. Mr. Lewis had been our CEO since 1997. Mr. Case is only the
third CEO in Realty Income’s 45-year history.
75
Portfolio Discussion
Leasing Results
At December 31, 2013, we had 70 properties available for lease out of 3,896 properties in our portfolio,
which represents a 98.2% occupancy rate. Since December 31, 2012, when we reported 84 properties
available for lease and a 97.2% occupancy rate, we:
Leased 27 properties;
Sold 19 properties available for lease; and
Have 32 new properties available for lease.
During 2013, 136 properties with expiring leases were leased to either existing or new tenants. The
annual rent on these leases was $16.1 million, as compared to the previous rent on these same
properties of $16.0 million. At December 31, 2013, our average annualized rental revenue per square
foot was approximately $13.21 per square foot on the 3,807 leased properties in our portfolio. At
December 31, 2013, we classified 12 properties with a carrying amount of $12.0 million as held for sale
on our balance sheet.
Investments in Existing Properties
In 2013, we capitalized costs of $8.5 million on existing properties in our portfolio, consisting of
$1.3 million for re-leasing costs and $7.2 million for building and tenant improvements. In 2012, we
capitalized costs of $6.6 million on existing properties in our portfolio, consisting of $1.62 million for re-
leasing costs and $4.93 million for building improvements.
As part of our re-leasing costs, we pay leasing commissions and sometimes provide tenant rent
concessions. Leasing commissions are paid based on the commercial real estate industry standard and
any rent concessions provided are minimal. We do not consider the collective impact of the leasing
commissions or tenant rent concessions to be material to our financial position or results of operations.
The majority of our building and tenant improvements are related to roof repairs, HVAC improvements,
and parking lot resurfacing and replacements. It is not customary for us to offer significant tenant
improvements on our properties as tenant incentives. The amounts of our capital expenditures can vary
significantly, depending on the rental market, credit worthiness, and the willingness of tenants to pay
higher rents over the terms of the leases.
Impact of Real Estate and Credit Markets
In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during
certain periods, the U.S. credit markets have experienced significant price volatility, dislocations and
liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the
commercial real estate and U.S. credit markets carefully and, if required, make decisions to adjust our
business strategy accordingly. See our discussion of "Risk Factors" in this annual report.
Increases in Monthly Dividends to Common Stockholders
We have continued our 45-year policy of paying monthly dividends. In addition, we increased the
dividend five times during 2013.
2013 Dividend increases
1st increase
2nd increase
3rd increase
4th increase
5th increase
Month
Paid
Jan 2013
Feb 2013
Apr 2013
Jul 2013
Oct 2013
Dividend
per share
Increase
per share
$ 0.1517500 $ 0.0003125
0.1809167 0.0291667
0.1812292 0.0003125
0.1815417 0.0003125
0.1818542 0.0003125
76
The dividends paid per share during 2013 as compared to 2012 increased 21.2%, which is the largest
annual increase in the company’s history. The 2013 dividends paid per share totaled $2.1474587 as
compared to $1.7716250 in 2012, an increase of $0.3758337.
In December 2013, we declared an increased dividend of $0.1821667 per share, which was paid in
January 2014. The increase in January 2014 was our 65th consecutive quarterly increase and the 74th
increase in the amount of the dividend since our listing on the NYSE in 1994. In January 2014 and
February 2014, we declared dividends of $0.1821667 per share, which will be paid in February 2014 and
March 2014, respectively.
The monthly dividend of $0.1821667 per share represents a current annualized dividend of $2.186 per
share, and an annualized dividend yield of approximately 5.9% based on the last reported sale price of
our common stock on the NYSE of $37.33 on December 31, 2013. Although we expect to continue our
policy of paying monthly dividends, we cannot guarantee that we will maintain our current level of
dividends, that we will continue our pattern of increasing dividends per share, or what our actual dividend
yield will be in any future period.
Universal Shelf Registration
In February 2013, we filed a shelf registration statement with the SEC, which is effective for a term of
three years and will expire in February 2016. This replaces our prior shelf registration statement. In
accordance with 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 (1) common stock, (2) preferred stock, (3) debt securities, (4)
depositary shares representing fractional interests in shares of preferred stock, (5) warrants to purchase
debt securities, common stock, preferred stock or depositary shares, and (6) 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.
Accelerated Stock Vesting
The Compensation Committee of our Board of Directors approved, effective July 1, 2013, the accelerated
vesting of each restricted stock award that had originally been granted with ten-year vesting to five years.
On July 1, 2013, 212,827 restricted shares vested as a result of this acceleration, resulting in additional
compensation expense of $3.7 million during 2013.
Issuance of Common Stock
In October 2013, we issued 9,775,000 shares of common stock at a price of $40.63 per share, including
1,275,000 shares purchased by the underwriters upon the exercise of their option to purchase additional
shares. After underwriting discounts and other estimated offering costs of $18.7 million, the net proceeds
of approximately $378.5 million were used to repay a portion of the borrowings under our acquisition
credit facility, which were used to fund property acquisitions.
In March 2013, we issued 17,250,000 shares of common stock at a price of $45.90 per share. After
underwriting discounts and other offering costs of $36.7 million, the net proceeds of $755.1 million were
used to redeem our 5.375% notes in March 2013 and repay borrowings under our acquisition credit
facility, which were used to fund property acquisitions, including our acquisition of ARCT.
In connection with our January 2013 acquisition of ARCT, we issued a total of 45,573,144 shares of our
common stock to ARCT shareholders and redeemed 208,709 shares of our common stock that were
previously held by ARCT.
77
Dividend Reinvestment and Stock Purchase Plan
In March 2011, we established a Dividend Reinvestment and Stock Purchase Plan, or the DRSPP, to
provide our common stockholders, as well as new investors, with a convenient and economical method of
purchasing our common stock and reinvesting their distributions. The DRSPP also allows our current
stockholders to buy additional shares of common stock by reinvesting all or a portion of their distributions.
The DRSPP authorizes up to 6,000,000 common shares to be issued. During 2013, we issued 1,449,139
shares and raised approximately $55.6 million under the DRSPP.
Noncontrolling Interests
As consideration for two separate acquisitions during 2013, partnership units of Tau Operating
Partnership, L.P. and Realty Income, L.P. were issued to third parties. These units (discussed in the
following paragraphs below) do not have voting rights, are entitled to monthly distributions equal to the
amount paid to our common stockholders, and are redeemable in cash or our common stock, at our
option and at a conversion ratio of one to one, subject to certain exceptions. As the general partner for
each of these partnerships, we have operating and financial control over these entities, consolidate them
in our financial statements, and record the partnership units held by third parties as noncontrolling
interests.
Issuance of Common and Preferred Partnership Units
In connection with our acquisition of ARCT in January 2013, we issued 317,022 common partnership
units and 6,750 preferred partnership units. These common units are entitled to monthly distributions
equivalent to the per common share amounts paid to the common stockholders of Realty Income. The
preferred units have a par value of $1,000, and are entitled to monthly payments at a rate of 2% per
annum, or $135,000 per year.
In June 2013, we issued 534,546 common partnership units of Realty Income, L.P. These common units
are entitled to monthly distributions equivalent to the per common share amount paid to the common
stockholders of Realty Income.
Credit Agency Ratings
The borrowing interest rates under our credit facility are based upon our ratings assigned by credit rating
agencies. We are currently assigned the following investment grade corporate credit ratings on our senior
unsecured notes and bonds: Fitch Ratings has assigned a rating of BBB+ with a “stable” outlook,
Moody’s Investors Service has assigned a rating of Baa1 with a “stable” outlook, and Standard & Poor’s
Ratings Group has assigned a rating of BBB+ with a “stable” outlook.
Based on our current ratings, the credit facility interest rate is LIBOR plus 1.075% with a facility
commitment fee of 0.175%, for all-in drawn pricing of 1.25% over LIBOR. The credit facility provides that
the interest rate can range between: (i) LIBOR plus 1.85% if our credit facility is lower than BBB-/Baa3
and (ii) LIBOR plus 1.00% 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 range from: (i) 0.45% for a rating lower than
BBB-/Baa3, and (ii) 0.15% for a credit rating of A-/A3 or higher.
We also issue senior debt securities and our credit ratings can impact the interest rates charged in those
transactions. In addition, 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.
78
Notes Outstanding
Our senior unsecured note and bond obligations consist of the following as of December 31, 2013, sorted
by maturity date (dollars in millions):
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
2.0% notes, issued in October 2012 and due in January 2018
6.75% notes, issued in September 2007 and due in August 2019
5.75% notes, issued in June 2010 and due in January 2021
3.25% notes, issued in October 2012 and due in October 2022
4.65% notes, issued in July 2013 and due in August 2023
5.875% bonds, $100 issued in March 2005 and $150 issued in
June 2011, both due in March 2035
Total principal amount
Unamortized original issuance discounts
$
$
150
275
175
350
550
250
450
750
250
3,200
(15 )
3,185
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. At
December 31, 2013, we remain in compliance with these covenants.
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 U.S. 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, 2013 are:
Note Covenants
Limitation on incurrence of total debt
Limitation on incurrence of secured debt
Debt service coverage (trailing 12 months)(1)
Maintenance of total unencumbered assets
Required
≤ 60% of adjusted assets
≤ 40% of adjusted assets
≥ 1.5 x
≥ 150% of unsecured debt
Actual
41.5%
7.8%
3.6 x
251.9%
(1) This covenant is calculated on a pro forma basis for the preceding four-quarter period on the assumption that: (i) the
incurrence of any Debt (as defined in the covenants) incurred by us since the first day of such four-quarter period and the
application of the proceeds therefrom (including to refinance other Debt since the first day of such four-quarter period), (ii) the
repayment or retirement of any of our Debt since the first day of such four-quarter period, and (iii) any acquisition or disposition
by us of any asset or group since the first day of such four-quarters had in each case occurred on January 1, 2013, and subject
to certain additional adjustments. Such pro forma ratio has been prepared on the basis required by that debt service covenant,
reflects various estimates and assumptions and is subject to other uncertainties, and therefore does not purport to reflect what
our actual debt service coverage ratio would have been had transactions referred to in clauses (i), (ii) and (iii) of the preceding
sentence occurred as of January 1, 2013, nor does it purport to reflect our debt service coverage ratio for any future period.
The following is our calculation of debt service coverage at December 31, 2013 (in thousands, for trailing twelve months):
Net income attributable to the Company
Plus: interest expense
Plus: provision for taxes
Plus: depreciation and amortization
Plus: provisions for impairment
Plus: pro forma adjustments
Less: gain on sales of investment properties
Income available for debt service, as defined
Total pro forma debt service charge
Debt service coverage ratio
$
$
$
245,564
174,007
1,808
308,394
3,028
59,625
(64,743 )
727,683
201,848
3.6
79
Fixed Charge Coverage Ratio
Fixed charge coverage ratio is calculated in exactly the same manner as the debt service coverage ratio,
except that preferred stock dividends are also added to the denominator. Similar to debt service
coverage ratio, 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 calculations of both
debt service and fixed charge coverage ratios may be different from the calculations used by other
companies and, therefore, comparability may be limited. The presentation of debt service and fixed
charge coverage ratios should not be considered as alternatives to any U.S. generally accepted
accounting principles, or GAAP, operating performance measures. Below is our calculation of fixed
charges at December 31, 2013 (in thousands, for trailing twelve months):
Income available for debt service, as defined
Pro forma debt service charge plus preferred stock dividends
Fixed charge coverage ratio
$
$
727,683
243,778
3.0
Table of Obligations
The following table summarizes the maturity of each of our obligations as of December 31, 2013 (dollars
in millions):
$
Year of
Maturity
2014
2015
2016
2017
2018
Thereafter
Credit
Facility (1)
-
$
-
128.0
-
-
-
$
Notes
and
Bonds (2)
-
150.0
275.0
175.0
350.0
2,250.0
$
Mortgages
Term
Loan Payable (3)
49.9
125.5
248.5
133.0
15.0
182.6
-
-
-
-
70.0
-
Interest (4)
$ 199.5
193.6
167.9
145.2
127.0
539.2
$
Ground
Leases
Paid by
Our
Ground
Leases
Paid by
Realty
Income (5) Tenants (6) Other (7)
25.4
-
-
-
-
-
12.6
12.7
12.7
12.8
12.8
144.5
1.0
1.0
1.0
1.0
1.0
9.4
$
$
Totals
$ 288.4
482.8
833.1
467.0
575.8
3,125.7
Totals
$ 128.0 $ 3,200.0 $ 70.0 $
754.5 $ 1,372.4 $
14.4 $ 208.1 $
25.4 $ 5,772.8
(1) The initial term of the credit facility expires in May 2016 and includes, at our option, a one-year extension.
(2) Excludes non-cash original issuance discounts recorded on the notes payable. The unamortized balance of the original
issuance discounts at December 31, 2013, is $14.5 million.
(3) Excludes non-cash net premiums recorded on the mortgages payable. The unamortized balance of these net premiums at
December 31, 2013, is $28.9 million.
(4) Interest on the term loan, notes, bonds, mortgages payable, and credit facility has been calculated based on outstanding
balances as of December 31, 2013 through their respective maturity dates.
(5) Realty Income currently pays the ground lessors directly for the rent under the ground leases.
(6) Our tenants, who are generally sub-tenants under 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.
(7) “Other” consists of $23.7 million of commitments under construction contracts and $1.7 million of contingent payments for
tenant improvements and leasing costs.
Our credit facility and notes payable obligations are unsecured. Accordingly, we have not pledged any
assets as collateral for these obligations.
Preferred Stock and Preferred Units Outstanding
In 2006, we issued 8.8 million shares of Class E preferred stock. Beginning December 7, 2011, shares of
Class E preferred stock were redeemable at our option for $25.00 per share, plus any accrued and
unpaid dividends. Dividends on shares of Class E preferred stock are paid monthly in arrears.
In February 2012, we issued 14.95 million shares of our Class F preferred stock at $25.00 per share. In
April 2012, we issued an additional 1.4 million shares of Class F preferred stock at $25.2863 per share.
Beginning February 15, 2017, shares of our Class F preferred stock are redeemable at our option for
$25.00 per share, plus any accrued and unpaid dividends. Dividends on the shares of our Class F
preferred stock are paid monthly in arrears.
80
We are current on our obligations to pay dividends on our Class E and Class F preferred stock.
As part of our acquisition of ARCT in January 2013, we issued 6,750 partnership units. Payments on
these preferred units are made monthly in arrears at rate of 2% per annum, or $135,000 per year, and are
included in interest expense.
No Unconsolidated Investments
We have no unconsolidated investments, nor do we engage in trading activities involving energy or
commodity contracts.
RESULTS OF OPERATIONS
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with U.S. generally accepted
accounting principles, or GAAP, and 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 to 35 years for buildings and 4 to 15 years for improvements. 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 to 35 years is an appropriate estimate of useful life.
Management must make significant assumptions in determining the fair value of assets acquired and
liabilities assumed. When acquiring a property for investment purposes, we typically allocate the fair
value of real estate acquired 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 or below-market lease value of in-place leases, the value of in-place leases, and
tenant relationships, as applicable. In an acquisition of multiple properties, we must also allocate the
purchase price among the properties. The allocation of the purchase price is based on our assessment
of estimated fair value and is often based upon the expected future cash flows of the property and various
characteristics of the markets where the property is located. In addition, any assumed mortgages
receivable or payable and any assumed or issued noncontrolling interests are recorded at their estimated
fair values. The estimated fair values of our mortgages payable have been calculated by discounting the
future cash flows using applicable interest rates that have been adjusted for factors, such as industry
type, tenant investment grade, maturity date, and comparable borrowings for similar assets. The initial
allocation of the purchase price is based on management’s preliminary assessment, which may differ
when final information becomes available. Subsequent adjustments made to the initial purchase price
allocation are made within the allocation period, which typically does not exceed one year. The use of
different assumptions in the allocation of the purchase price of the acquired properties and liabilities
assumed could affect the timing of recognition of the related revenue and expenses.
81
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, estimated holding periods, 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. Our strategy of primarily holding properties, long-term, directly decreases the likelihood of their
carrying values not being recoverable, thus requiring the recognition of an impairment. However, if our
strategy, or one or more of the above assumptions were to change in the future, an impairment may need
to be recognized. If events should occur that require us to reduce the carrying value of our real estate by
recording provisions for impairment, they 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, 2013,
2012 and 2011.
Rental Revenue
Rental revenue was $747.6 million for 2013 versus $466.5 million for 2012, an increase of $281.1 million,
or 60.3%. Rental revenue was $401.0 million in 2011. The increase in rental revenue in 2013 compared
to 2012 is primarily attributable to:
The 958 properties (25.0 million square feet) acquired by Realty Income in 2013, which
generated $213.1 million of rent in 2013;
The 423 properties (10.5 million square feet) acquired by Realty Income in 2012, which
generated $81.1 million of rent in 2013 compared to $22.7 million in 2012, an increase of
$58.4 million;
Same store rents generated on 2,338 properties (25.3 million square feet) during the entire years
of 2013 and 2012, increased by $6.2 million, or 1.4%, to $435.2 million from $429.0 million;
A net increase of $1.8 million relating to the aggregate of (i) rental revenue from properties
(132 properties comprising 1.1 million square feet) that were available for lease during part of
2013 or 2012, (ii) rental revenue for six properties under development, (iii) rental revenue for 29
properties re-leased primarily with rent-free periods, and (iv) lease termination settlements which,
in aggregate, totaled $12.56 million in 2013 compared to $10.74 million in 2012; and
A net increase in straight-line rent and other non-cash adjustments to rent of $1.7 million in 2013
as compared to 2012.
For purposes of determining the same store rent property pool, we include all properties that were owned
for the entire year-to-date period, for both the current and prior year except for properties during the
current or prior year that; (i) were available for lease at any time, (ii) were under development, (iii) we
have made an additional investment in, (iv) were involved in eminent domain and rent was reduced, and
(v) were re-leased with rent-free periods. Each of the exclusions from the same store pool is separately
addressed within the applicable sentences above explaining the changes in rental revenue for the period.
Of the 3,896 properties in the portfolio at December 31, 2013, 3,876, or 99.5%, are single-tenant
properties and the remaining twenty are multi-tenant properties. Of the 3,876 single-tenant properties,
3,807, or 98.2%, were net leased with a weighted average remaining lease term (excluding rights to
extend a lease at the option of the tenant) of approximately 10.8 years at December 31, 2013. Of our
3,807 leased single-tenant properties, 3,419 or 89.8% were under leases that provide for increases in
rents through:
Primarily base rent increases tied to a consumer price index (typically subject to ceilings);
Percentage rent based on a percentage of the tenants' gross sales;
Fixed increases; or
A combination of two or more of the above rent provisions.
82
Percentage rent, which is included in rental revenue, was $2.8 million in 2013, $1.9 million in 2012 and
$1.3 million in 2011 (excluding percentage rent reclassified to discontinued operations of $115,000 in
2013, $163,000 in 2012 and $70,000 in 2011). Percentage rent in 2013 was less than 1% of rental
revenue and we anticipate percentage rent to be less than 1% of rental revenue in 2014.
Our portfolio of real estate, leased primarily to regional and national commercial tenants under net leases,
continues to perform well and provides dependable lease revenue supporting the payment of monthly
dividends to our stockholders. At December 31, 2013, our portfolio of 3,896 properties was 98.2% leased
with 70 properties available for lease as compared to 97.2% occupancy, or 84 properties available for
lease at December 31, 2012. It has been our experience that approximately 2% to 4% of our property
portfolio will be unleased at any given time; however, it is possible that the number of properties available
for lease could exceed these levels in the future.
Tenant Reimbursements
Contractually obligated reimbursements from tenants for recoverable real estate taxes and operating
expenses were $24.9 million in 2013, compared to $14.6 million in 2012 and $9.8 million in 2011. The
increase in tenant reimbursements from 2012 to 2013 is primarily due to our 2012 and 2013 acquisitions,
including our acquisition of ARCT. Our tenant reimbursements match our reimbursable property
expenses for any given period.
Other Revenue
Other revenue, which comprises property-related revenue not included in rental revenue or tenant
reimbursements, was $5.9 million in 2013, compared to $1.7 million in 2012 and $1.6 million in 2011.
Depreciation and Amortization
Depreciation and amortization was $306.6 million in 2013, compared to $147.3 million in 2012 and
$116.5 million in 2011. The increases in depreciation and amortization in 2013 and 2012 were primarily
due to the acquisition of properties in 2013 and 2012, including the 515 properties acquired as part of our
acquisition of ARCT, which was partially offset by property sales in those same years. As discussed in
the sections entitled "Funds from Operations Available to Common Stockholders (FFO) and Normalized
Funds from Operations Available to Common Stockholders (Normalized FFO)" and “Adjusted Funds from
Operations Available to Common Stockholders (AFFO),” depreciation and amortization is a non-cash item
that is added back to net income available to common stockholders for our calculation of FFO, normalized
FFO and AFFO.
Interest Expense
Interest expense was $180.9 million in 2013, compared to $122.5 million in 2012 and $108.3 million in
2011. The increase in interest expense from 2012 to 2013 was primarily due to an increase in borrowings
attributable to the issuance in October 2012 of our 2.00% senior unsecured notes due January 2018, the
issuance in October 2012 of our 3.25% senior unsecured notes due October 2022, the January 2013
issuance of our $70 million senior unsecured term loan, the July 2013 issuance of our 4.65% senior
unsecured notes due August 2023, and an increase in mortgages payable and higher credit facility
borrowings, which were partially offset by lower average interest rates and the repayment of our 5.375%
senior unsecured notes in March 2013.
83
The following is a summary of the components of our interest expense (dollars in thousands):
Interest on our credit facility, term loan, notes and mortgages $
Interest included in discontinued operations
Credit facility commitment fees
Amortization of credit facility origination costs and
deferred financing costs
(Gain) loss on interest rate swap
Amortization of net mortgage premiums
Interest capitalized
Interest expense
2013
182,974
(526 )
1,930
7,434
(878 )
(9,481 )
(537 )
$
2012
117,401
(601 )
1,684
$
2011
104,452
(785 )
1,508
5,165
56
(665 )
(498 )
3,757
(4 )
(189 )
(438 )
$
180,916
$
122,542
$
108,301
Credit facility, term loan, mortgages and notes
Average outstanding balances (dollars in thousands)
Average interest rates
2013
3,892,089
$
2012
2,144,690
$
2011
1,754,935
$
4.67 %
5.47 %
5.95 %
At December 31, 2013, the weighted average interest rate on our:
Notes and bonds payable of $3.2 billion (excluding unamortized original issuance discounts of
$14.5 million) was 4.9%;
Mortgages payable of $754.5 million (excluding net premiums totaling $28.9 million on these
mortgages) was 5.4%;
Credit facility outstanding borrowings of $128.0 million was 1.2%;
Term loan outstanding borrowings of $70.0 million was 1.4%; and
Combined outstanding notes, bonds, mortgages and credit facility borrowings of $4.2 billion was
4.5%.
General and Administrative Expenses
General and administrative expenses increased by $18.8 million to $56.8 million in 2013, as compared to
$38.0 million in 2012. General and administrative expenses were $31.0 million in 2011. Included in
general and administrative expenses are acquisition transaction costs (excluding ARCT merger-related
costs) of $2.1 million for 2013, $2.4 million for 2012 and $1.5 million for 2011. Even though general and
administrative expenses increased during 2013, general and administrative expenses as a percentage of
total revenue decreased. The increase in expense was primarily due to increases in employee costs,
including the accelerated vesting of restricted shares in July 2013 which resulted in additional
compensation expense of $3.7 million, and higher costs as a result of our integration of ARCT. In January
2014, we had 116 employees, as compared to 97 employees in January 2013 and 83 employees in
January 2012.
Dollars in thousands
General and administrative expenses
Total revenue, including discontinued operations(1)
General and administrative expenses as a
percentage of total revenue
$
2013
56,827
759,889
$
2012
37,998
483,671
$
2011
30,954
422,224
7.5 %
7.9 %
7.3 %
(1) Excludes all tenant reimbursements revenue, as well as gain on sales and Crest Net revenue included in discontinued
operations.
Property Expenses (including reimbursable)
Property expenses consist of costs associated with unleased properties, non-net leased properties and
general portfolio expenses, as well as contractually obligated reimbursements from tenants for
recoverable real estate taxes and operating expenses. Expenses related to unleased properties and non-
net leased properties include, but are not limited to, property taxes, maintenance, insurance, utilities,
property inspections, bad debt expense and legal fees. General portfolio costs include, but are not limited
to, insurance, legal, property inspections, and title search fees. At December 31, 2013, 70 properties
were available for lease, as compared to 84 at December 31, 2012 and 87 at December 31, 2011.
84
Property expenses were $38.8 million (including $24.9 million reimbursable) in 2013, $21.3 million
(including $14.6 million reimbursable) in 2012 and $15.5 million (including $9.8 million reimbursable) in
2011. The increase in property expenses in 2013 is primarily attributable to increased portfolio size,
higher maintenance and utilities, insurance costs, property taxes, and ground rent expenses as a result of
our acquisition of ARCT, along with higher contractually obligated reimbursements primarily due to our
2012 and 2013 acquisitions.
Income Taxes
Income taxes were $2.7 million in 2013, as compared to $1.4 million in 2012 and $1.5 million in
2011. These amounts are for city and state income and franchise taxes paid by Realty Income and its
subsidiaries.
Merger-Related Costs
Merger-related costs include, but are not limited to, advisor fees, legal fees, accounting fees, printing fees
and transfer taxes related to our acquisition of ARCT. Merger-related costs were $13.0 million in 2013
and $7.9 million in 2012. On a diluted per common share basis, these expenses represented $0.07 for
2013 and $0.06 for 2012.
Discontinued Operations
Operations from ten Realty Income investment properties, two Crest properties classified as held for sale
at December 31, 2013, and properties previously sold, have been classified as discontinued operations.
The following is a summary of income from discontinued operations on our consolidated statements of
income (dollars in thousands):
Income from discontinued operations
2013
2012
2011
Gain on sales of investment properties
Rental revenue
Tenant reimbursements
Other revenue
Depreciation and amortization
Property expenses (including reimbursable)
Provisions for impairment
Crest's income from discontinued operations
Income from discontinued operations
Per common share, basic and diluted
$
$
$
$
64,743
6,040
146
418
(1,761 )
(916 )
(2,738 )
1,171
$
9,873
15,161
379
282
(3,916 )
(2,529 )
(1,500 )
683
5,193
19,546
370
94
(5,568 )
(2,518 )
(395 )
688
67,103
$
18,433
$
17,410
0.35
$
0.14
$
0.14
Crest’s Assets and Property Sales
At December 31, 2013, Crest had an inventory of three properties, one of which was classified as held for
investment. In addition to the three properties, Crest also held notes receivable of $18.7 million at
December 31, 2013 and $18.9 million at December 31, 2012.
During 2013, Crest did not acquire any properties. However, Crest sold one property in 2013 for
$597,000, and recorded an impairment of $308,000 upon the sale of this property. During 2012, Crest
acquired one property for $890,000, but did not sell any properties. During 2011, Crest did not buy or sell
any properties.
Gain on Sales of Investment Properties by Realty Income
During 2013, we sold 75 investment properties for $134.2 million, which resulted in a gain of $64.7
million. The results of operations for these properties have been reclassified as discontinued operations.
During 2012, we sold 44 investment properties for $50.6 million, which resulted in a gain of $9.9 million.
The results of operations for these properties have been reclassified as discontinued operations.
85
During 2011, we sold 26 investment properties for $22.0 million, which resulted in a gain of $5.2 million.
The results of operations for these properties have been reclassified as discontinued operations.
Additionally, we sold excess real estate from five properties for $2.1 million, which resulted in a gain of
$540,000. This gain is included in other revenue on our consolidated statement of income for 2011,
because this excess real estate was associated with properties that continue 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, 2013, we classified real estate with a carrying amount of $12.0 million as held for sale
on our balance sheet. In 2014, we intend to continue our active disposition efforts to further enhance our
real estate portfolio and anticipate approximately $50 million in property sales for all of 2014. 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 at our estimated
values or be able to invest the property sale proceeds in new properties.
Provisions for Impairment on Real Estate Acquired for Resale by Crest
During 2013, Crest recorded a provision for impairment of $308,000 for one property sold during the year.
During 2012 and 2011, Crest did not record any provisions for impairment.
Provisions for Impairment on Realty Income Investment Properties
In 2013, Realty Income recorded total provisions for impairment of $3.0 million. Provisions for impairment
of $2.7 million are included in income from discontinued operations on seven sold properties and one
property classified as held for sale. Additionally, during 2013, Realty Income recorded provisions for
impairment of $290,000 on one property held for investment in the automotive service industry. This
provision for impairment is included in income from continuing operations.
In 2012, Realty Income recorded total provisions for impairment of $5.1 million. Provisions for impairment
of $1.5 million are included in income from discontinued operations on six properties. Additionally, during
2012, Realty Income recorded provisions for impairment of $3.6 million on four properties held for
investment at December 31, 2012. These provisions for impairment are included in income from
continuing operations.
During 2011, Realty Income recorded total provisions for impairment of $405,000 on four properties.
These provisions for impairment are included in income from discontinued operations, except for $10,000
which is included in income from continuing operations.
Preferred Stock Dividends
Preferred stock dividends totaled $41.9 million in 2013, $40.9 million in 2012 and $24.3 million in 2011.
Excess of Redemption Value over Carrying Value of Preferred Shares Redeemed
When we redeemed our Class D preferred stock in March 2012, we incurred a charge of $3.7 million for
the excess of redemption value over the carrying value. This charge, representing the Class D preferred
stock original issuance cost that was paid in 2004, was recorded as a reduction to net income available to
common stockholders when the shares were redeemed during the first quarter of 2012. On a diluted per
common share basis, this charge was $0.03.
86
Net Income Available to Common Stockholders
Net income available to common stockholders was $203.6 million in 2013, an increase of $89.1 million as
compared to $114.5 million in 2012. Net income available to common stockholders in 2011 was
$132.8 million. Net income available to common stockholders in 2013 includes $13.0 million of merger-
related costs for the acquisition of ARCT, which represents $0.07 on a diluted per common share basis,
and $3.7 million for accelerated vesting of restricted shares that occurred in July 2013 from ten-year
vesting to five years, which represents $0.02 on a diluted per common share basis. Net income available
to common stockholders in 2012 includes $7.9 million of merger-related costs related to the acquisition of
ARCT, which represents $0.06 on a diluted per common share basis, and a $3.7 million charge for the
excess of redemption value over carrying value of the Class D preferred shares, which represents $0.03
on a diluted per common share basis.
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.
Gains from the sale of investment properties during 2013 were $64.7 million, as compared to gains from
the sale of investment properties of $9.9 million during 2012 and a $5.7 million gain from the sale of
properties during 2011.
87
FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (FFO) AND
NORMALIZED FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS
(NORMALIZED FFO)
FFO for 2013 increased by $188.1 million, or 72.1%, to $449.0 million, as compared to $260.9 million in
2012 and $249.4 million in 2011. FFO for 2013 includes $13.0 million for merger-related costs related to
our acquisition of ARCT, which represents $0.07 on a diluted per common share basis, and $3.7 million
for accelerated vesting of restricted shares that occurred in July 2013 from ten-year vesting to five years,
which represents $0.02 on a diluted per common share basis. FFO for 2012 includes $7.9 million of
merger-related costs, which represents $0.06 on a diluted per common share basis, and a $3.7 million
charge associated with the Class D preferred stock redemption in March 2012, which represents $0.03 on
a diluted per common share basis.
We define normalized FFO as FFO excluding the merger-related costs for our 2013 acquisition of ARCT.
Normalized FFO for 2013 increased by $193.2 million, or 71.9%, to $462.0 million, as compared to
$268.8 million in 2012 and $249.4 million in 2011.
The following is a reconciliation of net income available to common stockholders (which we believe is the
most comparable GAAP measure) to FFO and normalized 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):
Net income available to common stockholders
Depreciation and amortization:
Continuing operations
Discontinued operations
Depreciation allocated to noncontrolling interest
Depreciation of furniture, fixtures and equipment
Provisions for impairment on investment properties
Gain on sale of investment properties:
continuing operations
discontinued operations
FFO available to common stockholders
Merger-related costs
2013
2012
2011
$
203,634
$
114,538
$
132,779
306,577
1,818
(1,009 )
(288 )
3,028
-
(64,743 )
147,323
3,984
-
(249 )
5,139
-
(9,873 )
449,017
260,862
13,013
7,899
116,546
5,633
-
(238 )
405
(540 )
(5,193 )
249,392
-
Normalized FFO available to common stockholders
$
462,030 $
268,761 $
249,392
FFO per common share:
Basic
Diluted
Normalized FFO per common share,
Basic
Diluted
Distributions paid to common stockholders
Normalized FFO in excess of distributions paid to
common stockholders
Weighted average number of common shares
used for computation per share:
Basic
Diluted
88
$
$
$
$
$
$
2.34
2.34
$
$
2.41
2.41
$
$
1.96
1.96
2.02
2.02
$
$
$
$
1.98
1.98
1.98
1.98
409,222
$
236,348
$
219,297
52,808
$
32,413
$
30,095
191,754,857
132,817,472
126,142,696
191,781,622
132,884,933
126,189,399
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, plus impairments of depreciable real estate assets, reduced by gains
on the sale of investment properties and extraordinary items. We define normalized FFO, a non-GAAP
measure, as FFO excluding the merger-related costs for our 2013 acquisition of ARCT.
We consider FFO and normalized FFO to be appropriate supplemental measures of a REIT’s operating
performance as they are based on a net income analysis of property portfolio performance that adds back
items such as depreciation and impairments for FFO, and adds back merger-related costs, for normalized
FFO. 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.
89
ADJUSTED FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (AFFO)
AFFO for 2013 increased by $188.9 million, or 68.9%, to $463.1 million, as compared to $274.2 million in
2012 and $253.4 million in 2011. We consider AFFO to be an appropriate supplemental measure of our
performance. Most companies in our industry use a similar measurement, but they may use the term
"CAD" (for Cash Available for Distribution), "FAD" (for Funds Available for Distribution), or other terms.
The following is a reconciliation of net income available to common stockholders (which we believe is the
most comparable GAAP measure) to FFO, normalized 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
Merger-related costs
Normalized FFO available to common stockholders
Provisions for impairment on Crest properties
Amortization of share-based compensation
Amortization of deferred financing costs(2)
Excess of redemption value over carrying value
of Class D preferred share redemption
Amortization of net mortgage premiums
(Gain) loss on interest rate swaps
Capitalized leasing costs and commissions
Capitalized building improvements
Straight-line rent
Amortization of above and below-market leases
2013
2012
2011
$
203,634
$
245,383
114,538
$
146,324
449,017
260,862
13,013
7,899
462,030
308
20,785
4,436
-
(9,481 )
(878 )
(1,280 )
(7,227 )
(13,742 )
8,188
268,761
-
10,001
2,786
3,696
(665 )
56
(1,619 )
(4,935 )
(5,674 )
1,776
132,779
116,613
249,392
-
249,392
-
7,873
2,074
-
(189 )
(4 )
(1,722 )
(2,450 )
(2,681 )
1,079
Total AFFO available to common stockholders
$
463,139 $
274,183 $
253,372
AFFO per common share, basic and diluted:
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
$
$
$
$
2.42
2.41
409,222
$
$
$
2.06
2.06
236,348
$
$
$
2.01
2.01
219,297
53,917
$
37,835
$
34,075
191,754,857
132,817,472
126,142,696
191,781,622
132,884,933
126,189,399
(1) See reconciling items for FFO presented under "Funds from Operations Available to Common Stockholders (FFO)
and Normalized Funds from Operations Available to Common Stockholders (Normalized FFO)."
(2) Includes the amortization of costs incurred and capitalized when our notes were issued in March 2003, November
2003, March 2005, September 2005, September 2006, September 2007, June 2010, June 2011, October 2012, and
July 2013. Additionally, this includes the amortization of deferred financing costs incurred and capitalized in
connection with our assumption of the mortgages payable and the issuance of our term loan. The deferred financing
costs are being amortized over the lives of the respective mortgages and term loan. No costs associated with our
credit facility agreements or annual fees paid to credit rating agencies have been included.
90
We believe the non-GAAP financial measure AFFO provides useful information to investors because it is
a widely accepted industry measure of the operating performance of real estate companies that is used
by industry analysts and investors who look at and compare those companies. In particular, AFFO
provides an additional measure by which to compare the operating performance of different REITs
without having to account for differing depreciation assumptions and other unique revenue and expense
items which are not pertinent to the measurement of the particular company’s on-going operating
performance. Therefore, we believe that AFFO is an appropriate supplemental performance metric, and
that the most appropriate GAAP performance metric to which AFFO should be reconciled is net income
available to common stockholders.
Presentation of the information regarding FFO, normalized 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, normalized FFO and AFFO in the same way, so comparisons with other REITs may
not be meaningful. Furthermore, FFO, normalized FFO and AFFO are not necessarily indicative of cash
flow available to fund cash needs and should not be considered as alternatives to net income as an
indication of our performance. FFO, normalized FFO and AFFO should not be considered as alternatives
to reviewing our cash flows from operating, investing, and financing activities. In addition, FFO,
normalized FFO and AFFO should not be considered as measures of liquidity, of our ability to make cash
distributions, or of our ability to pay interest payments.
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 3,896 properties in our portfolio, approximately 97.7% or 3,807 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
As of December 31, 2013, the impact of recent accounting pronouncements on our business is not
considered to be material.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate changes primarily as a result of our credit facility, term loan, 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.
In order to mitigate and manage the effects of interest rate risks on our operations, we may utilize a
variety of financial instruments, including interest rate swaps and caps. The use of these types of
instruments to hedge our exposure to changes in interest rates carries additional risks, including
counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and
significant changes in interest rates will cause a significant loss of basis in the contract. To limit
counterparty credit risk we will seek to enter into such agreements with major financial institutions with
favorable credit ratings. There can be no assurance that we will be able to adequately protect against the
foregoing risks or realize an economic benefit that exceeds the related amounts incurred in connection
91
with engaging in such hedging activities. 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 rate debt as of December 31, 2013. 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
2014
2015
2016
2017
2018
Thereafter
Fixed rate
$
debt
48.2
249.9
521.2
281.8
364.8
2,425.3
Weighted average
interest rate on
fixed rate debt
6.43 %
5.42 %
5.39 %
5.68 %
2.15 %
5.18 %
Variable rate
Weighted average
interest rate on
$
debt variable rate debt
4.83 %
4.68 %
1.31 %
5.05 %
1.37 %
2.52 %
1.7
25.6
130.3
26.2
70.2
7.3
Totals (1)
$ 3,891.2
4.99 %
$
261.3
2.09 %
Fair Value (2)
(1) Excludes net premiums recorded on mortgages payable and original issuance discounts recorded on notes
$ 4,057.2
261.5
$
payable. At December 31, 2013, the unamortized balance of net premiums on mortgages payable is $28.9 million,
and the unamortized balance of original issuance discounts on notes payable is $14.5 million.
(2) We base the estimated fair value of the fixed rate senior notes at December 31, 2013 on the indicative market
prices and recent trading activity of our notes payable. We base the estimated fair value of our fixed rate and
variable rate mortgages at December 31, 2013 on the relevant Treasury yield curve, plus an applicable credit-
adjusted spread. We believe that the carrying value of the credit facility balance and term loan balance
reasonably approximate their estimated fair values at December 31, 2013.
The table incorporates only those exposures that exist as of December 31, 2013. 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. All of our mortgages payable have fixed
interest rates, except three with a total value of $63.3 million, excluding net premiums, at December 31,
2013. Interest on our credit facility and term loan balance is variable. However, the variable interest rate
feature on our term loan has been mitigated by an interest rate swap agreement. Based on our credit
facility balance of $128.0 million at December 31, 2013, a 1% change in interest rates would change our
interest costs by $1.3 million per year.
92
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,
Total assets (book value)
Cash and cash equivalents
Total debt
Total liabilities
Total 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 dividends
Excess of redemption value over carrying value
of preferred shares redeemed
Net income available to common stockholders
Cash distributions paid to common stockholders
Basic and diluted net income per common share
Cash distributions paid per common share
Cash distributions declared per common share
Basic weighted average number of common
2013
$ 9,924,441
10,257
4,166,840
4,503,083
5,421,358
518,906
5,009
778,375
179,180
67,103
246,283
(41,930 )
2012
$ 5,429,348
5,248
2,869,853
3,016,554
2,412,794
326,469
1,083
482,847
140,719
18,433
159,152
(40,918 )
2011
$ 4,404,492
4,165
2,040,284
2,149,638
2,254,854
298,952
(13,442 )
412,360
139,622
17,410
157,032
(24,253 )
2010
$ 3,531,269
17,607
1,595,679
1,684,304
1,846,965
243,368
7,581
333,386
111,422
19,362
130,784
(24,253) )
2009
$ 2,911,562
10,026
1,351,375
1,423,553
1,488,009
226,707
(36,789) )
311,194
107,736
23,391
131,127
(24,253 )
-
203,634
409,222
1.06
2.147459
2.177875
(3,696 )
114,538
236,348
0.86
1.771625
1.777875
-
132,779
219,297
1.05
1.736625
1.737875
-
106,531
182,500
1.01
1.721625
1.722875
-
106,874
178,008
1.03
1.706625
1.707875
shares outstanding
191,754,857
132,817,472
126,142,696
105,869,637
103,577,507
Diluted weighted average number of common
shares outstanding
191,781,622
132,884,933
126,189,399
105,942,721
103,581,053
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.
93
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, 2013, 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 (1992)" 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 13, 2014 by,
John P. Case, Chief Executive Officer
Paul M. Meurer, Chief Financial Officer, Executive Vice President and Treasurer
94
Changes in Internal Controls
There were no changes to our internal control over financial reporting that occurred during the quarter
ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. As of December 31, 2013, 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
John Case, Realty Income’s Chief Executive Officer, certified to the NYSE in 2013, 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, 2013, the certifications by
John Case and Paul M. Meurer, Realty Income’s Chief Executive Officer and Chief Financial Officer,
respectively, required under Section 302 of the Sarbanes-Oxley Act.
95
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.
2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Price Per Share
of Common Stock
High
Low
$
$
46.63
55.48
46.01
43.20
39.03
41.89
44.17
41.70
40.51
39.84
38.41
36.58
34.31
36.88
40.35
37.35
$
$
$
$
$
Distributions
Declared (1)
0.5430626
0.5440001
0.5449376
0.5458751
2.1778754
0.4368125
0.4377500
0.4486875
0.4546250
Total
(1) Common stock cash distributions are declared monthly by us based on financial results for the prior months. At
December 31, 2013, a distribution of $0.1821667 per common share had been declared and was paid in January 2014.
1.7778750
$
There were 9,741 registered holders of record of our common stock as of December 31, 2013. We
estimate that our total number of shareholders is over 165,000 when we include both registered and
beneficial holders of our common stock.
During the fourth quarter of 2013, 16,780 shares of stock, at a price of $39.76, and 48,494 shares of
stock, at a price of $37.33, were withheld for state and federal payroll taxes on the vesting of employee
stock awards, as permitted under the 2012 Incentive Award Plan of Realty Income Corporation.
Total Return Performance
275
250
225
200
175
150
125
100
e
u
l
a
V
x
e
d
n
I
Realty Income Corporation
Russell 2000
Realty Income Peer Group Index
SNL Triplenet REIT Index
75
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
Index
Realty Income Corporation
Russell 2000
Realty Income Peer Group*
SNL Triplenet REIT Index
12/31/08
100.00
100.00
100.00
100.00
Period Ending
12/31/09
120.89
127.17
131.90
134.18
12/31/10
168.40
161.32
177.66
168.83
12/31/11
181.07
154.59
191.51
174.57
12/31/12
217.87
179.86
220.46
209.37
12/31/13
212.82
249.69
218.28
212.59
* Realty Income Peer Group consists of fifteen companies with an implied market capitalization between $3.8 billion and $18.9 billion as of September 30, 2013.
96
MISSION
We are The Monthly Dividend Company®. Over the past 45 years we
have paid our shareholders over $2.7 billion in monthly dividends
and we have increased dividends 74 times since our listing on the
New York Stock Exchange in 1994 (NYSE “O”). We are committed
to continuing to operate your company in a manner that supports
the ongoing payment of dividends that increase over time.
COMPANY DESCRIPTION
We have been acquiring freestanding commercial real estate since
1969. Our focus is on acquiring single-tenant commercial properties
leased to creditworthy tenants under 10 to 20-year net-lease
agreements. We hold these properties for their long-term lease
revenue production, which provides us with the cash flow we use
to pay dividends to our shareholders. Additionally, we employ
conservative balance sheet management to protect the integrity
of the cash flow to pay dividends and actively manage our
real estate portfolio in order to sustain high occupancy.
2014 MILESTONE
During 2014 we will celebrate our 20th year as a New York Stock
Exchange-traded public company and will have crossed the
threshold of paying dividends without interruption for 20 years.
TABLE OF CONTENTS
Historical Financial Performance
Letter to Shareholders
The Magic of Rising Dividends Over Time
2013 Annual Report: Form 10-K
Company Information
2
4
15
16
97
Company Information
Executive Officers
Additional Officers
Debra M. Bonebrake
Senior Vice President,
Industrial, Distribution
and Office
Gregory J. Fahey
Senior Vice President,
Controller
Robert J. Israel
Senior Vice President,
Research
Laura S. King
Senior Vice President,
Assistant General Counsel
and Assistant Secretary
Theresa M. Casey
Vice President,
IT Enterprise Software
Elizabeth Cate
Vice President,
Portfolio Management
Benjamin N. Fox
Vice President,
Asset Management
Tere H. Miller
Vice President,
Investor Relations
Dawn Nguyen
Vice President,
Portfolio Management
Clint Schmucker
Vice President,
Information Technology
Joel Tomlinson
Vice President,
Director of Acquisitions
Cary J. Wenthur
Vice President,
Senior Director of Acquisitions
Janeen Bedard
Associate Vice President,
Assistant to CEO for
Corporate Strategy
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
Shannon C. Jensen
Associate Vice President,
Senior Legal Counsel
Scott A. Kohnen
Associate Vice President,
Director of Research
Sean P. Nugent
Associate Vice President,
Assistant Controller
Jenette S. O’Brien
Associate Vice President,
Director of Investment
Property Sales
Patrick Rea
Associate Vice President,
Property Management
Independent Registered Public Accounting Firm
KPMG LLP
San Diego, California
For Additional Corporate Information
Visit the Realty Income corporate
website at: www.realtyincome.com
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
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 92025-3873
R E A L T Y I N C O M E 2 0 1 3 A N N U A L R E P O R T 9 7
Left to Right: Richard Collins, John Case, Paul Meurer, Gary Malino, Sumit Roy, Michael Pfeiffer
Gary M. Malino
President,
Chief Operating Officer
Paul M. Meurer
Executive Vice President,
Chief Financial Officer
and Treasurer
Michael R. Pfeiffer
Executive Vice President,
General Counsel and Secretary
Sumit Roy
Executive Vice President,
Chief Investment Officer
John P. Case
Chief Executive Officer
Member of the Board
of Directors
Richard G. Collins
Executive Vice President,
Portfolio Management
Directors
Michael D. McKee
Chairman of the Board of Directors and
Chief Executive Officer, Bentall Kennedy
John P. Case
Chief Executive Officer
Member of the Board of Directors
Thomas A. Lewis
Vice Chairman of the Board of Directors
Kathleen R. Allen, Ph.D.
Director, Center for Technology Commercialization,
Marshall School of Business
University of Southern California
A. Larry Chapman
Retired, Executive Vice President,
Head of Commercial Real Estate, Wells Fargo Bank
Priya Cherian Huskins
Partner, Woodruff-Sawyer & Co.
Gregory T. McLaughlin
Senior Vice President, PGA Tour
Ronald L. Merriman
Retired Vice Chair, KPMG, LLP
R
E
A
L
T
Y
I
N
C
O
M
E
2
0
1
3
A
N
N
U
A
L
R
E
P
O
R
T
61%
Revenue
Growth
19%
FFO per share
Growth
21%
Dividend
Growth
5
Dividend
Increases
RECORD
2013
PERFORMANCE
$12.6
Billion
Enterprise Value
$4.7
Billion
Acquisitions
3,896
Properties
Owned
98.2%
Occupancy
2 0 1 3 A N N U A L R E P O R T
600 La Terraza Boulevard
Escondido, CA 92025-3873
www.realtyincome.com
E Printed on recyled paper with soy-based inks.