10-Q 1 riq0311_10q.htm REALTY INCOME CORPORATION FORM 10-Q riq0311_10q.htm




 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

FORM 10-Q

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2011, or

o Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 1-13374

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

Maryland
 
33-0580106
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification Number)
 
600 La Terraza Boulevard, Escondido, California  92025-3873
(Address of Principal Executive Offices)

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

 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer, " "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer x   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  x

There were 126,828,616 shares of common stock outstanding as of April 20, 2011.

 
1

 

REALTY INCOME CORPORATION
 
Form 10-Q
March 31, 2011

 
PART I.                   FINANCIAL INFORMATION
Page
 
Item 1:
Financial Statements
 
   
Consolidated Balance Sheets                                                                                           
3
   
Consolidated Statements of Income                                                                                           
4
   
Consolidated Statements of Cash Flows                                                                                           
5
   
Notes to Consolidated Financial Statements                                                                                           
6
 
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
   
16
   
17
   
Recent Developments                                                                                           
19
   
Liquidity and Capital Resources                                                                                           
22
   
Results of Operations                                                                                           
26
   
32
   
33
   
Property Portfolio Information                                                                                           
34
   
Impact of Inflation                                                                                           
40
   
Impact of Recent Accounting Pronouncements                                                                                           
40
   
Other Information                                                                                           
40
 
Item 3:
40
 
Item 4:
Controls and Procedures                                                                                             
41
PART II.                   OTHER INFORMATION
 
 
Item 1A:
Risk Factors                                                                                             
42
 
Item 2:
42
 
Item 6:
Exhibits                                                                                             
42
SIGNATURE                                                                                                                 
45


PART I.
FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
CONSOLIDATED BALANCE SHEETS
 
March 31, 2011 and December 31, 2010
(dollars in thousands, except per share data)
 
   
2011
   
2010
 
ASSETS
 
(unaudited)
       
Real estate, at cost:
           
Land
  $ 1,547,899     $ 1,520,413  
Buildings and improvements
    2,681,780       2,592,449  
Total real estate, at cost
    4,229,679       4,112,862  
Less accumulated depreciation and amortization
    (736,770 )     (711,615 )
Net real estate held for investment
    3,492,909       3,401,247  
Real estate held for sale, net
    4,064       3,631  
Net real estate
    3,496,973       3,404,878  
Cash and cash equivalents
    129,707       17,607  
Accounts receivable, net
    10,506       11,301  
Goodwill
    17,206       17,206  
Other assets, net
    116,164       84,598  
Total assets
  $ 3,770,556     $ 3,535,590  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Distributions payable
  $ 20,356     $ 19,051  
Accounts payable and accrued expenses
    23,804       47,019  
Other liabilities
    16,248       22,555  
Line of credit payable
    --       --  
Notes payable
    1,600,000       1,600,000  
Total liabilities
    1,660,408       1,688,625  
                 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Preferred stock and paid in capital, par value $1.00 per share,
               
20,000,000 shares authorized, 13,900,000 shares issued
               
and outstanding in 2011 and 2010
    337,790       337,790  
Common stock and paid in capital, par value $1.00 per share,
               
200,000,000 shares authorized, 126,828,609 and 118,058,988
               
shares issued and outstanding as of March 31, 2011 and
               
December 31, 2010, respectively
    2,351,962       2,066,287  
Distributions in excess of net income
    (579,604 )     (557,112 )
Total stockholders’ equity
    2,110,148       1,846,965  
Total liabilities and stockholders’ equity
  $ 3,770,556     $ 3,535,590  
 
The accompanying notes to consolidated financial statements are an integral part of these statements.


CONSOLIDATED STATEMENTS OF INCOME

For the three months ended March 31, 2011 and 2010
(dollars in thousands, except per share data)
(unaudited)
 
   
2011
   
2010
 
             
REVENUE
           
Rental
  $ 97,616     $ 82,512  
Other
    140       106  
Total revenue
    97,756       82,618  
                 
EXPENSES
               
Depreciation and amortization
    26,810       23,041  
Interest
    25,122       21,395  
General and administrative
    7,870       6,711  
Property
    1,983       1,971  
Income taxes
    368       277  
Total expenses
    62,153       53,395  
Income from continuing operations
    35,603       29,223  
Income from discontinued operations:
               
Real estate acquired for resale by Crest
    222       211  
Real estate held for investment
    174       771  
Total income from discontinued operations
    396       982  
Net income
    35,999       30,205  
Preferred stock cash dividends
    (6,063 )     (6,063 )
Net income available to common stockholders
  $ 29,936     $ 24,142  
                 
Amounts available to common stockholders per common share:
               
Income from continuing operations:
               
Basic
  $ 0.25     $ 0.22  
Diluted
  $ 0.25     $ 0.22  
Net income:
               
Basic
  $ 0.25     $ 0.23  
Diluted
  $ 0.25     $ 0.23  
Weighted average common shares outstanding:
               
Basic
    118,960,878       103,606,241  
Diluted
    119,109,044       103,686,440  

The accompanying notes to consolidated financial statements are an integral part of these statements.


CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the three months ended March 31, 2011 and 2010
(dollars in thousands)(unaudited)

   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 35,999     $ 30,205  
Adjustments to net income:
               
Depreciation and amortization
    26,810       23,041  
Income from discontinued operations:
               
Real estate acquired for resale
    (222 )     (211 )
Real estate held for investment
    (174 )     (771 )
Provisions for impairment on real estate held for investment
    164       --  
Amortization of share-based compensation
    2,180       1,761  
Cash provided by discontinued operations:
               
Real estate acquired for resale by Crest
    222       211  
Real estate held for investment
    124       352  
Collection of notes receivable by Crest
    36       34  
Change in assets and liabilities:
               
Accounts receivable and other assets
    7,509       5,661  
Accounts payable, accrued expenses and other liabilities
    (31,122 )     (23,756 )
Net cash provided by operating activities
    41,526       36,527  
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sales of investment properties, discontinued operations
    1,099       797  
Funds held in escrow pending property acquisitions
    (6,148 )     --  
Restricted escrow deposit for Section 1031 tax-deferred exchange
    --       (609 )
Acquisition of and improvements to investment properties
    (118,576 )     (28,713 )
Intangibles acquired in connection with acquisitions of investment properties
    (32,067 )      --  
Net cash used in investing activities
    (155,692 )     (28,525 )
CASH FLOWS FROM FINANCING ACTIVITIES
               
Cash distributions to common stockholders
    (51,123 )     (44,764 )
Cash dividends to preferred stockholders
    (6,063 )     (6,063 )
Borrowings from line of credit
    38,600       58,400  
Payments under line of credit
    (38,600 )     (23,100 )
Proceeds from common stock offerings, net
    285,533       --  
Debt issuance costs
    (43 )     --  
Other items
    (2,038 )     (1,652 )
Net cash provided by (used in) financing activities
    226,266       (17,179 )
Net increase (decrease) in cash and cash equivalents
    112,100       (9,177 )
Cash and cash equivalents, beginning of period
    17,607       10,026  
Cash and cash equivalents, end of period
  $ 129,707     $ 849  

For supplemental disclosures, see note 12.
 
The accompanying notes to consolidated financial statements are an integral part of these statements.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(unaudited)

1.
Management Statement
 
The consolidated financial statements of Realty Income Corporation ("Realty Income", the "Company", "we", "our" or "us") were prepared from our books and records without audit and include all adjustments (consisting of only normal recurring accruals) necessary to present a fair statement of results for the interim period presented. Certain of the 2010 balances have been reclassified to conform to the 2011 presentation. Readers of this quarterly report should refer to our audited financial statements for the year ended December 31, 2010, which are included in our 2010 Annual Report on Form 10-K, as certain disclosures that would substantially duplicate those contained in the audited financial statements have not been included in this report.

At March 31, 2011, we owned 2,519 properties, located in 49 states, containing over 22.5 million leasable square feet, along with three properties owned by our wholly-owned taxable REIT subsidiary, Crest Net Lease, Inc., or Crest. Crest was created to buy and sell properties, primarily to individual investors who are involved in tax-deferred exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended, or the Code.

2.
Summary of Significant Accounting Policies and Procedures
 
A.  The accompanying consolidated financial statements include the accounts of Realty Income, Crest and other entities for which we make operating and financial decisions (i.e., control), after elimination of all material intercompany balances and transactions.  All of Realty Income’s subsidiaries are wholly-owned. We have no unconsolidated or off-balance sheet investments in variable interest entities.

B.  We have elected to be taxed as a real estate investment trust, or REIT, under the Code. We believe we have qualified and continue to qualify as a REIT. Under the REIT operating structure, we are permitted to deduct distributions paid to our stockholders and generally will not be required to pay federal corporate income taxes on such income. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements, except for federal income taxes of Crest, which are included in discontinued operations. The income taxes recorded on our consolidated statements of income represent amounts paid by Realty Income for city and state income and franchise taxes.

C.  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 rent, when determining collectibility of accounts receivable and appropriate allowances to record.  The allowance for doubtful accounts was $1.1 million at March 31, 2011 and December 31, 2010.

   
March 31,
   
December 31,
 
D.  Other assets consist of the following (dollars in thousands) at:
 
2011
   
2010
 
Value of in-place and above-market leases, net
  $ 58,358     $ 26,221  
Notes receivable issued in connection with Crest property sales
    22,039       22,075  
Deferred bond financing costs, net
    13,820       14,203  
Prepaid expenses
    8,971       8,431  
Funds held in escrow pending property acquisitions
    6,148       --  
Restricted escrow deposits for Section 1031 tax-deferred exchanges
    --       6,361  
Credit facility organization costs, net
    4,227       4,619  
Corporate assets, net of accumulated depreciation and amortization
    790       827  
Other items
    1,811       1,861  
    $ 116,164     $ 84,598  
 
E.  Distributions payable consist of the following declared
 
March 31,
   
December 31,
 
       distributions (dollars in thousands) at:
 
2011
   
2010
 
Common stock distributions
  $ 18,335     $ 17,030  
Preferred stock dividends
    2,021       2,021  
    $ 20,356     $ 19,051  
                 
F.  Accounts payable and accrued expenses consist of the
 
     March 31,
   
December 31,
 
     following (dollars in thousands) at:
    2011       2010  
Bond interest payable
  $ 12,533     $ 33,240  
Other items
    11,271       13,779  
    $ 23,804     $ 47,019  

   
March 31,
   
December 31,
 
G.  Other liabilities consist of the following (dollars in thousands) at:
 
2011
   
2010
 
Rent received in advance
  $ 7,690     $ 14,564  
Security deposits
    4,361       4,539  
Value of in-place below-market leases, net
    4,197       3,452  
    $ 16,248     $ 22,555  

3.       Investments in Real Estate
 
We acquire the land, buildings and improvements that are necessary for the successful operations of retail and other commercial enterprises.

A.  During the first three months of 2011, Realty Income invested $150.7 million in 26 new properties, and properties under development, with an initial weighted average contractual lease rate of 7.9%. These 26 new properties, and properties under development, are located in 15 states, contain over 1.3 million leasable square feet and are 100% leased with an average lease term of 16.6 years. The initial weighted average contractual lease rate is computed by dividing the estimated aggregate base rent for the first year of each lease by the estimated total cost of the properties. In accordance with generally accepted accounting principles, or GAAP, acquisition transaction costs of $371,000 were recorded to "general and administrative" expense on our consolidated statement of income, for the three months ended March 31, 2011.

In March 2011, we announced the signing of definitive purchase agreements for the acquisition of approximately $544 million of 33 single-tenant retail, distribution, office and manufacturing properties.  Included in the $150.7 million invested, during the first three months of 2011, is $130.1 million invested in 13 of the 33 properties.  In aggregate, the total properties to be acquired in connection with this previously announced transaction will be located in 17 different states and consist of approximately 3.8 million square feet of leasable space. The majority of the lease revenue from these single-tenant properties will be generated from investment grade tenants, or their operating subsidiaries, in 11 different industries. The average remaining lease term of these properties will be over 11 years and all of the properties have in-place leases.

In comparison, during the first three months of 2010, Realty Income invested $27.7 million in eight new properties with an initial weighted average contractual lease rate of 9.0%. These eight properties are located in six states, contain over 104,000 leasable square feet, and are 100% leased with an average lease term of 18.2 years. In accordance with GAAP, acquisition transaction costs of $48,000 were recorded to "general and administrative" expense on our consolidated statement of income, for the three months ended March 31, 2010.


During the first three months of 2011, we capitalized costs of $943,000 on existing properties in our portfolio, consisting of $269,000 for re-leasing costs and $674,000 for building and tenant improvements. In comparison, during the first three months of 2010, we capitalized costs of $935,000 on existing properties in our portfolio, consisting of $292,000 for re-leasing costs and $643,000 for building and tenant improvements.
 
B.  During the first three months of 2011 and 2010, Crest did not invest in any new properties.  Crest’s property inventory, which is classified as held for investment, consisted of three properties with a net book value of $2.9 million at March 31, 2011 and $3.0 million at December 31, 2010.

C.  Of the $150.7 million invested by Realty Income in the first three months of 2011, approximately $130.1 million was used to acquire 13 properties with existing leases. Associated with these 13 properties, we recorded $21.8 million as the intangible value of the in-place leases, $11.1 million as the intangible value of above-market leases and $833,000 as the intangible value of below-market leases. The value of the in-place and above-market leases are recorded to "other assets" on our consolidated balance sheet, as of March 31, 2011, and the value of the below-market leases are recorded to "other liabilities" on our consolidated balance sheet, as of March 31, 2011. All of these amounts are amortized over the life of the respective leases.

 4.     Credit Facility

In December 2010, we entered into a $425 million revolving, unsecured credit facility that replaced our previous $355 million acquisition credit facility that was scheduled to expire in May 2011. The initial term of the credit facility expires in March 2014 and includes two, one-year extension options. Under the new credit facility, our investment grade credit ratings provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 185 basis points with a facility commitment fee of 35 basis points, for all-in drawn pricing of 220 basis points over LIBOR. The borrowing rate is not subject to an interest rate floor. We also have other interest rate options available to us. Our credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation.

As a result of entering into our current credit facility, we incurred credit facility origination costs of $4.2 million that were classified as part of "other assets" on our consolidated balance sheet at December 31, 2010.  At March 31, 2011, the balance of these credit facility origination costs was $3.8 million, which is being amortized over the remaining term of the credit facility.  The remaining credit facility origination costs that were incurred as a result of entering into our previous $355 million credit facility, which were $417,000 at March 31, 2011, are included in "other assets" and are being amortized over the remaining term of our current $425 million credit facility.

The average borrowing rate on our credit facility during the first three months of 2011 was 2.1% and, during the first three months of 2010, was 1.2%. Our borrowing rate at March 31, 2011 was 2.1%, and at March 31, 2010 was 1.2%. Our current and prior credit facilities are subject to various leverage and interest coverage ratio limitations. We are and have been in compliance with these covenants.

5.       Notes Payable
 
Our senior unsecured note obligations consist of the following at March 31, 2011 and December 31, 2010, sorted by maturity date (dollars in millions):

   5.375% notes, issued in March 2003 and due in March 2013
  $ 100  
   5.5% notes, issued in November 2003 and due in November 2015
    150  
   5.95% notes, issued in September 2006 and due in September 2016
    275  
   5.375% notes, issued in September 2005 and due in September 2017
    175  
   6.75% notes, issued in September 2007 and due in August 2019
    550  
   5.75% notes, issued in June 2010 and due in January 2021
    250  
   5.875% bonds, issued in March 2005 and due in March 2035
    100  
    $ 1,600  
 
 
6.     Issuance of Common Stock
 
In March 2011, we issued 8,625,000 shares of common stock at a price of $34.81 per share. After offering costs of $14.7 million, the net proceeds of approximately $285.5 million have been and will be used to fund a substantial portion of the previously announced property acquisitions aggregating approximately $544 million, which are expected to close during the next four to six months. The remaining net proceeds, if any, will be used for general corporate purposes and working capital.

7.       Fair Value of Financial Assets and Liabilities
 
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, and all liabilities, due to their short-term nature, except for our notes receivable issued in connection with property sales and our notes payable, which are disclosed below (dollars in millions):

   
Carrying value per
   
Estimated
 
At March 31, 2011
 
balance sheet
   
fair value
 
Notes receivable issued in connection with Crest property sales
  $ 22.0     $ 22.9  
Notes payable
  $ 1,600.0     $ 1,721.3  

   
Carrying value per
   
Estimated
 
At December 31, 2010
 
balance sheet
   
fair value
 
Notes receivable issued in connection with Crest property sales
  $ 22.1     $ 23.2  
Notes payable
  $ 1,600.0     $ 1,707.1  

The estimated fair value of our notes receivable, issued in connection with property sales, has been calculated by discounting the future cash flows using an interest rate based upon the current 5-year or 7-year Treasury yield curve, plus an applicable credit-adjusted spread. The notes receivable were issued in connection with the sale of three Crest properties. Payments to us on these notes receivable are current and no allowance for doubtful accounts has been recorded for them.

The estimated fair value of our notes payable is based upon indicative market prices and recent trading activity of our notes payable.

8.       Gain on Sales of Investment Properties
 
During the first three months of 2011, we sold three investment properties for $1.1 million, which resulted in a gain of $129,000. In comparison, during the first three months of 2010, we sold three investment properties for $1.8 million, which resulted in a gain of $703,000. The results of operations for these properties have been reclassified as discontinued operations.
 
During the first three months of 2011 and 2010, Crest did not sell any properties.


9.        Discontinued Operations
 
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment is recorded if estimated future operating cash flows (undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are less than the current book value of the property. Key factors that we use in this analysis include: projected rental rates, capital expenditures and property sales capitalization rates. Additionally, a property classified as held for sale is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell.

For the first three months of 2011, Realty Income recorded a provision for impairment of $36,000 on one property, which was sold in March 2011. For the first three months of 2010, Realty Income recorded a provision for impairment of $34,000 on one property, which was sold in the second quarter of 2010.  For the first three months of 2011 and 2010, no provisions for impairment were recorded by Crest.

Operations from nine investment properties were classified as held for sale at March 31, 2011, plus properties sold in 2011 and 2010, are reported as discontinued operations. Their respective results of operations have been reclassified as "income from discontinued operations, real estate held for investment" on our consolidated statements of income. We do not depreciate properties that are classified as held for sale.

No debt was assumed by buyers of our investment properties, or repaid as a result of our investment property sales, and we do not allocate interest expense to discontinued operations related to real estate held for investment. We allocate interest expense related to borrowings specifically attributable to Crest’s properties. The interest expense amounts allocated to the Crest properties held for sale are included in "income from discontinued operations, real estate acquired for resale by Crest" on our consolidated statements of income.

The following is a summary of Crest’s "income from discontinued operations, real estate acquired for resale by Crest" on our consolidated statements of income (dollars in thousands):
 
   
                  Three months ended
                     March 31,
 
Crest's income from discontinued operations, real estate acquired for resale
 
2011
   
2010
 
Interest revenue
  $ 347     $ 350  
Interest expense
    (200 )     (128 )
General and administrative expense
    (13 )     (97 )
Property expenses
    (3 )     (3 )
Income tax benefit
    91       89  
Income from discontinued operations, real estate acquired for resale by Crest
  $ 222     $ 211  

The following is a summary of Realty Income’s "income from discontinued operations, real estate held for investment" on our consolidated statements of income (dollars in thousands):
 
   
      Three months ended
   March 31,
 
Realty Income's income from discontinued operations, real estate held for investment
 
2011
   
2010
 
Gain on sales of investment properties
  $ 129     $ 703  
Rental revenue
    199       780  
Other revenue
    20       10  
Depreciation and amortization
    (43 )     (250 )
Property expenses
    (95 )     (438 )
Provision for impairment
    (36 )     (34 )
Income from discontinued operations, real estate held for investment
  $ 174     $ 771  
 
 
The following is a summary of our total income from discontinued operations (dollars in thousands, except per share data):
 
   
   Three months ended
      March 31,
 
Total discontinued operations
 
2011
   
2010
 
 Real estate acquired for resale by Crest
  $ 222     $ 211  
 Real estate held for investment
    174       771  
 Income from discontinued operations
  $ 396     $ 982  
 Per common share, basic and diluted
  $ 0.00     $ 0.01  

The per share amounts for "income from discontinued operations" above and the "income from continuing operations" and "net income" reported on the consolidated statements of income have each been calculated independently.

10.   Distributions Paid and Payable
 
A.  Common Stock
 
We pay monthly distributions to our common stockholders. The following is a summary of the monthly distributions paid per common share for the first three months of 2011 and 2010:
 
Month
 
2011
   
2010
 
January
  $ 0.14425     $ 0.14300  
February
    0.14425       0.14300  
March
    0.14425       0.14300  
Total
  $ 0.43275     $ 0.42900  
 
At March 31, 2011, a distribution of $0.1445625 per common share was payable and was paid in April 2011.

B.  Preferred Stock

In 2004, we issued 5.1 million shares of 7.375% Monthly Income Class D cumulative redeemable preferred stock. In May 2009, the Class D preferred shares became redeemable, at our option, for $25 per share. During each of the first three months of 2011 and 2010, we paid three monthly dividends to holders of our Class D preferred stock totaling $0.4609377 per share, or $2.4 million, and at March 31, 2011, a monthly dividend of $0.1536459 per share was payable and was paid in April 2011.

In 2006, we issued 8.8 million shares of 6.75% Monthly Income Class E cumulative redeemable preferred stock. Beginning December 7, 2011, the Class E preferred shares are redeemable, at our option, for $25 per share. During each of the first three months of 2011 and 2010, we paid three monthly dividends to holders of our Class E preferred stock totaling $0.421875 per share, or $3.7 million, and at March 31, 2011, a monthly dividend of $0.140625 per share was payable and was paid in April 2011.

We are current in our obligations to pay dividends on our Class D and Class E preferred stock.
 
11.   Net Income Per Common Share
 
Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted net income per common share is computed by dividing net income available to common stockholders for the period by the weighted average number of common shares that would have been outstanding assuming the issuance of common shares for all potentially dilutive common shares outstanding during the reporting period.

 
The following is a reconciliation of the denominator of the basic net income per common share computation to the denominator of the diluted net income per common share computation:
 
 
                                  Three months ended
                                   March 31,
 
2011
2010
Weighted average shares used for the basic net income per share computation
118,960,878
103,606,241
Incremental shares from share-based compensation
148,166
80,199
Adjusted weighted average shares used for diluted net income per share computation
 119,109,044
  103,686,440
Unvested shares from share-based compensation that were anti-dilutive
  800
520

12.       Supplemental Disclosures of Cash Flow Information
 
Interest paid, in the first three months of 2011, was $44.9 million and, in the first three months of 2010, was $37.1 million.
 
Interest capitalized to properties under development, in the first three months of 2011, was $71,000 and, in the first three months of 2010, was $2,000.
 
Income taxes paid by Realty Income and Crest, in the first three months of 2011, was $834,000 and, in the first three months of 2010, was $865,000.

The following non-cash investing and financing activities are included in the accompanying consolidated financial statements:

A.  Share-based compensation expense, for the first three months of 2011, was $2.2 million and, for the first three months of 2010, was $1.8 million.

B.  See note 9 for a discussion of impairments recorded by Realty Income and Crest in discontinued operations, for the first three months of 2011.  Additionally, for the first three months of 2011, Realty Income recorded a provision for impairment of $164,000 on one property held for investment at March 31, 2011.  This provision for impairment is included in "property expenses" on our consolidated statement of income, for the three months ended March 31, 2011.

C.  In the first three months of 2010, we recorded a $1.0 million receivable for the sale of an investment property as a result of an eminent domain action. This receivable is included in "other assets" on our consolidated balance sheet at March 31, 2010.

D.  Accrued costs on properties under development resulted in an increase in buildings and improvements and accounts payable of $951,000 at March 31, 2011.

13.       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 32 industry and activity segments (including properties owned by Crest that are grouped together as a segment). All of the properties are incorporated into one of the applicable segments. Because almost all of our leases require the tenant to pay operating expenses, revenue is the only component of segment profit and loss we measure.
 

The following tables set forth certain information regarding the properties owned by us, classified according to the business of the respective tenants, as of March 31, 2011 (dollars in thousands):
 
   
March 31,
   
December 31,
 
Assets, as of:
 
2011
   
2010
 
Segment net real estate:
           
   Automotive service
  $ 105,428     $ 106,669  
   Automotive tire services
    194,343       195,883  
   Beverages
    301,176       302,159  
   Child care
    71,942       73,235  
   Convenience stores
    706,634       711,667  
   Drug stores
    157,903       143,739  
   Health and fitness
    224,527       220,296  
   Restaurants
    729,336       734,615  
   Theaters
    278,743       281,072  
   23 other non-reportable segments
    726,941       635,543  
Total segment net real estate
    3,496,973       3,404,878  
Other intangible assets - Apparel
    3,526       3,644  
Other intangible assets - Automotive tire services
    573       588  
Other intangible assets - Drug stores
    15,322       5,938  
Other intangible assets - Equipment services
    2,454       -  
Other intangible assets - Financial services
    5,596       -  
Other intangible assets - Grocery stores
    5,937       6,031  
Other intangible assets - Health and fitness
    1,672       1,707  
Other intangible assets - Office supplies
    376       390  
Other intangible assets - Sporting goods
    5,670       5,786  
Other intangible assets - Theaters
    1,502       1,579  
Other intangible assets - Transportation services
    15,188       -  
Other intangible assets - Other
    540       558  
Goodwill - Automotive service
    1,338       1,338  
Goodwill - Child care
    5,353       5,353  
Goodwill - Convenience stores
    2,074       2,074  
Goodwill - Home furnishings
    1,557       1,557  
Goodwill - Restaurants
    3,779       3,779  
Goodwill - non-reportable segments
    3,105       3,105  
Other corporate assets
    198,021       87,285  
Total assets
  $ 3,770,556     $ 3,535,590  

Revenue for the three months ended March 31:
 
2011
   
2010
 
Segment rental revenue:
           
Automotive service
  $ 4,116     $ 3,903  
Automotive tire services
    5,507       5,496  
Beverages
    5,669       -  
Child care
    5,678       5,568  
Convenience stores
    19,404       14,192  
Drug stores
    3,724       3,432  
Health and fitness
    6,242       5,533  
Restaurants
    18,393       18,772  
Theaters
    7,956       7,563  
23 non-reportable segments
    20,927       18,053  
Total rental revenue
    97,616       82,512  
Other revenue
    140       106  
Total revenue
  $ 97,756     $ 82,618  


14.     Common Stock Incentive Plan
 
In 2003, our Board of Directors adopted, and stockholders approved, the 2003 Incentive Award Plan of Realty Income Corporation, or the Stock Plan, to enable us to attract and retain the services of directors, employees and consultants, considered essential to our long-term success. The Stock Plan offers our directors, employees and consultants an opportunity to own stock in Realty Income and/or rights that will reflect our growth, development and financial success. The Stock Plan was amended and restated by our Board of Directors in February 2006 and in May 2007.

The amount of share-based compensation costs recognized in "general and administrative expense" on our consolidated statements of income, during the first three months of 2011, was $2.2 million and, during the first three months of 2010, was $1.8 million.

The following table summarizes our common stock grant activity under our Stock Plan. Our common stock grants vest over periods ranging from immediately to 10 years.

   
For the three
months ended
March 31, 2011
   
For the year ended
 December 31, 2010
 
   
Number of
shares
   
Weighted
average
price (1)
   
Number of
shares
   
Weighted
average
price (1)
 
Outstanding nonvested shares, beginning of year
    924,294     $ 19.69       853,234     $ 19.14  
Shares granted
    203,014       33.82       278,200       28.99  
Shares vested
    (204,664 )     23.99       (206,153 )     23.70  
Shares forfeited
    (148 )     25.53       (987 )     26.03  
Outstanding nonvested shares, end of each period
     922,496     $   24.80        924,294     $   19.69  
(1) Grant date fair value.

During the first three months of 2011, we issued 203,014 shares of common stock under our Stock Plan. These shares vest over the following service periods: 13,158 vested immediately, 5,000 vest over a service period of one year, 58,400 vest over a service period of three years and 126,456 vest over a service period of five years.

As of March 31, 2011, the remaining unamortized share-based compensation expense totaled $22.9 million, which is being amortized on a straight-line basis over the service period of each applicable award.

Due to a historically low turnover rate, we do not estimate a forfeiture rate for our nonvested shares. Accordingly, unexpected forfeitures will lower share-based compensation expense during the applicable period. Under the terms of our Stock Plan, we pay non-refundable dividends to the holders of our nonvested shares. Applicable accounting guidance requires that the dividends paid to holders of these nonvested shares be charged as compensation expense to the extent that they relate to nonvested shares that do not or are not expected to vest. However, since we do not estimate forfeitures given our historical trends, we did not record any amount to compensation expense related to dividends paid in 2011 or 2010.


As of March 31, 2011, there were no remaining stock options outstanding. During the first three months of 2011, there were 2,454 stock options exercised, at an exercise price of $14.70, and there were no stock option forfeitures.  Stock options, none of which were granted after January 1, 2002, were granted with an exercise price equal to the underlying stock’s fair market value at the date of grant.

15.       Dividend Reinvestment and Stock Purchase Plan
 
In March 2011, we established a Dividend Reinvestment and Stock Purchase Plan, or The Plan, to provide our common stockholders, as well as new investors, with a convenient and economical method of purchasing our common stock and/or reinvesting their distributions. The Plan allows our current stockholders to buy additional shares of common stock by reinvesting all or a portion of their distributions. The Plan authorizes up to 6,000,000 common shares to be issued.  Through March 31, 2011, no new shares have been issued under The Plan.

16.       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 March 31, 2011, we have contingent payments of $922,000 for tenant improvements and leasing costs. In addition, we have committed $9.1 million under construction contracts, which is expected to be paid in the next twelve months.

17.       Subsequent Events
 
A.    In April 2011, we declared the following dividends, which will be paid in May 2011:
 
-  
$0.1445625 per share to our common stockholders;
-  
$0.1536459 per share to our Class D preferred stockholders; and
-  
$0.140625 per share to our Class E preferred stockholders.

B.  
In conjunction with our previously announced acquisition of 33 single tenant, retail, distribution, office and manufacturing properties during the next four to six months, we invested $103 million in five properties during April 2011.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations


This quarterly report on Form 10-Q, including the documents incorporated by reference, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. When used in this quarterly report, the words “estimated”, “anticipated”, “expect”, “believe”, “intend” and similar expressions are intended to identify forward-looking statements. Forward-looking statements include discussions of strategy, plans or intentions of management. Forward-looking statements are subject to risks, uncertainties, and assumptions about Realty Income Corporation, including, among other things:
 
Our anticipated growth strategies;
Our intention to acquire additional properties and the timing of these acquisitions;
Our intention to sell properties and the timing of these property sales;
Our intention to re-lease vacant properties;
Anticipated trends in our business, including trends in the market for long-term net-leases of freestanding, single-tenant properties;
Future expenditures for development projects; and
Profitability of our subsidiary, Crest Net Lease, Inc., or Crest.

Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. In particular, some of the factors that could cause actual results to differ materially are:
 
Our continued qualification as a real estate investment trust;
General business and economic conditions;
Competition;
Fluctuating interest rates;
Access to debt and equity capital markets;
  
Continued volatility and uncertainty in the credit markets and broader financial markets;
Other risks inherent in the real estate business including tenant defaults, potential liability relating to environmental matters, illiquidity of real estate investments, and potential damages from natural disasters;
Impairments in the value of our real estate assets;
Changes in the tax laws of the United States of America;
The outcome of any legal proceedings to which we are a party; and
Acts of terrorism and war.

Additional factors that may cause risks and uncertainties include those discussed in the sections entitled “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K, for the fiscal year ended December 31, 2010.

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date that this quarterly report was filed with the Securities and Exchange Commission, or 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 quarterly report or to reflect the occurrence of unanticipated events. In light of these risks and uncertainties, the forward-looking events discussed in this quarterly report might not occur.


Realty Income Corporation, The Monthly Dividend Company®, is a Maryland corporation organized to operate as an equity real estate investment trust, or REIT. Our primary business objective is to generate dependable monthly cash distributions from a consistent and predictable level of funds from operations, or FFO, per share. Our monthly distributions are supported by the cash flow from our portfolio of properties leased to retail and other commercial enterprises. We have in-house acquisition, leasing, legal, credit research, real estate research, portfolio management and capital markets expertise. Over the past 42 years, Realty Income and its predecessors have been acquiring and owning freestanding retail and other commercial properties that generate rental revenue under long-term lease agreements (primarily 15 to 20 years).

In addition, we seek to increase distributions to stockholders and FFO per share through both active portfolio management and the acquisition of additional properties.

Generally, our portfolio management efforts seek to include:
 
Contractual rent increases on existing leases;
Rent increases at the termination of existing leases, when market conditions permit; and
The active management of our property portfolio, including re-leasing vacant properties, and selectively selling properties, thereby mitigating our exposure to certain tenants and markets.

In acquiring additional properties, our strategy is primarily to acquire properties that are:
 
Freestanding, single-tenant locations;
Leased to regional and national commercial enterprises; and
Leased under long-term, net-lease agreements.

At March 31, 2011, we owned a diversified portfolio:
 
Of 2,519 properties;
With an occupancy rate of 96.8%, or 2,438 properties occupied and only 81 properties available for lease;
Leased to 125 different retail and other commercial enterprises doing business in 31 separate industries;
Located in 49 states;
With over 22.5 million square feet of leasable space; and
With an average leasable space per property of approximately 8,900 square feet.

Of the 2,519 properties in the portfolio, 2,503, or 99.4%, are single-tenant properties, and the remaining 16 are multi-tenant properties. At March 31, 2011, of the 2,503 single-tenant properties, 2,423 were leased with a weighted average remaining lease term (excluding extension options) of approximately 11.5 years.

In addition, at March 31, 2011, our wholly-owned taxable REIT subsidiary, Crest Net Lease, Inc., or Crest, had an inventory of three properties, which are classified as held for investment. In addition to the three properties, Crest also holds notes receivable of $22.0 million at March 31, 2011.

We typically acquire properties under long-term leases with regional and national retailers and other commercial enterprises. Our acquisition and investment activities generally focus on businesses providing goods and services that satisfy basic consumer and business needs.


In general, our net-lease agreements:
 
Are for initial terms of 15 to 20 years;
Require the tenant to pay minimum monthly rent and property operating expenses (taxes, insurance and maintenance); and
Provide for future rent increases based on increases in the consumer price index (typically subject to ceilings), additional rent calculated as a percentage of the tenants’ gross sales above a specified level, or fixed increases.

Investment Philosophy
We believe that owning an actively managed, diversified portfolio of commercial properties under long-term, net leases produces consistent and predictable income. Net leases typically require the tenant to be responsible for monthly rent and property operating expenses including property taxes, insurance and maintenance. In addition, tenants are typically responsible for future rent increases based on increases in the consumer price index (typically subject to ceilings), additional rent calculated as a percentage of the tenants’ gross sales above a specified level, or fixed increases. We believe that owning a portfolio of properties under long-term leases, coupled with the tenant’s responsibility for property expenses, generally produces a more predictable income stream than many other types of real estate portfolios, while continuing to offer the potential for growth in rental income.

Credit Strategy
We primarily provide sale-leaseback financing to less than investment grade tenants. We typically acquire and lease back properties to regional and national commercial enterprises and believe that within this market we can achieve an attractive risk-adjusted return. Since 1970, our overall weighted average occupancy rate at the end of each year has been 98.2%, and our occupancy rate at the end of each year has never been below 96%.

Acquisition Strategy
We seek to invest in industries in which several, well-organized, regional and national retailers and other commercial enterprises are capturing market share through service, quality control, economies of scale, strong consumer brands, advertising, and the selection of prime locations. We execute our acquisition strategy by acting as a source of capital to regional and national commercial enterprises by acquiring and leasing back their real estate locations. We undertake thorough research and analysis to identify what we consider to be appropriate industries, tenants and property locations for investment. Our research expertise is fundamental to uncovering net-lease opportunities in markets where our real estate financing program adds value. In selecting real estate for potential investment, we generally seek to acquire properties that have the following characteristics:
 
Freestanding, commercially-zoned property with a single tenant;
Properties that are important locations for regional and national commercial enterprises;
  
Properties that we deem to be profitable for the tenants and/or can generally be characterized as important to the operations of the company’s business;
Properties that are located within attractive demographic areas, relative to the business of our tenants, with high visibility and easy access to major thoroughfares; and
Properties that can be purchased with the simultaneous execution or assumption of long-term, net-lease agreements, offering both current income and the potential for rent increases.

Portfolio Management Strategy
The active management of the property portfolio is an essential component of our long-term strategy. We continually monitor our portfolio for any changes that could affect the performance of the industries, tenants and locations in which we have invested. We also regularly analyze our portfolio with a view toward optimizing its returns and enhancing our credit quality.


Our executives regularly review and analyze:
 
  
The performance of the various industries of our tenants; and
  
The operation, management, business planning and financial condition of our tenants.

We have an active portfolio management program that incorporates the sale of assets when we believe the reinvestment of the sale proceeds will:
 
  
Generate higher returns;
  
Enhance the credit quality of our real estate portfolio;
  
Extend our average remaining lease term; or
  
Decrease tenant or industry concentration.

At March 31, 2011, we classified real estate with a carrying amount of $4.1 million as held for sale on our balance sheet. Additionally, we anticipate selling investment properties from our portfolio that have not yet been specifically identified, from which we anticipate receiving between $10 million and $35 million in proceeds during the next 12 months. We intend to invest these proceeds into new property acquisitions, if there are attractive opportunities available. However, we cannot guarantee that we will sell properties during the next 12 months or be able to invest the proceeds from the sales of any properties in new properties.

Impact of Real Estate and Credit Markets
In the commercial real estate market, property prices generally continue to fluctuate. Likewise, the U.S. credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which sometimes impact our access to and cost of capital. We continue to monitor the commercial real estate and U.S. credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly. See our discussion of "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2010.


Increases in Monthly Distributions to Common Stockholders
We have continued our 42-year policy of paying distributions monthly.  Monthly distributions per share were increased in April 2011 by $0.0003125 to $0.1445625. The increase in April 2011 was our 54th consecutive quarterly increase and the 61st increase in the amount of our dividend since our listing on the New York Stock Exchange, or NYSE, in 1994. In the first three months of 2011, we paid three monthly cash distributions per share in the amount of $0.14425, totaling $0.43275. In March 2011 and April 2011, we declared distributions of $0.1445625 per share, which were paid in April 2011 and will be paid in May 2011, respectively.

The monthly distribution of $0.1445625 per share represents a current annualized distribution of $1.73475 per share, and an annualized distribution yield of approximately 5.0% based on the last reported sale price of our common stock on the NYSE of $34.95 on March 31, 2011. Although we expect to continue our policy of paying monthly distributions, we cannot guarantee that we will maintain our current level of distributions, that we will continue our pattern of increasing distributions per share, or what our actual distribution yield will be in any future period.

Acquisitions during the First Three Months of 2011
During the first three months of 2011, Realty Income invested $150.7 million in 26 new properties, and properties under development, with an initial weighted average contractual lease rate of 7.9%. These 26 new properties, and properties under development, are located in 15 states, contain over 1.3 million leasable square feet, and are 100% leased with an average lease term of 16.6 years. There were no acquisitions by Crest in the first three months of 2011.

 
The initial weighted average contractual lease rate is computed as estimated contractual net operating income (in a net-leased property that is equal to the aggregate base rent or, in the case of properties under development, the estimated aggregate base rent under the lease) for the first year of each lease, divided by the estimated total cost of the properties. Since it is possible that a tenant could default on the payment of contractual rent, we cannot assure you that the actual return on the funds invested will remain at the percentages listed above.

In March 2011, we announced the signing of definitive purchase agreements for the acquisition of approximately $544 million of 33 single-tenant retail, distribution, office and manufacturing properties.  Included in the $150.7 million invested, during the first three months of 2011, is $130.1 million invested in 13 of the 33 properties. We anticipate that the remainder of the properties in this portfolio should close during the next four to six months. In aggregate, the total properties to be acquired in connection with this previously announced transaction will be located in 17 different states and consist of approximately 3.8 million square feet of leasable space. The majority of the lease revenue from these single-tenant properties will be generated from investment grade tenants, or their operating subsidiaries, in 11 different industries. The average remaining lease term of these properties will be over 11 years and all of the properties have in-place leases.

Acquisitions during April 2011
In conjunction with our previously announced acquisition of 33 single tenant, retail, distribution, office and manufacturing properties, during the next four to six months, we invested $103 million in five properties during April 2011.

Portfolio Discussion
 
Leasing Results
At March 31, 2011, we had 81 properties available for lease out of 2,519 properties in our portfolio, which represents a 96.8% occupancy rate. Since December 31, 2010, when we reported 84 properties available for lease and a 96.6% occupancy rate, we:

  
Leased ten properties;
  
Sold three properties; and
  
Have ten new properties available for lease.

In addition, during the first quarter of 2011, we leased three properties to new tenants concurrent with the expiration of the prior leases. At March 31, 2011, our average annualized rental revenue per square foot was approximately $17.70.

Investments in Existing Properties
In the first three months of 2011, we capitalized costs of $943,000 on existing properties in our portfolio, consisting of $269,000 for re-leasing costs and $674,000 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 relate 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 market and the willingness of tenants to pay higher rents over the terms of the leases.


Issuance of Common Stock
In March 2011, we issued 8,625,000 shares of common stock at a price of $34.81 per share. The net proceeds of approximately $285.5 million have been, and will be used, to fund a substantial portion of the previously announced property acquisitions aggregating approximately $544 million, which are expected to close during the next four to six months. The remaining net proceeds, if any, will be used for general corporate purposes and working capital.

Dividend Reinvestment and Stock Purchase Plan
In March 2011, we established a Dividend Reinvestment and Stock Purchase Plan, or The Plan, to provide our common shareholders, as well as new investors, with a convenient and economical method of purchasing our common stock and/or reinvesting their distributions. The Plan allows our current stockholders to buy additional shares of common stock by reinvesting all or a portion of their distributions.  The Plan authorizes up to 6,000,000 common shares to be issued. Through March 31, 2011, no new shares have been issued under The Plan.

Net Income Available to Common Stockholders
Net income available to common stockholders was $29.9 million, in the first three months of 2011, versus $24.1 million in the same period of 2010, an increase of $5.8 million. On a diluted per common share basis, net income was $0.25, in the first three months of 2011, and $0.23, in the first three months of 2010.

The calculation to determine net income available to common stockholders includes gains from the sale of properties. The amount of gains varies from period to period based on the timing of property sales and can significantly impact net income available to common stockholders.

The gain from the sale of properties, during the first three months of 2011, was $129,000, as compared to $703,000, during the first three months of 2010.

Funds from Operations Available to Common Stockholders (FFO)
In the first three months of 2011, our FFO increased by $9.9 million, or 21.2%, to $56.6 million versus $46.7 million in the first three months of 2010. On a diluted per common share basis, FFO was $0.48 in the first three months of 2011 and $0.45 in the first three months of 2010.

See our discussion of FFO later in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which includes a reconciliation of net income available to common stockholders to FFO.

Adjusted Funds from Operations Available to Common Stockholders (AFFO)
In the first three months of 2011, our AFFO increased by $10.6 million, or 22.3%, to $58.2 million versus $47.6 million in the first three months of 2010.  On a diluted per common share basis, AFFO was $0.49 in the first three months of 2011 and $0.46 in the first three months of 2010.

See our discussion of AFFO later in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," which includes a reconciliation of net income available to common stockholders to FFO and AFFO.
 

Capital Philosophy
Historically, we have met our long-term capital needs by issuing common stock, preferred stock and long-term unsecured notes and bonds. Over the long term, we believe that common stock should be the majority of our capital structure. However, we may issue additional preferred stock or debt securities from time to time. We may issue common stock when we believe that our share price is at a level that allows for the proceeds of any offering to be accretively invested into additional properties. In addition, we may issue common stock to permanently finance properties that were financed by our credit facility or debt securities. However, we cannot assure you that we will have access to the capital markets at times and at terms that are acceptable to us.

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 $425 million credit facility, and from time-to-time 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 March 31, 2011, our total outstanding borrowings were $1.6 billion of senior unsecured notes, or approximately 25.1% of our total market capitalization of $6.38 billion. There were no outstanding borrowings on our credit facility at March 31, 2011.

We define our total market capitalization at March 31, 2011 as the sum of:
 
Shares of our common stock outstanding of 126,828,609 multiplied by the last reported sales price of our common stock on the NYSE of $34.95 per share on March 31, 2011, or $4.43 billion;
Aggregate liquidation value (par value of $25 per share) of the Class D preferred stock of $127.5 million;
  
Aggregate liquidation value (par value of $25 per share) of the Class E preferred stock of $220 million; and
Outstanding notes of $1.6 billion.

Mortgage Debt
We have no mortgage debt on any of our properties.

$425 Million Acquisition Credit Facility
In December 2010, we entered into a $425 million revolving, unsecured credit facility that replaced our previous $355 million acquisition credit facility that was scheduled to expire in May 2011. The initial term of the credit facility expires in March 2014 and includes two, one-year extension options. Under the new credit facility, our investment grade credit ratings provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 185 basis points with a facility commitment fee of 35 basis points, for all-in drawn pricing of 220 basis points over LIBOR. The borrowing rate is not subject to an interest rate floor.  We also have other interest rate options available to us. At March 31, 2011, we had a borrowing capacity of $425 million available on our credit facility and no outstanding balance. If there were outstanding borrowings, the borrowing rate would have been 2.1%.
 
We expect to use our credit facility to acquire additional properties and for other corporate purposes.  Any additional borrowings will increase our exposure to interest rate risk. We have the right to request an increase in the borrowing capacity of the credit facility, up to $200 million, to a total borrowing capacity of $625 million. Any increase in the borrowing capacity is subject to approval by the lending banks participating in our credit facility.

Cash Reserves
We are organized to operate as an equity REIT that acquires and leases properties and distributes to stockholders, in the form of monthly cash distributions, a substantial portion of our net cash flow generated from leases on our properties. We intend to retain an appropriate amount of cash as working capital. At March 31, 2011, we had cash and cash equivalents totaling $129.7 million, which represents a portion of the net proceeds of $285.5 million from the March 2011 issuance of common stock. A majority of our cash and cash equivalents at March 31, 2011, will be used to fund the remaining portion of our previously announced $544 million acquisition of 33 single-tenant retail, distribution, office and manufacturing properties.

We believe that our cash and cash equivalents on hand, cash provided from operating activities and borrowing capacity is sufficient to meet our liquidity needs for the foreseeable future.  We intend, however, to use additional sources of capital to fund property acquisitions and to repay future borrowings under our credit facility.

Universal Shelf Registration
In March 2009, we filed a shelf registration statement with the SEC, which expires in March 2012. In accordance with the SEC rules, the amount of the securities to be issued pursuant to this shelf registration statement was not specified when it was filed and there is no specific dollar limit. The securities covered by this registration statement include common stock, preferred stock, debt securities, or any combination of 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.

Credit Agency Ratings
The borrowing rates under our credit facility are based upon our credit ratings. We are currently assigned the following investment grade corporate credit ratings on our senior unsecured notes:  Fitch Ratings has assigned a rating of BBB+, Moody’s Investors Service has assigned a rating of Baa1 and Standard & Poor’s Ratings Group has assigned a rating of BBB to our senior notes. All of these ratings have “stable” outlooks.

Based on our current ratings, the current facility interest rate is LIBOR plus 185 basis points with a facility commitment fee of 35 basis points, for all-in drawn pricing of 220 basis points over LIBOR. The credit facility provides that the interest rate can range between: (i) LIBOR plus 300 basis points if our credit facility is lower than BBB-/Baa3 and (ii) LIBOR plus 175 basis points if our credit rating is A-/A3 or higher. In addition, our credit facility provides for a facility commitment fee based on our credit ratings, which ranges from (i) 50 basis points for a rating lower than BBB-/Baa3, and (ii) 30 basis points for a credit rating of A-/A3 or higher.

We also issue senior debt securities from time to time and our credit ratings can impact the interest rates charged in those transactions. If our credit ratings or ratings outlook change, our cost to obtain debt financing could increase or decrease.

The credit ratings assigned to us could change based upon, among other things, our results of operations and financial condition. These ratings are subject to ongoing evaluation by credit rating agencies and we cannot assure you that our ratings will not be changed or withdrawn by a rating agency in the future if, in
 
 
its judgment, circumstances warrant. Moreover, a rating is not a recommendation to buy, sell or hold our debt securities, preferred stock or common stock.

Notes Outstanding
Our senior unsecured note obligations consist of the following as of March 31, 2011, sorted by maturity date (dollars in millions):

   5.375% notes, issued in March 2003 and due in March 2013
  $ 100  
   5.5% notes, issued in November 2003 and due in November 2015
    150  
   5.95% notes, issued in September 2006 and due in September 2016
    275  
   5.375% notes, issued in September 2005 and due in September 2017
    175  
   6.75% notes, issued in September 2007 and due in August 2019
    550  
   5.75% notes, issued in June 2010 and due in January 2021
    250  
   5.875% bonds, issued in March 2005 and due in March 2035
    100  
    $ 1,600  

All of our outstanding notes and bonds have fixed interest rates. Interest on all of our senior note and bond obligations is paid semiannually. All of these notes and bonds contain various covenants, including: (i) a limitation on incurrence of any debt which would cause our debt to total adjusted assets ratio to exceed 60%; (ii) a limitation on incurrence of any secured debt which would cause our secured debt to total adjusted assets ratio to exceed 40%; (iii) a limitation on incurrence of any debt which would cause our debt service coverage ratio to be less than 1.5 times; and (iv) the maintenance at all times of total unencumbered assets not less than 150% of our outstanding unsecured debt. We have been in compliance with these covenants since each of the notes and bonds was issued.

The following is a summary of the key financial covenants for our senior unsecured notes, as defined and calculated per the terms of our notes. These calculations, which are not based on U.S. generally accepted accounting principles, or 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 March 31, 2011 are:
 
Note Covenants
Required
Actual
Limitation on incurrence of total debt
≤ 60% of adjusted assets
36.2%
Limitation on incurrence of secured debt
≤ 40% of adjusted assets
0.0%
Debt service coverage (trailing 12 months)
≥ 1.5 x
     3.5x
Maintenance of total unencumbered assets
≥ 150% of unsecured debt
276.3%

The following table summarizes the maturity of each of our obligations as of March 31, 2011 (dollars in millions):
 
Table of Obligations
         
Ground
             
                     
Leases
             
                     
Paid by
             
Year of
 
Credit
               
Our
             
Maturity
 
Facility
   
Notes
   
Interest (1)
   
Tenants(2)
   
Other (3)
   
Totals
 
2011
  $ --     $ --     $ 72.6     $ 2.7     $ 10.0     $ 85.3  
2012
    --       --       96.8       3.5       --       100.3  
2013
    --       100.0       92.5       3.4       --       195.9  
2014
    --       --       91.4       3.2       --       94.6  
2015
    --       150.0       90.4       3.1       --       243.5  
Thereafter
    --       1,350.0       347.5       31.9       --       1,729.4  
Totals
  $ --     $ 1,600.0     $ 791.2     $ 47.8     $ 10.0     $ 2,449.0  
 
 
 (1) Interest on the credit facility and notes has been calculated based on outstanding balances as of March 31, 2011 through their respective maturity dates.
 
 (2) 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.
 
 (3) “Other” consists of $9.1 million of commitments under construction contracts and $922,000 of contingent payments for tenant improvements and leasing costs.
 
 
Our credit facility and note obligations are unsecured.  Accordingly, we have not pledged any assets as collateral for these obligations.

Preferred Stock Outstanding
In 2004, we issued 5.1 million shares of 7.375% Class D cumulative redeemable preferred stock. In May 2009, shares of Class D preferred stock became redeemable at our option for $25 per share, plus any accrued and unpaid dividends. Dividends on shares of Class D preferred stock are paid monthly in arrears.

In 2006, we issued 8.8 million shares of 6.75% Class E cumulative redeemable preferred stock. Beginning December 7, 2011, shares of Class E preferred stock are redeemable at our option for $25 per share, plus any accrued and unpaid dividends. Dividends on shares of Class E preferred stock are paid monthly in arrears.

We are current in our obligations to pay dividends on our Class D and Class E preferred stock.

No Off-Balance Sheet Arrangements or Unconsolidated Investments
We have no unconsolidated or off-balance sheet investments in “variable interest entities” or off-balance sheet financing, nor do we engage in trading activities involving energy or commodity contracts or other derivative instruments. Additionally, we have no joint ventures or mandatorily redeemable preferred stock. As such, our financial position and results of operations are not affected by accounting regulations regarding the consolidation of off-balance sheet entities and classification of financial instruments with characteristics of both liabilities and equity.

Distribution Policy
Distributions are paid monthly to our common, Class D preferred and Class E preferred stockholders if, and when, declared by our Board of Directors.

In order to maintain our status as a REIT for federal income tax purposes, we generally are required to distribute dividends to our stockholders aggregating annually at least 90% of our 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 2010, our cash distributions totaled $206.8 million, or approximately 136.3% of our estimated REIT taxable income of $151.7 million. Our estimated REIT taxable income reflects non-cash deductions for depreciation and amortization. Our estimated REIT taxable income is presented to show our compliance with REIT distribution requirements and is not a measure of our liquidity or performance.

We intend to continue to make distributions to our stockholders that are sufficient to meet this distribution requirement and that will reduce 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 cash distributions to common stockholders, for the first three months of 2011, totaled $51.1 million, representing 90.3% of our funds from operations available to common stockholders of $56.6 million. In comparison, our 2010 cash distributions to common stockholders totaled $182.5 million, representing 94.2% of our funds from operations available to common stockholders of $193.7 million.

The Class D preferred stockholders receive cumulative distributions at a rate of 7.375% per annum on the $25 per share liquidation preference (equivalent to $1.84375 per annum per share). The Class E preferred stockholders receive cumulative distributions at a rate of 6.75% per annum on the $25 per share liquidation preference (equivalent to $1.6875 per annum per share). Dividends on our Class D and Class E preferred stock are current.


Future distributions will be at the discretion of our Board of Directors and will depend on, among other things, our results of operations, FFO, cash flow from operations, financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended, our debt service requirements and any other factors the Board of Directors may deem relevant. In addition, our credit facility contains financial covenants that could limit the amount of distributions payable by us in the event of a default, and which prohibit the payment of distributions on the common or preferred stock in the event that we fail to pay when due (subject to any applicable grace period) any principal or interest on borrowings under our credit facility.

Distributions of our current and accumulated earnings and profits for federal income tax purposes generally will be taxable to stockholders as ordinary income, except to the extent that we recognize capital gains and declare a capital gains dividend, or that such amounts constitute "qualified dividend income" subject to a reduced rate of tax. The maximum tax rate of non-corporate taxpayers for “qualified dividend income” has generally been reduced to 15% (until it “sunsets” or reverts to the provisions of prior law, which under current law will occur with respect to taxable years beginning after December 31, 2012). In general, dividends payable by REITs are not eligible for the reduced tax rate on corporate dividends, except to the extent the REIT’s dividends are attributable to dividends received from taxable corporations (such as our taxable REIT subsidiary, Crest), to income that was subject to tax at the corporate or REIT level (for example, if we distribute taxable income that we retained and paid tax on in the prior taxable year) or, as discussed above, dividends properly designated by us as “capital gain dividends.” Distributions in excess of earnings and profits generally will be treated as a non-taxable reduction in the stockholders’ basis in their stock. Distributions above that basis, generally, will be taxable as a capital gain to stockholders who hold their shares as a capital asset. Approximately 26.8% of the distributions to our common stockholders, made or deemed to have been made in 2010, were classified as a return of capital for federal income tax purposes. We are unable to predict the portion of future distributions that may be classified as a return of capital.


Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with GAAP. Our consolidated financial statements are the basis for our discussion and analysis of financial condition and results of operations. Preparing our consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. We believe that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. This summary should be read in conjunction with the more complete discussion of our accounting policies and procedures included in note 2 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2010.

In order to prepare our consolidated financial statements according to the rules and guidelines set forth by GAAP, many subjective judgments must be made with regard to critical accounting policies. One of these judgments is our estimate for useful lives in determining depreciation expense for our properties. Depreciation on a majority of our buildings and improvements is computed using the straight–line method over an estimated useful life of 25 years. If we use a shorter or longer estimated useful life, it could have a material impact on our results of operations. We believe that 25 years is an appropriate estimate of useful life.

When acquiring a property for investment purposes, we allocate the fair value of real estate acquired to: (1) land and (2) building and improvements, based in each case on their estimated fair values.


For properties acquired with in-place operating leases, 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 and below-market leases, the value of in-place leases and tenant relationships.

Another significant judgment must be made as to if, and when, impairment losses should be taken on our properties when events or a change in circumstances indicate that the carrying amount of the asset may not be recoverable. A provision is made for impairment if estimated future operating cash flows (undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are less than the current book value of the property. Key inputs that we estimate in this analysis include projected rental rates, capital expenditures and property sales capitalization rates. If a property is held for sale, it is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell. The carrying value of our real estate is the largest component of our consolidated balance sheet. If events should occur that require us to reduce the carrying value of our real estate by recording provisions for impairment, it could have a material impact on our results of operations.

The following is a comparison of our results of operations for the three months ended March 31, 2011 to the three months ended March 31, 2010.

Rental Revenue
Rental revenue was $97.6 million, for the first three months of 2011, versus $82.5 million, for the first three months of 2010, an increase of $15.1 million, or 18.3%. The increase in rental revenue in the first three months of 2011, compared to the first three months of 2010, is primarily attributable to:

  
The 26 retail properties acquired by Realty Income in 2011, which generated $654,000 of rent in the first three months of 2011;
  
The 186 retail properties acquired by Realty Income in 2010, which generated $13.98 million of rent in the first three months of 2011 compared to $22,000 of rent in the first three months of 2010, an increase of $13.95 million; and
Same store rents generated on 2,167 properties, during the entire first three months of 2011 and 2010, increased by $848,000, or 1.1%, to $81.30 million from $80.45 million; net of
  
A net decrease of $207,000 relating to the aggregate of (i) development properties acquired before 2010 that started paying rent in 2010, (ii) properties that were unleased during part of 2011 or 2010, (iii) properties sold during 2011 and 2010 and (iv) lease termination settlements, which, in aggregate, totaled $1.6 million in the first three months of 2011 compared to $1.8 million in the first three months of 2010; and
  
A net decrease in straight-line rent and other non-cash adjustments to rent of $68,000, in the first three months of 2011, as compared to the first three months of 2010.

Of the 2,519 properties in the portfolio at March 31, 2011, 2,503, or 99.4%, are single-tenant properties and the remaining 16 are multi-tenant properties. Of the 2,503 single-tenant properties, 2,423, or 96.8%, were net leased with a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 11.5 years at March 31, 2011. Of our 2,423 leased single-tenant properties, 2,213, or 91.3%, were under leases that provide for increases in rents through:
 
Primarily base rent increases tied to a consumer price index (typically subject to ceilings);
Overage rent based on a percentage of the tenants’ gross sales;
  
Fixed increases; or
A combination of two or more of the above rent provisions.
 
Percentage rent, which is included in rental revenue, was $464,000, in the first three months of 2011, and $619,000, in the first three months of 2010. Percentage rent, in the first three months of 2011, was less than 1% of rental revenue and we anticipate percentage rent to continue to be less than 1% of rental revenue for 2011.
 
 
Our portfolio of real estate, leased primarily to regional and national commercial enterprises under net leases, continues to perform well and provides dependable lease revenue supporting the payment of monthly dividends to our stockholders. At March 31, 2011, our portfolio of 2,519 properties was 96.8% leased with 81 properties available for lease as compared to 84 at December 31, 2010 and 77 at March 31, 2010. It has been our experience that approximately 2% to 4% of our property portfolio will be unleased at any given time; however, we cannot assure you that the number of properties available for lease will not exceed these levels.

Depreciation and Amortization
Depreciation and amortization was $26.8 million, for the first three months of 2011, as compared to $23.0 million, for the first three months of 2010. The increase in depreciation and amortization in 2011 was primarily due to the acquisition of properties in 2011 and 2010, which was partially offset by property sales in those same years. As discussed in the section entitled “Funds from Operations Available to Common Stockholders,” depreciation and amortization is a non-cash item that is added back to net income available to common stockholders for our calculation of FFO and AFFO.

Interest Expense
Interest expense was $25.1 million, for the first three months of 2011, as compared to $21.4 million, for the first three months of 2010.  The increase in interest expense from 2010 to 2011 was primarily due to an increase in borrowings attributable to the issuance of our $250 million of 5.75% senior unsecured notes in June 2010.

As a result of entering into our current credit facility, we incurred credit facility origination costs of $4.2 million that were classified as part of “other assets” on our consolidated balance sheet at December 31, 2010. At March 31, 2011, the balance of these credit facility origination costs was $3.8 million, which is being amortized over the remaining term of the credit facility. The remaining credit facility origination costs that were incurred as a result of entering into our previous $355 million credit facility, which were $417,000 at March 31, 2011, are included in “other assets” and are being amortized over the remaining term of our current $425 million credit facility.

The following is a summary of the components of our interest expense (dollars in thousands):

   
Three months ended
 March 31,
 
   
2011
   
2010
 
Interest on our notes and credit facility
  $ 24,221     $ 20,618  
Interest included in discontinued operations from real estate acquired for resale by Crest
    (200 )     (128 )
Credit facility commitment fees
    377       248  
Amortization of credit facility origination costs and deferred bond financing costs
    795       659  
Interest capitalized
    (71 )     (2 )
Interest expense
  $ 25,122     $ 21,395  

   
Three months ended
 March 31,
 
Credit facility and notes outstanding
 
2011
   
2010
 
Average outstanding balances (dollars in thousands)
  $ 1,605,474     $ 1,356,429  
Average interest rates
    6.03 %     6.08 %

At March 31, 2011, the weighted average interest rate on our notes payable of $1.6 billion was 6.05%. There was no outstanding balance on our credit facility at March 31, 2011, but if there was, the borrowing rate would have been 2.09%.

 
Interest Coverage Ratio
Our interest coverage ratio, for the first three months of 2011 and 2010, was 3.5 times. Interest coverage ratio is calculated as: the interest coverage amount (as calculated in the following table) divided by interest expense, including interest recorded as discontinued operations. We consider the interest coverage ratio to be an appropriate supplemental measure of a company’s ability to meet its interest expense obligations. Our calculation of interest coverage ratio may be different from the calculation used by other companies and, therefore, comparability may be limited. This information should not be considered as an alternative to any GAAP liquidity measures.

The following is a reconciliation of net cash provided by operating activities on our consolidated statements of cash flow to our interest coverage amount (dollars in thousands):

   
Three months ended
 March 31,
 
   
2011
   
2010
 
Net cash provided by operating activities
  $ 41,526     $ 36,527  
Interest expense
    25,122       21,395  
Interest expense included in discontinued operations(1)
    200       128  
Income taxes
    368       277  
Income tax benefit included in discontinued operations(1)
    (91 )     (89 )
Collection of notes receivable by Crest(1)
    (36 )     (34 )
Amortization of share-based compensation
    (2,180 )     (1,761 )
Changes in assets and liabilities:
               
Accounts receivable and other assets
    (7,509 )     (5,661 )
Accounts payable, accrued expenses and other liabilities
    31,122       23,756  
Interest coverage amount
  $ 88,522     $ 74,538  
Divided by interest expense(2)
  $ 25,322     $ 21,523  
Interest coverage ratio
    3.5       3.5  
(1)   Crest activities.
(2)  Includes interest expense recorded to "income from discontinued operations, real estate acquired for resale by Crest" on our consolidated statements of income.

Fixed Charge Coverage Ratio
Our fixed charge coverage ratio, for the first three months of 2011, was 2.8 times and, for the first three months of 2010, was 2.7 times. Fixed charge coverage ratio is calculated in exactly the same manner as interest coverage ratio, except that preferred stock dividends are also added to the denominator. We consider fixed charge coverage ratio to be an appropriate supplemental measure of a company’s ability to make its interest and preferred stock dividend payments. Our calculation of the fixed charge coverage ratio may be different from the calculation used by other companies and, therefore, comparability may be limited. This information should not be considered as an alternative to any GAAP liquidity measures.

Interest coverage amount divided by interest expense plus preferred stock dividends (dollars in thousands):
   
Three months ended
 March 31,
 
   
2011
   
2010
 
Interest coverage amount
  $ 88,522     $ 74,538  
Divided by interest expense plus preferred stock dividends(1)
  $ 31,385     $ 27,586  
Fixed charge coverage ratio
    2.8       2.7  
 
(1) Includes interest expense recorded to “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income.


General and Administrative Expenses
General and administrative expenses increased by $1.2 million to $7.9 million, in the first three months of 2011, as compared to $6.7 million, in the first three months of 2010. In the first three months of 2011 and 2010, general and administrative expenses, as a percentage of total revenue, were 8.1%. General and administrative expenses increased, during the first three months of 2011, primarily due to increases in employee costs and transaction costs related to acquisitions. In April 2011, we had 79 employees, as compared to 71 employees in April 2010. In accordance with GAAP, general and administrative expenses, for the first three months of 2011, include transaction costs of $371,000 related to the acquisition of 26 new properties during 2011, as compared to $48,000 of transaction costs for the first three months of 2010.

Property Expenses
Property expenses are broken down into costs associated with non-net leased multi-tenant properties, unleased single-tenant properties and general portfolio expenses. Expenses related to the multi-tenant and unleased single-tenant properties include, but are not limited to, property taxes, maintenance, insurance, utilities, property inspections, bad debt expense and legal fees. General portfolio costs include, but are not limited to, insurance, legal, bad debt expense, property inspections and title search fees. At March 31, 2011, 81 properties were available for lease, as compared to 84 at December 31, 2010 and 77 at March 31, 2010.

Property expenses were $2.0 million in the first three months of 2011 and 2010. In the first three months of 2011, property expenses included provisions for impairment of $164,000 recorded for one property.

Income Taxes
Income taxes were $368,000, in the first three months of 2011, as compared to $277,000, in the first three months of 2010. These amounts are for city and state income taxes paid by Realty Income.

In addition, Crest recorded state and federal income tax benefits of $91,000 in the first three months of 2011, as compared to tax benefits of $89,000, in the first three months of 2010. These amounts are included in “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income.

Discontinued Operations
Crest’s inventory of three properties is classified as real estate held for investment at March 31, 2011. The results of operations for these properties are included in “income from continuing operations” on our consolidated statements of income.

The following is a summary of Crest’s “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income (dollars in thousands):

 
 
 
Three months ended
 March 31,
 
Crest's income from discontinued operations, real estate acquired for resale
 
2011
   
2010
 
Interest revenue
  $ 347     $ 350  
Interest expense
    (200 )     (128 )
General and administrative expense
    (13 )     (97 )
Property expenses
    (3 )     (3 )
Income taxes
    91       89  
Income from discontinued operations, real estate acquired for resale by Crest
  $ 222     $ 211  
                 


Operations from nine of our investment properties were classified as held for sale at March 31, 2011, plus properties sold in 2011 and 2010, have been classified as discontinued operations. The following is a summary of Realty Income’s “income from discontinued operations, real estate held for investment” on our consolidated statements of income (dollars in thousands):

 
 
Three months ended
 March 31,
 
Realty Income's income from discontinued operations, real estate held for investment
 
2011
   
2010
 
Gain on sales of investment properties
  $ 129     $ 703  
Rental revenue
    199       780  
Other revenue
    20       10  
Depreciation and amortization
    (43 )     (250 )
Property expenses
    (95 )     (438 )
Provision for impairment
    (36 )     (34 )
Income from discontinued operations, real estate held for investment
  $ 174     $ 771  

The following is a summary of our total income from discontinued operations (dollars in thousands, except per share data):
 
   
Three months ended
 March 31,
 
Total discontinued operations
 
2011
   
2010
 
Real estate acquired for resale by Crest
  $ 222     $ 211  
Real estate held for investment
    174       771  
Income from discontinued operations
  $ 396     $ 982  
                 
Per common share, basic and diluted
  $ 0.00     $ 0.01  
 
The above per share amounts have each been calculated independently.

Crest’s Property Sales
During the first three months of 2011 and 2010, Crest did not sell any properties.

Gain on Sales of Investment Properties by Realty Income
During the first three months of 2011, we sold three investment properties for $1.1 million, which resulted in a gain of $129,000. In comparison, during the first three months of 2010, we sold three investment properties for $1.8 million, which resulted in a gain of $703,000. The results of operations for these properties have been reclassified as discontinued operations.

Provisions for Impairment on Real Estate Acquired for Resale by Crest
No provisions for impairment were recorded by Crest in the first three months of 2011 or 2010.

Provisions for Impairment on Realty Income Investment Properties
For the first three months of 2011, Realty Income recorded a provision for impairment of $36,000 on one property, which was sold in March 2011. This provision for impairment is included in "income from discontinued operations, real estate held for investment" on our consolidated statement of income, for the three months ended March 31, 2011. Additionally, for the first three months of 2011, Realty Income recorded a provision for impairment of $164,000 on one property held for investment at March 31, 2011. This provision for impairment is included in "property expenses" on our consolidated statement of income, for the three months ended March 31, 2011.

For the first three months of 2010, Realty Income recorded a provision for impairment of $34,000 on one property, which was subsequently sold in the second quarter of 2010.  This provision for impairment is included in "income from discontinued operations, real estate held for investment" on our consolidated statement of income, for the three months ended March 31, 2010.

 
Preferred Stock Dividends
Preferred stock cash dividends totaled $6.1 million in the first three months of 2011 and 2010.

Net Income Available to Common Stockholders
Net income available to common stockholders was $29.9 million in the first three months of 2011, an increase of $5.8 million, as compared to $24.1 million in the first three months of 2010.

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.


FFO, for the first three months of 2011, increased by $9.9 million, or 21.2%, to $56.6 million as compared to $46.7 million, for the first three months of 2010. The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable GAAP measure) to FFO. Also presented is information regarding distributions paid to common stockholders and the weighted average number of common shares used for the basic and diluted computation per share (dollars in thousands, except per share amounts):
 
   
Three months ended
 March 31,
 
   
2011
   
2010
 
Net income available to common stockholders
  $ 29,936     $ 24,142  
Depreciation and amortization:
               
Continuing operations
    26,810       23,041  
Discontinued operations
    43       250  
Depreciation of furniture, fixtures and equipment
    (62 )     (78 )
Gain on sales of land and investment properties, discontinued operations
    (129 )     (703 )
FFO available to common stockholders
  $   56,598     $   46,652  
                 
FFO per common share:
               
Basic
  $ 0.48     $ 0.45  
Diluted
  $ 0.48     $ 0.45  
                 
Distributions paid to common stockholders
  $ 51,123     $ 44,764  
                 
FFO in excess of distributions paid to common stockholders
  $ 5,475     $ 1,888  
                 
Weighted average number of common shares used for computation per share:
               
Basic
    118,960,878       103,606,241  
Diluted
    119,109,044       103,686,440  

We define FFO, a non-GAAP measure, consistent with the National Association of Real Estate Investment Trust’s definition, as net income available to common stockholders, plus depreciation and amortization of real estate assets, reduced by gains on sales of investment properties and extraordinary items.


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


AFFO, for the first three months of 2011, increased $10.6 million, or 22.3%, to $58.2 million, as compared to $47.6 million in the first three months of 2010. 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) or "FAD" (for Funds Available for Distribution).  
 
The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable GAAP measure) to FFO and AFFO. Also presented is information regarding distributions paid to common stockholders and the weighted average number of common shares used for the basic and diluted computation per share (dollars in thousands, except per share amounts):
 
   
Three months ended
 March 31,
 
 
 
2011
   
2010
 
Net income available to common stockholders
  $ 29,936     $ 24,142  
Cumulative adjustments to calculate FFO(1)
    26,662       22,510  
FFO available to common stockholders
    56,598       46,652  
Amortization of share-based compensation
    2,180       1,761  
Amortization of deferred note financing costs(2)
    376       341  
Provisions for impairment
    200       34  
Capitalized leasing costs and commissions
    (269 )     (292 )
Capitalized building improvements
    (674 )     (643 )
Straight-line rent revenue(3)
    (172 )     (238 )
Total AFFO available to common stockholders
  $ 58,239     $ 47,615  
                 
AFFO per common share:
               
Basic
  $ 0.49     $ 0.46  
Diluted
  $ 0.49     $ 0.46  
                 
Distributions paid to common stockholders
  $ 51,123     $ 44,764  
                 
AFFO in excess of distributions paid to common stockholders
  $ 7,116     $ 2,851  
                 
Weighted average number of common shares used for computation per share:
               
Basic
    118,960,878       103,606,241  
Diluted
    119,109,044       103,686,440  
 
 (1)
See reconciling items for FFO presented on previous page.
 (2)
Amortization of deferred note financing costs 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 and June 2010. These costs are being amortized over the lives of these notes. No costs associated with our credit facility agreements or annual fees paid to credit rating agencies have been included.
 (3)
A negative amount indicates that our straight-line rent revenue was greater than our actual cash rent collected.

 
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 ongoing 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 and AFFO is intended to assist the reader in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and AFFO in the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and AFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income as an indication of our performance. FFO and AFFO should not be considered as an alternative to reviewing our cash flows from operating, investing and financing activities.  In addition, FFO and AFFO should not be considered as a measure of liquidity, of our ability to make cash distributions, or of our ability to pay interest payments.


At March 31, 2011, we owned a diversified portfolio:
 
Of 2,519 properties;
With an occupancy rate of 96.8%, or 2,438 properties occupied and only 81 properties available for lease;
Leased to 125 different retail and other commercial enterprises doing business in 31 separate industries;
Located in 49 states;
With over 22.5 million square feet of leasable space; and
With an average leasable space per property of approximately 8,900 square feet.

In addition to our real estate portfolio, our subsidiary, Crest, had an inventory of three properties located in three states at March 31, 2011. These properties are classified as held for investment.

At March 31, 2011, of our 2,519 retail properties, 2,428 were leased under net-lease agreements. A net lease typically requires the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance. In addition, our tenants are typically responsible for future rent increases based on increases in the consumer price index (typically subject to ceilings), additional rent calculated as a percentage of the tenants’ gross sales above a specified level, or fixed increases.

In order to more accurately reflect the Company’s exposure to various industries, the following industry table has been modified to reflect the changes below:
 
  
Properties previously included in the “distribution and office” industry were reclassified to the “home improvement,” “convenience store,” and “restaurant” industries, to better reflect the industry in which the tenant operates;
  
The “equipment rental” industry was renamed "equipment services; "
  
The “travel plazas” industry was renamed "transportation services;" and
  
The “wine and spirits” industry was renamed "beverages."

Additionally, we added a table that quantifies our exposure to various property types.


Industry Diversification
The following table sets forth certain information regarding Realty Income’s property portfolio (excluding properties owned by Crest) classified according to the business of the respective tenants, expressed as a percentage of our total rental revenue:
   
Percentage of Rental Revenue(1)
 
   
For the Quarter
   
For the Years Ended
 
 
Industries
 
Ended
March 31,
2011
   
Dec 31,
2010
   
Dec 31,
2009
   
Dec 31,
2008
   
Dec 31,
2007
   
Dec 31,
2006
   
Dec 31,
2005
 
Apparel stores
    1.5 %     1.2 %     1.1 %     1.1 %     1.2 %     1.7 %     1.6 %
Automotive collision services
    0.9       1.0       1.1       1.0       1.1       1.3       1.3  
Automotive parts
    1.2       1.4       1.5       1.6       2.1       2.8       3.4  
Automotive service
    4.2       4.7       4.8       4.8       5.2       6.9       7.6  
Automotive tire services
    5.6       6.4       6.9       6.7       7.3       6.1       7.2  
Beverages
    5.8       3.0       --       --       --       --       --  
Book stores
    0.1       0.1       0.2       0.2       0.2       0.2       0.3  
Business services
    *       *       *       *       0.1       0.1       0.1  
Child care
    5.8       6.5       7.3       7.6       8.4       10.3       12.7  
Consumer electronics
    0.6       0.6       0.7       0.8       0.9       1.1       1.3  
Convenience stores
    19.9       17.1       16.9       15.8       14.0       16.1       18.7  
Crafts and novelties
    0.2       0.3       0.3       0.3       0.3       0.4       0.4  
Drug stores
    3.8       4.1       4.3       4.1       2.7       2.9       2.8  
Entertainment
    1.1       1.2       1.3       1.2       1.4       1.6       2.1  
Equipment services
    0.2       0.2       0.2       0.2       0.2       0.2       0.4  
Financial services
    0.2       0.2       0.2       0.2       0.2       0.1       0.1  
General merchandise
    0.7       0.8       0.8       0.8       0.7       0.6       0.5  
Grocery stores
    1.7       0.9       0.7       0.7       0.7       0.7       0.7  
Health and fitness
    6.4       6.9       5.9       5.6       5.1       4.3       3.7  
Home furnishings
    1.2       1.3       1.3       2.4       2.6       3.1       3.7  
Home improvement
    1.8       2.0       2.2       2.1       2.4       3.4       1.1  
Motor vehicle dealerships
    2.5       2.6       2.7       3.2       3.1       3.4       2.6  
Office supplies
    0.9       0.9       1.0       1.0       1.1       1.3       1.5  
Pet supplies and services
    0.7       0.9       0.9       0.8       0.9       1.1       1.3  
Private education
    0.8       0.8       0.9       0.8       0.8       0.8       0.8  
Restaurants
    18.9       21.1       22.0       22.5       21.5       11.9       9.4  
Shoe stores
    0.2       0.1       --       --       --       --       0.3  
Sporting goods
    2.8       2.7       2.6       2.3       2.6       2.9       3.4  
Theaters
    8.1       8.9       9.2       9.0       9.0       9.6       5.2  
Transportation services
    0.7       0.2       0.2       0.2       0.2       0.3       0.3  
Video rental
    0.0       0.2       1.0       1.1       1.7       2.1       2.5  
Other
    1.5       1.7       1.8       1.9       2.3       2.7       3.0  
Totals
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %

 
* Less than 0.1%

(1)
Includes rental revenue for all properties owned by Realty Income at the end of each period presented, including revenue from properties reclassified as discontinued operations.


Property Type
The following table sets forth certain property type information regarding Realty Income’s property portfolio (excluding properties owned by Crest) as of March 31, 2011 (dollars in thousands):
 
         
Approximate
   
Rental Revenue for
   
Percentage of
 
   
Number of
   
Leasable
   
the Quarter Ended
   
Rental
 
Property Type
 
Properties
   
Square Feet
   
March 31, 2011(1)
   
Revenue
 
Retail
    2,475       19,788,400     $