10-K 1 a13-26753_110k.htm 10-K

Table of Contents

GRAPHIC

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2013

 

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

 

(IRS Employer

 

 

Incorporation or Organization)

 

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

 

Securities registered pursuant to Section 12 (b) of the Act:

 

 

 

 

Name of Each Exchange

 

 

Title of Each Class

 

On Which Registered

 

 

Common Stock, $0.01 Par Value

Class E Preferred Stock, $0.01 Par Value

Class F Preferred Stock, $0.01 Par Value

 

New York Stock Exchange

New York Stock Exchange

New York Stock Exchange

 

 

Securities registered pursuant to Section 12 (g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES x     NO o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES o     NO x

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

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

 

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

 

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

 

At June 30, 2013, the aggregate market value of the Registrant’s shares of common stock, $0.01 par value, held by non-affiliates of the Registrant was $8.2 billion based upon the last reported sale price of $41.92 per share on the New York Stock Exchange on June 28, 2013, the last business day of the Registrant’s most recently completed second fiscal quarter.

 

At January 29, 2014, the number of shares of common stock outstanding was 207,593,695, the number of shares of Class E preferred stock outstanding was 8,800,000 and the number of shares of Class F preferred stock outstanding was 16,350,000.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III, Items 10, 11, 12, 13 and 14 incorporate by reference certain specific portions of the definitive Proxy Statement for Realty Income Corporation’s Annual Meeting to be held on May 6, 2014, to be filed pursuant to Regulation 14A. Only those portions of the proxy statement which are specifically incorporated by reference herein shall constitute a part of this annual report.

 



Table of Contents

 

REALTY INCOME CORPORATION

 

Index to Form 10-K

 

 

 

 

 

PART I

 

 

Page

 

Item 1:

Business

 

 

 

The Company

2

 

 

Recent Developments

3

 

 

Dividend Policy

8

 

 

Business Philosophy and Strategy

9

 

 

Property Portfolio Information

15

 

 

Forward-Looking Statements

22

 

Item 1A:

Risk Factors

22

 

Item 1B:

Unresolved Staff Comments

31

 

Item 2:

Properties

31

 

Item 3:

Legal Proceedings

32

 

Item 4:

Mine Safety Disclosures

32

PART II

 

 

 

Item 5:

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

32

 

Item 6:

Selected Financial Data

33

 

Item 7:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

General

34

 

 

Liquidity and Capital Resources

34

 

 

Results of Operations

43

 

 

Funds from Operations Available to Common Stockholders (FFO) and Normalized Funds from Operations Available to Common Stockholders (Normalized FFO)

48

 

 

Adjusted Funds from Operations Available to Common Stockholders (AFFO)

50

 

 

Impact of Inflation

51

 

 

Impact of Recent Accounting Pronouncements

51

 

Item 7A:

Quantitative and Qualitative Disclosures About Market Risk

51

 

Item 8:

Financial Statements and Supplementary Data

52

 

Item 9:

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

82

 

Item 9A:

Controls and Procedures

83

 

Item 9B:

Other Information

84

PART III

 

 

 

Item 10:

Directors, Executive Officers and Corporate Governance

84

 

Item 11:

Executive Compensation

84

 

Item 12:

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

84

 

Item 13:

Certain Relationships, Related Transactions and Director Independence

84

 

Item 14:

Principal Accounting Fees and Services

84

PART IV

 

 

 

Item 15:

Exhibits and Financial Statement Schedules

85

SIGNATURES

 

91

 

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Table of Contents

 

PART I

 

Item 1:  Business

THE COMPANY

 

Realty Income Corporation, The Monthly Dividend Company®, or Realty Income, is a publicly traded real estate company with the primary business objective of generating dependable monthly cash dividends from a consistent and predictable level of cash flow from operations. Our monthly dividends are supported by the cash flow from our portfolio of properties leased to commercial tenants. We have in-house acquisition, leasing, legal, credit research, real estate research, portfolio management (including property and asset management), and capital markets expertise. Over the past 45 years, Realty Income and its predecessors have been acquiring and owning freestanding commercial properties that generate rental revenue under long-term lease agreements.

 

Realty Income was founded in 1969, and in 1994 was listed on the New York Stock Exchange, or NYSE.  We elected to be taxed as a real estate investment trust, or REIT, requiring us to distribute dividends to our stockholders aggregating at least 90% of our taxable income (excluding net capital gains).

 

We seek to increase distributions to stockholders and funds from operations, or FFO, per share through both active portfolio management and the acquisition of additional properties.

 

Generally, our portfolio management efforts seek to achieve:

 

·                  Contractual rent increases on existing leases;

·                  Rent increases at the termination of existing leases, when market conditions permit; and

·                  The active management of our property portfolio, including re-leasing vacant properties, and selectively selling properties, thereby mitigating our exposure to certain tenants and markets.

 

At December 31, 2013, we owned a diversified portfolio:

 

·                  Of 3,896 properties;

·                  With an occupancy rate of 98.2%, or 3,826 properties leased and 70 properties available for lease;

·                  Leased to 205 different commercial tenants doing business in 47 separate industries;

·                  Located in 49 states and Puerto Rico;

·                  With over 62.6 million square feet of leasable space; and

·                  With an average leasable space per property of approximately 16,100 square feet, including approximately 10,600 square feet per retail property.

 

Of the 3,896 properties in the portfolio, 3,876, or 99.5%, are single-tenant properties, and the remaining twenty are multi-tenant properties. At December 31, 2013, of the 3,876 single-tenant properties, 3,807 were leased with a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 10.8 years.

 

In acquiring additional properties, our strategy is primarily to acquire freestanding, single-tenant locations under long-term, net lease agreements.  Our acquisition and investment activities generally focus on businesses providing goods and services that satisfy basic consumer and business needs.  In general, our net lease agreements:

 

·                  Are for initial terms of 10 to 20 years;

·                  Require the tenant to pay minimum monthly rent and property operating expenses (taxes, insurance and maintenance); and

·                  Provide for future rent increases based on increases in the consumer price index (typically subject to ceilings), additional rent calculated as a percentage of the tenants’ gross sales above a specified level, or fixed increases.

 

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Our nine senior officers owned 0.4% of our outstanding common stock with a market value of $33.3 million at January 29, 2014. Our directors and nine senior officers, as a group, owned 0.6% of our outstanding common stock with a market value of $51.7 million at January 29, 2014.

 

Our common stock is listed on the NYSE under the ticker symbol “O” with a cusip number of 756109-104. Our central index key number is 726728.

 

Our 6.75% Monthly Income Class E Cumulative Redeemable Preferred Stock is listed on the NYSE under the ticker symbol “OprE” with a cusip number of 756109-708.

 

Our 6.625% Monthly Income Class F Cumulative Redeemable Preferred Stock is listed on the NYSE under the ticker symbol “OprF” with a cusip number of 756109-807.

 

In January 2014, we had 116 employees as compared to 97 employees in January 2013.

 

We maintain a corporate website at www.realtyincome.com. On our website we make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, Form 3s, Form 4s, Form 5s, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file these reports with the Securities and Exchange Commission, or SEC.  None of the information on our website is deemed to be part of this report.

 

RECENT DEVELOPMENTS

 

Increases in Monthly Dividends to Common Stockholders

We have continued our 45-year policy of paying monthly dividends.  In addition, we increased the dividend five times during 2013.

 

 

Month

Dividend

Increase

2013 Dividend increases

Paid

per share

per share

1st increase

Jan 2013

$ 0.1517500

$ 0.0003125

2nd increase

Feb 2013

0.1809167

0.0291667

3rd increase

Apr 2013

0.1812292

0.0003125

4th increase

Jul 2013

0.1815417

0.0003125

5th increase

Oct 2013

0.1818542

0.0003125

 

The dividends paid per share during 2013 as compared to 2012 increased 21.2%, which is the largest annual increase in the company’s history.  The 2013 dividends paid per share totaled $2.1474587 as compared to $1.7716250 in 2012, an increase of $0.3758337.

 

In December 2013, we declared an increased dividend of $0.1821667 per share, which was paid in January 2014.  The increase in January 2014 was our 65th consecutive quarterly increase and the 74th increase in the amount of the dividend since our listing on the NYSE in 1994.  In January 2014 and February 2014, we declared dividends of $0.1821667 per share, which will be paid in February 2014 and March 2014, respectively.

 

The monthly dividend of $0.1821667 per share represents a current annualized dividend of $2.186 per share, and an annualized dividend yield of approximately 5.9% based on the last reported sale price of our common stock on the NYSE of $37.33 on December 31, 2013. Although we expect to continue our policy of paying monthly dividends, we cannot guarantee that we will maintain our current level of dividends, that we will continue our pattern of increasing dividends per share, or what our actual dividend yield will be in any future period.

 

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Acquisitions During 2013

During 2013, we invested $1.51 billion in 459 new properties and properties under development or expansion, with an initial weighted average contractual lease rate of 7.1%. The 459 new properties and properties under development or expansion are located in 40 states, will contain approximately 9.0 million leasable square feet, and are 100% leased with a weighted average lease term of 14.0 years. The tenants occupying the new properties operate in 23 industries and the property types consist of 83.8% retail, 9.2% office, 4.9% industrial and distribution, and 2.1% manufacturing, based on rental revenue.  These investments are in addition to the $3.2 billion acquisition of 515 properties of American Realty Capital Trust, Inc., or ARCT, which were added to our real estate portfolio during the first quarter of 2013.  Our combined total investment in real estate assets during 2013 was $4.67 billion in 974 new properties and properties under development or expansion.  During 2013, none of our real estate investments caused any one tenant to be 10% or more of our total assets at December 31, 2013.

 

In conjunction with our acquisition of ARCT, each outstanding share of ARCT common stock was converted into the right to receive a combination of: (i) $0.35 in cash and (ii) 0.2874 shares of our common stock, resulting in the issuance of a total of approximately 45.6 million shares of our common stock to ARCT shareholders, valued at a per share amount of $44.04, which was the closing sale price of our common stock on January 22, 2013.  In connection with the closing of this acquisition, we terminated and repaid the amounts then outstanding of approximately $552.9 million under ARCT’s revolving credit facility and term loan.  In connection with our acquisition of ARCT, we assumed approximately $516.3 million of mortgages payable.  We incurred merger costs of $13.0 million and $7.9 million, respectively, in 2013 and 2012.  The total merger costs were approximately $21 million.

 

Our acquisition of ARCT provided benefits to Realty Income, including accretion to net earnings, growth in the size of our real estate portfolio, diversification of industries and property type, and increase in the percentage of investment grade tenants.

 

The 515 properties added to our real estate portfolio as a result of the ARCT acquisition, are located in 44 states and Puerto Rico, contain over 16.0 million leasable square feet and are 100% leased with a weighted average lease term of 12.2 years.  The 69 tenants, occupying the 515 properties acquired, operate in 28 industries and the property types consist of 54.0% retail, 32.6% industrial and distribution, and 13.4% office, based on rental revenue.

 

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

 

In the case of a property under development or expansion, the estimated initial weighted average contractual lease rate is computed as follows: estimated net operating income (which is calculated by multiplying the capitalization rate determined by the lease by our projected total investment in the property, including land, construction and capitalized interest costs) for the first full year of each lease, divided by such projected total investment in the property.  Of the $4.67 billion we invested during 2013, $39.6 million was invested in 21 properties under development or expansion, with an estimated initial weighted average contractual lease rate of 8.5%.  We may continue to pursue development or expansion opportunities under similar arrangements in the future.

 

John P. Case Appointed Chief Executive Officer (CEO)

In September 2013, we announced that our Board of Directors appointed John P. Case as CEO of the company.  Mr. Case, who had previously served as President and Chief Investment Officer, succeeded Tom A. Lewis, who retired as our CEO.  Mr. Lewis had been our CEO since 1997.  Mr. Case is only the third CEO in Realty Income’s 45-year history.

 

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Portfolio Discussion

 

Leasing Results

At December 31, 2013, we had 70 properties available for lease out of 3,896 properties in our portfolio, which represents a 98.2% occupancy rate.  Since December 31, 2012, when we reported 84 properties available for lease and a 97.2% occupancy rate, we:

 

·                  Leased 27 properties;

·                  Sold 19 properties available for lease; and

·                  Have 32 new properties available for lease.

 

During 2013, 136 properties with expiring leases were leased to either existing or new tenants.  The annual rent on these leases was $16.1 million, as compared to the previous rent on these same properties of $16.0 million.  At December 31, 2013, our average annualized rental revenue was approximately $13.21 per square foot on the 3,807 leased properties in our portfolio.  At December 31, 2013, we classified 12 properties with a carrying amount of $12.0 million as held for sale on our balance sheet.

 

Investments in Existing Properties

In 2013, we capitalized costs of $8.5 million on existing properties in our portfolio, consisting of $1.3 million for re-leasing costs and $7.2 million for building and tenant improvements.  In 2012, we capitalized costs of $6.6 million on existing properties in our portfolio, consisting of $1.62 million for re-leasing costs and $4.93 million for building and tenant improvements.

 

As part of our re-leasing costs, we pay leasing commissions and sometimes provide tenant rent concessions.  Leasing commissions are paid based on the commercial real estate industry standard and any rent concessions provided are minimal.  We do not consider the collective impact of the leasing commissions or tenant rent concessions to be material to our financial position or results of operations.

 

The majority of our building and tenant improvements are related to roof repairs, HVAC improvements, and parking lot resurfacing and replacements.  It is not customary for us to offer significant tenant improvements on our properties as tenant incentives.  The amounts of our capital expenditures can vary significantly, depending on the rental market, tenant credit worthiness, and the willingness of tenants to pay higher rents over the terms of the leases.

 

Amendment to Credit Facility

In October 2013, we amended our credit facility by increasing the borrowing capacity by $500 million to $1.5 billion.  All other material business terms of the credit facility remain unchanged.

 

Note Issuance

In July 2013, we issued $750 million of 4.65% senior unsecured notes due August 2023, or the 2023 Notes.  The price to the investors for the 2023 Notes was 99.775% of the principal amount for an effective yield of 4.678% per annum.  The total net proceeds of approximately $741.4 million from this offering were used to repay all outstanding borrowings under our acquisition credit facility, and the remaining proceeds were used for general corporate purposes, including additional property acquisitions.  Interest is paid semiannually on the 2023 Notes.

 

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Accelerated Stock Vesting

The Compensation Committee of our Board of Directors approved, effective July 1, 2013, the accelerated vesting of each restricted stock award that had originally been granted with ten-year vesting to five years.  On July 1, 2013, 212,827 restricted shares vested as a result of this acceleration, resulting in additional compensation expense of $3.7 million during 2013.

 

Issuance of Common Stock

In October 2013, we issued 9,775,000 shares of common stock at a price of $40.63 per share, including 1,275,000 shares purchased by the underwriters upon the exercise of their option to purchase additional shares.  After underwriting discounts and other estimated offering costs of $18.7 million, the net proceeds of approximately $378.5 million were used to repay a portion of the borrowings under our acquisition credit facility, which were used to fund property acquisitions.

 

In March 2013, we issued 17,250,000 shares of common stock at a price of $45.90 per share. After underwriting discounts and other offering costs of $36.7 million, the net proceeds of $755.1 million were used to redeem our 5.375% notes in March 2013 and repay borrowings under our acquisition credit facility, which were used to fund property acquisitions, including our acquisition of ARCT.

 

In connection with our January 2013 acquisition of ARCT, we issued a total of 45,573,144 shares of our common stock to ARCT shareholders and redeemed 208,709 shares of our common stock that were previously held by ARCT.

 

Dividend Reinvestment and Stock Purchase Plan

In March 2011, we established a Dividend Reinvestment and Stock Purchase Plan, or the DRSPP, to provide our common stockholders, as well as new investors, with a convenient and economical method of purchasing our common stock and reinvesting their distributions.  The DRSPP also allows our current stockholders to buy additional shares of common stock by reinvesting all or a portion of their distributions.  The DRSPP authorizes up to 6,000,000 common shares to be issued.  During 2013, we issued 1,449,139 shares and raised approximately $55.6 million under the DRSPP.

 

Note Repayment

In March 2013, we repaid the $100 million of outstanding 5.375% notes, plus accrued and unpaid interest, using proceeds from our March 2013 common stock offering and our credit facility.

 

Term Loan

In January 2013, in conjunction with our acquisition of ARCT, we entered into a $70 million senior unsecured term loan maturing January 21, 2018, to partially repay the then outstanding ARCT term loan.  Borrowing under the term loan bears interest at LIBOR, plus 1.20%.  In conjunction with this term loan, we also acquired an interest rate swap which essentially fixes our per annum interest rate on the term loan at 2.15%.

 

Noncontrolling Interests

As consideration for two separate acquisitions during 2013, partnership units of Tau Operating Partnership, L.P. and Realty Income, L.P. were issued to third parties.  These units (discussed in the following paragraphs below) do not have voting rights, are entitled to monthly distributions equal to the amount paid to our common stockholders, and are redeemable in cash or our common stock, at our option and at a conversion ratio of one to one, subject to certain exceptions.  As the general partner for each of these partnerships, we have operating and financial control over these entities, consolidate them in our financial statements, and record the partnership units held by third parties as noncontrolling interests.

 

Issuance of Common and Preferred Partnership Units

In connection with our acquisition of ARCT in January 2013, we issued 317,022 common partnership units and 6,750 preferred partnership units.  These common units are entitled to monthly distributions equivalent to the per common share amounts paid to the common stockholders of Realty Income.  The preferred units have a par value of $1,000, and are entitled to monthly payments at a rate of 2% per annum, or $135,000 per year.

 

In June 2013, we issued 534,546 common partnership units of Realty Income, L.P.  These common units are entitled to monthly distributions equivalent to the per common share amount paid to the common stockholders of Realty Income.

 

Universal Shelf Registration

In February 2013, we filed a shelf registration statement with the SEC, which is effective for a term of three years and will expire in February 2016. This replaces our prior shelf registration statement.  In accordance with SEC rules, the amount of securities to be issued pursuant to this shelf registration statement was not specified when it was filed and there is no specific dollar limit. The securities covered by this registration statement

 

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include (1) common stock, (2) preferred stock, (3) debt securities, (4) depositary shares representing fractional interests in shares of preferred stock, (5) warrants to purchase debt securities, common stock, preferred stock or depositary shares, and (6) any combination of these securities. We may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering.

 

Net Income Available to Common Stockholders

Net income available to common stockholders was $203.6 million in 2013, compared to $114.5 million in 2012, an increase of $89.1 million. On a diluted per common share basis, net income was $1.06 in 2013, as compared to $0.86 in 2012, an increase of $0.20, or 23.3%.  Net income available to common stockholders for 2013 includes $13.0 million of merger-related costs for the acquisition of ARCT, which represents $0.07 on a diluted per common share basis, and $3.7 million for accelerated vesting of restricted shares that occurred in July 2013 from ten-year vesting to five years, which represents $0.02 on a diluted per common share basis.  Net income available to common stockholders for 2012 includes $7.9 million of merger-related costs for the acquisition of ARCT, which represents $0.06 on a diluted per common share basis, and a $3.7 million charge for the excess of redemption value over carrying value of the shares of our 7.375% Monthly Income Class D Cumulative Redeemable Preferred Stock, or Class D preferred stock, which represents $0.03 on a diluted per common share basis.

 

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

 

Gains from the sale of properties during 2013 were $64.7 million, as compared to gains from the sale of properties of $9.9 million during 2012.

 

Funds from Operations Available to Common Stockholders (FFO) and Normalized Funds from Operations Available to Common Stockholders (Normalized FFO)

In 2013, our FFO increased by $188.1 million, or 72.1%, to $449.0 million versus $260.9 million in 2012.  On a diluted per common share basis, FFO was $2.34 in 2013, compared to $1.96 in 2012, an increase of $0.38, or 19.4%.  FFO in 2013 includes $13.0 million of merger-related costs, which represents $0.07 on a diluted per common share basis, and $3.7 million for accelerated vesting of restricted shares that occurred in July 2013 from ten-year vesting to five years, which represents $0.02 on a diluted per common share basis.  FFO for 2012 includes $7.9 million of merger-related costs, which represents $0.06 on a diluted per common share basis, and includes a $3.7 million charge for the excess of redemption value over carrying value of the shares of our Class D preferred stock, which represents $0.03 on a diluted per common share basis.

 

We define normalized FFO as FFO excluding the merger-related costs for our acquisition of ARCT.  In 2013, our normalized FFO increased by $193.2 million, or 71.9%, to $462.0 million, versus $268.8 million in 2012.  On a diluted common share basis, normalized FFO was $2.41 in 2013, compared to $2.02 in 2012, an increase of $0.39, or 19.3%.

 

See our discussion of FFO and normalized FFO (which are not financial measures under U.S. generally accepted accounting principles, or GAAP), in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this annual report, which includes a reconciliation of net income available to common stockholders to FFO and normalized FFO.

 

Adjusted Funds from Operations Available to Common Stockholders (AFFO)

In 2013, our AFFO increased by $188.9 million, or 68.9%, to $463.1 million versus $274.2 million in 2012. On a diluted per common share basis, AFFO was $2.41 in 2013, compared to $2.06 in 2012, an increase of $0.35, or 17.0%.

 

See our discussion of AFFO (which is not a financial measure under GAAP), in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this annual report, which includes a reconciliation of net income available to common stockholders to FFO, normalized FFO and AFFO.

 

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DIVIDEND POLICY

 

Distributions are paid monthly to holders of shares of our common stock, 6.75% Monthly Income Class E Cumulative Redeemable Preferred Stock, or Class E preferred stock, and 6.625% Monthly Income Class F Cumulative Redeemable Preferred Stock, or Class F preferred stock, if, and when, declared by our Board of Directors.

 

Distributions are paid monthly to the limited partners holding common units of Tau Operating Partnership, L.P. and Realty Income, L.P., each on a per unit basis that is generally equal to the amount paid per share to our common stockholders.

 

In order to maintain our tax status as a REIT for federal income tax purposes, we generally are required to distribute dividends to our stockholders aggregating annually at least 90% of our taxable income (excluding net capital gains), and we are subject to income tax to the extent we distribute less than 100% of our taxable income (including net capital gains). In 2013, our cash distributions to preferred and common stockholders totaled $451.2 million, or approximately 161.4% of our estimated taxable income of $279.6 million. Our estimated taxable income reflects non-cash deductions for depreciation and amortization. Our estimated taxable income is presented to show our compliance with REIT dividend requirements and is not a measure of our liquidity or operating performance.  We intend to continue to make distributions to our stockholders that are sufficient to meet this dividend requirement and that will reduce or eliminate our exposure to income taxes. Furthermore, we believe our funds from operations are more than sufficient to support our current level of cash distributions to our stockholders. Our 2013 cash distributions to common stockholders totaled $409.2 million, representing 88.4% of our adjusted funds from operations available to common stockholders of $463.1 million.

 

The Class E preferred stockholders receive cumulative distributions at a rate of 6.75% per annum on the $25.00 per share liquidation preference (equivalent to $1.6875 per annum per share). The Class F preferred stockholders receive cumulative distributions at a rate of 6.625% per annum on the $25.00 per share liquidation preference (equivalent to $1.65625 per annum per share). Dividends on our Class E and Class F preferred stock are current.

 

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

 

Distributions of our current and accumulated earnings and profits for federal income tax purposes generally will be taxable to stockholders as ordinary income, except to the extent that we recognize capital gains and declare a capital gains dividend, or that such amounts constitute “qualified dividend income” subject to a reduced rate of tax. The maximum tax rate of non-corporate taxpayers for “qualified dividend income” is generally 20%. In general, dividends payable by REITs are not eligible for the reduced tax rate on qualified dividend income, except to the extent that certain holding requirements have been met with respect to the REIT’s stock and the REIT’s dividends are attributable to dividends received from certain taxable corporations (such as our taxable REIT subsidiaries) or to income that was subject to tax at the corporate or REIT level (for example, if we distribute taxable income that we retained and paid tax on in the prior taxable year).

 

Distributions in excess of earnings and profits generally will be treated as a non-taxable reduction in the stockholders’ basis in their stock, but not below zero. Distributions in excess of that basis generally will be taxable as a capital gain to stockholders who hold their shares as a capital asset. Approximately 38.7% of the distributions to our common stockholders, made or deemed to have been made in 2013, were classified as a return of capital for federal income tax purposes. We estimate that in 2014, between 15% and 30% of the distributions may be classified as a return of capital.

 

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BUSINESS PHILOSOPHY AND STRATEGY

 

Capital Philosophy

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

 

Our primary cash obligations, for the current year and subsequent years, are included in the “Table of Obligations,” which is presented in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  We expect to fund our operating expenses and other short-term liquidity requirements, including property acquisitions and development costs, payment of principal and interest on our outstanding indebtedness, property improvements, re-leasing costs and cash distributions to common and preferred stockholders, primarily through cash provided by operating activities, borrowing on our $1.5 billion credit facility and occasionally through public securities offerings.

 

Conservative Capital Structure

We believe that our stockholders are best served by a conservative capital structure. Therefore, we seek to maintain a conservative debt level on our balance sheet and solid interest and fixed charge coverage ratios. At December 31, 2013, our total outstanding borrowings of senior unsecured notes, term loan, mortgages payable and credit facility borrowings were $4.18 billion, or approximately 33.2% of our total market capitalization of $12.59 billion.

 

We define our total market capitalization at December 31, 2013 as the sum of:

 

·                  Shares of our common stock outstanding of 207,485,073, plus total common units of 851,568, multiplied by the last reported sales price of our common stock on the NYSE of $37.33 per share on December 31, 2013, or $7.78 billion;

·                  Aggregate liquidation value (par value of $25.00 per share) of the Class E preferred stock of $220.0 million;

·                  Aggregate liquidation value (par value of $25.00 per share) of the Class F preferred stock of $408.8 million;

·                  Outstanding borrowings of $128.0 million on our credit facility;

·                  Outstanding mortgages payable of $783.4 million, which includes net mortgage premiums of $28.9 million;

·                  Outstanding borrowings of $70.0 million on our term loan; and

·                  Outstanding senior unsecured notes and bonds of $3.2 billion, which excludes unamortized original issuance discounts of $14.5 million.

 

Investment Philosophy

We believe that owning an actively managed, diversified portfolio of commercial properties under long-term, net leases produces consistent and predictable income. Net leases typically require the tenant to be responsible for monthly rent and property operating expenses including property taxes, insurance and maintenance. In addition, tenants of our properties typically pay rent increases based on: 1) increases in the consumer price index (typically subject to ceilings), 2) additional rent calculated as a percentage of the tenants’ gross sales above a specified level, or 3) fixed increases. We believe that a portfolio of properties owned under long-term net leases generally produces a more predictable income stream than many other types of real estate portfolios, while continuing to offer the potential for growth in rental income.

 

Investment Strategy

When identifying new properties for acquisition, we generally focus on providing capital to owners and operators of commercial tenants by acquiring the real estate they consider important to the successful operation of their business.

 

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We primarily focus on acquiring properties with many of the following attributes:

 

·                  Tenants with reliable and sustainable cash flow;

·                  Tenants with revenue and cash flow from multiple sources;

·                  Tenants that are willing to sign a long-term lease (10 or more years);

·                  Tenants that are large owners and users of real estate;

·                  Real estate that is critical to the tenant’s ability to generate revenue (i.e. they need the property in which they operate in order to conduct their business);

·                  Real estate with property valuations at or below replacement cost;

·                  Properties with rental or lease payments that are at or below market rents; and

·                  Property transactions where we can achieve an attractive spread over our cost of capital.

 

From a retail perspective, our investment focus has primarily been on businesses that have a service component because we believe the lease revenue from these types of businesses is more stable. Because of this investment focus, for the quarter ended December 31, 2013, approximately 59.1% of our retail rental revenue was derived from tenants with a service component in their business. We believe these service-oriented businesses would generally be difficult to duplicate over the Internet and that our properties continue to perform well relative to competition from Internet-based businesses.

 

Diversification is also a key objective of our investment strategy.  We believe that diversification of the portfolio by tenant, industry, property type, and geographic location leads to more predictable investment results for our shareholders by reducing vulnerability that can come with any single concentration.  Our investment efforts have led to a diversified property portfolio that, as of December 31, 2013, consisted of 3,896 properties located in 49 states and Puerto Rico, leased to 205 different commercial tenants doing business in 47 industry segments. Each of the 47 industry segments, represented in our property portfolio, individually accounted for no more than 10.6% of our rental revenue for the quarter ended December 31, 2013.

 

Credit Strategy

We typically acquire and lease properties to tenants in transactions where we can achieve an attractive risk-adjusted return. Since 1970, our occupancy rate at the end of each year has never been below 96%.

 

We believe the principal financial obligations for most of our tenants typically include their bank and other debt, payment obligations to suppliers and real estate lease obligations. Because we typically own the land and building in which a tenant conducts its business or which are critical to the tenant’s ability to generate revenue, we believe the risk of default on a tenant’s lease obligations is less than the tenant’s unsecured general obligations. It has been our experience that since tenants must retain their profitable and critical locations in order to survive; in the event of reorganization they are less likely to reject a lease for a profitable or critical location because this would terminate their right to use the property. Thus, as the property owner, we believe we will fare better than unsecured creditors of the same tenant in the event of reorganization. If a property is rejected by the tenant during reorganization, we own the property and can either lease it to a new tenant or sell the property. In addition, we believe that the risk of default on real estate leases can be further mitigated by monitoring the performance of the tenants’ individual locations and considering whether to sell locations that are weaker performers.

 

In order to qualify for inclusion in our portfolio, new property acquisitions must meet stringent investment and credit requirements. The properties must generate attractive current yields and the tenant must meet our credit profile.  We have established a four-part analysis that examines each potential investment based on:

 

·                  Industry, company, market conditions and credit profile;

·                  Store profitability for retail locations, if profitability data is available;

·                  The importance of the real estate location to the operations of the company’s business; and

·                  Overall real estate characteristics, including property value and comparative rental rates.

 

Prior to entering into any transaction, our investment professionals, assisted by our research department, conduct a review of a tenant’s credit quality.  The information reviewed may include reports and filings, including any public credit ratings, financial statements, debt and equity analyst reports, and reviews of corporate credit spreads, stock prices, market capitalization and other financial metrics.  We conduct additional due diligence, including additional financial reviews of the tenant and a more comprehensive review of the business segment and industry in which the tenant operates.  We continue to monitor our tenants’ credit quality on an ongoing basis by reviewing the available information previously discussed, and providing summaries of these findings to management.

 

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Acquisition Strategy

We seek to invest in industries in which several, well-organized, regional and national commercial tenants are capturing market share through service, quality control, economies of scale, strong consumer brands, advertising, and the selection of prime locations. Our acquisition strategy is to act as a source of capital to regional and national commercial tenants by acquiring and leasing back their real estate locations. In addition, we frequently acquire large portfolios of properties net leased to multiple tenants in a variety of industries.  We have an internal team dedicated to sourcing such opportunities, often using our proprietary relationships with various tenants, owners/developers, and advisors to uncover and secure transactions.  We also undertake thorough research and analysis to identify what we consider to be appropriate industries, tenants and property locations for investment. This research expertise is instrumental to uncovering net lease opportunities in markets where our real estate financing program adds value. In selecting potential investments, we generally seek to acquire real estate that has the following characteristics:

 

·                  Properties that are freestanding, commercially-zoned with a single tenant;

·                  Properties that are important locations for regional and national commercial tenants;

·                  Properties that we deem to be profitable for the tenants and/or can generally be characterized as important to the operations of the company’s business;

·                  Properties that are located within attractive demographic areas, relative to the business of our tenants, with high visibility and easy access to major thoroughfares; and

·                  Properties that can be purchased with the simultaneous execution or assumption of long-term, net lease agreements, offering both current income and the potential for rent increases.

 

Portfolio Management Strategy

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

 

We regularly review and analyze:

 

·                  The performance of the various industries of our tenants; and

·                 The operation, management, business planning, and financial condition of our tenants.

 

We have an active portfolio management program that incorporates the sale of assets when we believe the reinvestment of the sale proceeds will:

 

·                  Generate higher returns;

·                  Enhance the credit quality of our real estate portfolio;

·                  Extend our average remaining lease term; or

·                  Decrease tenant or industry concentration.

 

At December 31, 2013, we classified real estate with a carrying amount of $12.0 million as held for sale on our balance sheet. In 2014, we intend to continue our active disposition efforts to further enhance our real estate portfolio and anticipate approximately $50 million in property sales for all of 2014.  We intend to invest these proceeds into new property acquisitions, if there are attractive opportunities available. However, we cannot guarantee that we will sell properties during the next 12 months at our estimated values or be able to invest the property sale proceeds in new properties.

 

Impact of Real Estate and Credit Markets

In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during certain periods, the U.S. credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real estate and U.S. credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly.

 

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Universal Shelf Registration

In February 2013, we filed a shelf registration statement with the SEC, which is effective for a term of three years and will expire in February 2016. This replaces our prior shelf registration statement.  In accordance with SEC rules, the amount of securities to be issued pursuant to this shelf registration statement was not specified when it was filed and there is no specific dollar limit. The securities covered by this registration statement include (1) common stock, (2) preferred stock, (3) debt securities, (4) depositary shares representing fractional interests in shares of preferred stock, (5) warrants to purchase debt securities, common stock, preferred stock or depositary shares, and (6) any combination of these securities. We may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering.

 

$1.5 Billion Acquisition Credit Facility

In October 2013, we increased our unsecured acquisition credit facility from $1.0 billion to $1.5 billion.  The initial term of the credit facility expires in May 2016 and includes, at our election, a one-year extension option. Under this credit facility, our current investment grade credit ratings provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 1.075% with a facility commitment fee of 0.175%, for all-in drawn pricing of 1.25% over LIBOR. The borrowing rate is not subject to an interest rate floor or ceiling. We also have other interest rate options available to us under this credit facility. Our credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation.

 

At December 31, 2013, we had a borrowing capacity of $1.372 billion available on our credit facility (subject to customary conditions to borrowing) and an outstanding balance of $128.0 million.  The interest rate on borrowings outstanding under our credit facility, at December 31, 2013, was 1.2% per annum.  We must comply with various financial and other covenants in our credit facility.  At December 31, 2013, we remain in compliance with these covenants.

 

We expect to use our credit facility to acquire additional properties and for other corporate purposes. Any additional borrowings will increase our exposure to interest rate risk. We regularly review our credit facility and may seek to extend or replace our credit facility, to the extent we deem appropriate.

 

We generally use our credit facility for the short-term financing of new property acquisitions. Thereafter, when capital is available on acceptable terms, we generally seek to refinance those borrowings with the net proceeds of long-term or permanent financing, which may include the issuance of common stock, preferred stock or debt securities. We cannot assure you, however, that we will be able to obtain any such refinancing, or that market conditions prevailing at the time of the refinancing will enable us to issue equity or debt securities upon acceptable terms.

 

Cash Reserves

We are organized to operate as an equity REIT that acquires and leases properties and distributes to stockholders, in the form of monthly cash distributions, a substantial portion of our net cash flow generated from leases on our properties.  We intend to retain an appropriate amount of cash as working capital.  At December 31, 2013, we had cash and cash equivalents totaling $10.3 million.

 

We believe that our cash and cash equivalents on hand, cash provided from operating activities, and borrowing capacity is sufficient to meet our liquidity needs for the next twelve months.  We intend, however, to use permanent or long-term capital to fund property acquisitions and to repay future borrowings under our credit facility.

 

Credit Agency Ratings

The borrowing interest rates under our credit facility are based upon our ratings assigned by credit rating agencies. We are currently assigned the following investment grade corporate credit ratings on our senior unsecured notes and bonds:  Fitch Ratings has assigned a rating of BBB+ with a “stable” outlook, Moody’s Investors Service has assigned a rating of Baa1 with a “stable” outlook, and Standard & Poor’s Ratings Group has assigned a rating of BBB+ with a “stable” outlook.

 

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Based on our current ratings, the credit facility interest rate is LIBOR plus 1.075% with a facility commitment fee of 0.175%, for all-in drawn pricing of 1.25% basis points over LIBOR.  The credit facility provides that the interest rate can range between: (i) LIBOR plus 1.85% if our credit facility is lower than BBB-/Baa3 and (ii) LIBOR plus 1.00% if our credit rating is A-/A3 or higher.  In addition, our credit facility provides for a facility commitment fee based on our credit ratings, which range from: (i) 0.45% for a rating lower than BBB-/Baa3, and (ii) 0.15% for a credit rating of A-/A3 or higher.

 

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

 

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

 

Notes Outstanding

As of December 31, 2013, we had $3.2 billion of senior unsecured note and bond obligations, excluding unamortized original issuance discounts of $14.5 million.  All of our outstanding notes and bonds have fixed interest rates. Interest on all of our senior note and bond obligations is paid semiannually.

 

Mortgage Debt

As of December 31, 2013, we had $754.5 million of mortgages payable, all of which were assumed in connection with our property acquisitions.  Included in this amount is $514.4 million of mortgages payable assumed in connection with the ARCT acquisition.  Additionally, at December 31, 2013, we had net premiums totaling $28.9 million on these mortgages, of which $16.2 million is in connection with the ARCT acquisition.

 

Term Loan

In January 2013, in conjunction with our acquisition of ARCT, we entered into a $70 million senior unsecured term loan maturing in January 2018.  Borrowing under the term loan bears interest at LIBOR, plus 1.20%.  In conjunction with this term loan, we also acquired an interest rate swap which essentially fixes our per annum interest rate on the term loan at 2.15%.

 

No Unconsolidated Investments

We have no unconsolidated investments, nor do we engage in trading activities involving energy or commodity contracts.

 

Corporate Responsibility

Realty Income is committed to providing an enjoyable, diverse and safe working atmosphere for our employees, to upholding our responsibilities as a public company operating for the benefit of our shareholders and to being mindful of the environment.  As The Monthly Dividend Company®, we believe our primary responsibility is to provide a dividend return to our shareholders. How we manage and use the physical, human and financial resources that enable us to acquire and own the real estate, which provides us with the lease revenue to pay monthly dividends, demonstrates our commitment to corporate responsibility.

 

Social Responsibility and Ethics.  We are committed to being socially responsible and conducting our business according to the highest ethical standards. Our employees enjoy compensation that is in line with those of our peers and competitors, including generous healthcare benefits for employees and their families; participation in a 401K plan with a matching contribution by Realty Income; competitive vacation and time-off benefits; paid maternity leave and an infant-at-work program for new parents.  Our employees also have access to members of our Board of Directors to report anonymously, if desired, any suspicion of misconduct, by any member of our senior management or executive team.  We also have a long-standing commitment to equal employment opportunity and adhere to all Equal Employer Opportunity Policy guidelines.

 

We apply the principles of full and fair disclosure in all of our business dealings, as outlined in our Corporate Code of Business Ethics. We are also committed to dealing fairly with all of our customers, suppliers and competitors.

 

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Corporate Governance. We believe that nothing is more important than a company’s reputation for integrity and serving as a responsible fiduciary for its shareholders. We are committed to managing the company for the benefit of our shareholders and are focused on maintaining good corporate governance.  Practices that illustrate this commitment include:

 

·                  Our Board of Directors is comprised of eight directors, six of which are independent, non-employee directors

·                  Our Board of Directors is elected on an annual basis

·                  We employ a majority vote standard for elections

·                  Our Compensation Committee of the Board of Directors works with independent consultants, in conducting annual compensation reviews for our key executives, and compensates each individual based on reaching certain performance metrics that determine the success of our company

·                  We adhere to all other corporate governance principles outlined in our “Corporate Governance Guidelines” document.

 

Environmental Practices.  Our focus on energy related matters is demonstrated by how we manage our day-to-day activities in our corporate headquarters building.  In our headquarters building we promote energy conservation and encourage the following practices:

 

·                  Powering down office equipment at the end of the day

·                  Setting fax and copier machines to “energy saver mode”

·                  Encouraging employees to reduce paper usage whenever possible, by storing documents electronically and using “duplex” copy mode;

·                  Employing an automated “lights out” system that is activated 24/7; and

·                  Programming HVAC to only operate during normal business operating hours

 

In addition, our headquarters building was constructed according to the State of California energy standards and we have installed solar panels on our roof to fulfill our energy requirements. All of the windows on our building are dual-paned to increase energy efficiency and reduce our carbon footprint.

 

With respect to recycling and reuse practices, we encourage the use of recycled products and the recycling of materials during our operations.  Recycling bins are placed in all areas where materials are regularly disposed of and at the individual desks of our employees. Cell phones, wireless devices and office equipment is recycled or donated whenever possible.  We also continue to pursue a paperless environment since this reduces costs and saves trees.  As a result, we encourage file-sharing networks and environments to produce and edit documents in order to reduce the dissemination of hard copy documents, and have implemented an electronic invoice approval system.

 

With respect to the properties that we own, these properties are net-leased to our tenants who are responsible for maintaining the buildings and are in control of their energy usage and environmental sustainability practices.

 

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PROPERTY PORTFOLIO INFORMATION

 

At December 31, 2013, we owned a diversified portfolio:

 

·                  Of 3,896 properties;

·                  With an occupancy rate of 98.2%, or 3,826 properties leased and 70 properties available for lease;

·                  Leased to 205 different commercial tenants doing business in 47 separate industries;

·                  Located in 49 states and Puerto Rico;

·                  With over 62.6 million square feet of leasable space; and

·                  With an average leasable space per property of approximately 16,100 square feet, including approximately 10,600 square feet per retail property.

 

At December 31, 2013, of our 3,896 properties, 3,807 were leased under net lease agreements. A net lease typically requires the tenant to be responsible for minimum monthly rent and certain property operating expenses including property taxes, insurance and maintenance. In addition, our tenants are typically subject to future rent increases based on increases in the consumer price index (typically subject to ceilings), additional rent calculated as a percentage of the tenants’ gross sales above a specified level, or fixed increases.

 

As a result of our 2013 acquisitions, the following industry table has been modified from similar tables we have prepared in the past to reflect the changes below:

 

·                  Five new industries were added: (1) “government services,” (2) “health care,” (3) “jewelry,” (4) “other manufacturing,” and (5) “electrical utilities”; and

·                  Some properties previously included in the “other” industry were reclassified to both the “health care” and “government services” industries to better reflect the industry in which the tenant operates.

 

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Industry Diversification

The following table sets forth certain information regarding Realty Income’s property portfolio classified according to the business of the respective tenants, expressed as a percentage of our total rental revenue:

 

 

 

Percentage of Rental Revenue(1)

 

 

For the

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

For the Years Ended

 

 

December 31,

 

Dec 31,

 

Dec 31,

 

Dec 31,

 

Dec 31,

 

Dec 31,

 

Dec 31,

 

 

2013

 

2013

 

2012

 

2011

 

2010

 

2009

 

2008

Retail industries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Apparel stores

 

1.7

%

 

1.9

%

 

1.7

%

 

1.4

%

 

1.2

%

 

1.1

%

 

1.1

%

Automotive collision services

 

0.8

 

 

0.8

 

 

1.1

 

 

0.9

 

 

1.0

 

 

1.1

 

 

1.0

 

Automotive parts

 

1.4

 

 

1.2

 

 

1.0

 

 

1.2

 

 

1.4

 

 

1.5

 

 

1.6

 

Automotive service

 

1.9

 

 

2.1

 

 

3.1

 

 

3.7

 

 

4.7

 

 

4.8

 

 

4.8

 

Automotive tire services

 

3.3

 

 

3.6

 

 

4.7

 

 

5.6

 

 

6.4

 

 

6.9

 

 

6.7

 

Book stores

 

*

 

 

*

 

 

0.1

 

 

0.1

 

 

0.1

 

 

0.2

 

 

0.2

 

Child care

 

2.5

 

 

2.8

 

 

4.5

 

 

5.2

 

 

6.5

 

 

7.3

 

 

7.6

 

Consumer electronics

 

0.3

 

 

0.3

 

 

0.5

 

 

0.5

 

 

0.6

 

 

0.7

 

 

0.8

 

Convenience stores

 

10.6

 

 

11.2

 

 

16.3

 

 

18.5

 

 

17.1

 

 

16.9

 

 

15.8

 

Crafts and novelties

 

0.5

 

 

0.5

 

 

0.3

 

 

0.2

 

 

0.3

 

 

0.3

 

 

0.3

 

Dollar stores

 

7.1

 

 

6.2

 

 

2.2

 

 

-

 

 

-

 

 

-

 

 

-

 

Drug stores

 

9.7

 

 

8.1

 

 

3.5

 

 

3.8

 

 

4.1

 

 

4.3

 

 

4.1

 

Education

 

0.4

 

 

0.4

 

 

0.7

 

 

0.7

 

 

0.8

 

 

0.9

 

 

0.8

 

Entertainment

 

0.6

 

 

0.6

 

 

0.9

 

 

1.0

 

 

1.2

 

 

1.3

 

 

1.2

 

Equipment services

 

0.1

 

 

0.1

 

 

0.1

 

 

0.2

 

 

0.2

 

 

0.2

 

 

0.2

 

Financial services

 

1.4

 

 

1.5

 

 

0.2

 

 

0.2

 

 

0.2

 

 

0.2

 

 

0.2

 

General merchandise

 

1.2

 

 

1.1

 

 

0.6

 

 

0.6

 

 

0.8

 

 

0.8

 

 

0.8

 

Grocery stores

 

2.8

 

 

2.9

 

 

3.7

 

 

1.6

 

 

0.9

 

 

0.7

 

 

0.7

 

Health and fitness

 

6.8

 

 

6.3

 

 

6.8

 

 

6.4

 

 

6.9

 

 

5.9

 

 

5.6

 

Health care

 

1.0

 

 

1.1

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Home furnishings

 

0.8

 

 

0.9

 

 

1.0

 

 

1.1

 

 

1.3

 

 

1.3

 

 

2.4

 

Home improvement

 

1.5

 

 

1.6

 

 

1.5

 

 

1.7

 

 

2.0

 

 

2.2

 

 

2.1

 

Jewelry

 

0.1

 

 

0.1

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Motor vehicle dealerships

 

1.6

 

 

1.6

 

 

2.1

 

 

2.2

 

 

2.6

 

 

2.7

 

 

3.2

 

Office supplies

 

0.4

 

 

0.5

 

 

0.8

 

 

0.9

 

 

0.9

 

 

1.0

 

 

1.0

 

Pet supplies and services

 

0.8

 

 

0.8

 

 

0.6

 

 

0.7

 

 

0.9

 

 

0.9

 

 

0.8

 

Restaurants - casual dining

 

4.7

 

 

5.1

 

 

7.3

 

 

10.9

 

 

13.4

 

 

13.7

 

 

14.3

 

Restaurants - quick service

 

4.3

 

 

4.4

 

 

5.9

 

 

6.6

 

 

7.7

 

 

8.3

 

 

8.2

 

Shoe stores

 

0.1

 

 

0.1

 

 

0.1

 

 

0.2

 

 

0.1

 

 

-

 

 

-

 

Sporting goods

 

1.6

 

 

1.7

 

 

2.5

 

 

2.7

 

 

2.7

 

 

2.6

 

 

2.3

 

Theaters

 

5.6

 

 

6.2

 

 

9.4

 

 

8.8

 

 

8.9

 

 

9.2

 

 

9.0

 

Transportation services

 

0.1

 

 

0.1

 

 

0.2

 

 

0.2

 

 

0.2

 

 

0.2

 

 

0.2

 

Wholesale clubs

 

4.3

 

 

3.9

 

 

3.2

 

 

0.7

 

 

-

 

 

-

 

 

-

 

Other

 

*

 

 

0.1

 

 

0.1

 

 

0.1

 

 

0.3

 

 

1.1

 

 

1.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail industries

 

80.0

%

 

79.8

%

 

86.7

%

 

88.6

%

 

95.4

%

 

98.3

%

 

98.2

%

 

-16-



Table of Contents

 

Industry Diversification (continued)

 

 

 

 

 

 

 

 

Percentage of  Rental Revenue(1)

 

 

 

For the

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

For the Years Ended

 

 

 

December 31,

 

Dec 31,

 

Dec 31,

 

Dec 31,

 

Dec 31,

 

Dec 31,

 

Dec 31,

 

 

 

 

2013

 

2013

 

2012

 

2011

 

2010

 

2009

 

2008

 

 

Non-retail industries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

1.3

 

1.2

 

0.9

 

0.5

 

-

 

-

 

-

 

 

Beverages

 

3.0

 

3.3

 

5.1

 

5.6

 

3.0

 

-

 

-

 

 

Consumer appliances

 

0.6

 

0.6

 

0.1

 

-

 

-

 

-

 

-

 

 

Consumer goods

 

1.0

 

1.0

 

0.1

 

-

 

-

 

-

 

-

 

 

Crafts and novelties

 

0.1

 

0.1

 

-

 

-

 

-

 

-

 

-

 

 

Diversified industrial

 

0.2

 

0.2

 

0.1

 

-

 

-

 

-

 

-

 

 

Electric Utilities

 

0.1

 

*

 

-

 

-

 

-

 

-

 

-

 

 

Equipment services

 

0.5

 

0.4

 

0.3

 

0.2

 

-

 

-

 

-

 

 

Financial services

 

0.5

 

0.5

 

0.4

 

0.3

 

-

 

-

 

-

 

 

Food processing

 

1.4

 

1.5

 

1.3

 

0.7

 

-

 

-

 

-

 

 

Government services

 

1.3

 

1.4

 

0.1

 

0.1

 

0.1

 

0.1

 

-

 

 

Health care

 

0.8

 

0.8

 

*

 

*

 

-

 

-

 

-

 

 

Home furnishings

 

0.2

 

0.2

 

-

 

-

 

-

 

-

 

-

 

 

Insurance

 

0.1

 

0.1

 

*

 

-

 

-

 

-

 

-

 

 

Machinery

 

0.2

 

0.2

 

0.1

 

-

 

-

 

-

 

-

 

 

Other manufacturing

 

0.6

 

0.6

 

-

 

-

 

-

 

-

 

-

 

 

Packaging

 

0.9

 

0.9

 

0.7

 

0.4

 

-

 

-

 

-

 

 

Paper

 

0.1

 

0.2

 

0.1

 

0.1

 

-

 

-

 

-

 

 

Shoe stores

 

0.8

 

0.9

 

-

 

-

 

-

 

-

 

-

 

 

Telecommunications

 

0.6

 

0.7

 

0.8

 

0.7

 

-

 

-

 

-

 

 

Transportation services

 

5.3

 

5.3

 

2.2

 

1.6

 

-

 

-

 

-

 

 

Other

 

0.4

 

0.1

 

1.0

 

1.2

 

1.5

 

1.6

 

1.8

 

 

Non-retail industries

 

20.0%

 

20.2%

 

13.3%

 

11.4%

 

4.6%

 

1.7%

 

1.8%

 

 

Totals

 

100.0%

 

100.0%

 

100.0%

 

100.0%

 

100.0%

 

100.0%

 

100.0%

 

 

*

Less than 0.1%

(1)

Includes rental revenue for all properties owned by Realty Income at the end of each period presented, including revenue from properties reclassified as discontinued operations. Excludes revenue from properties owned by Crest Net Lease, Inc., or Crest.

 

-17-



Table of Contents

 

Property Type Diversification

The following table sets forth certain property type information regarding Realty Income’s property portfolio as of December 31, 2013 (dollars in thousands):

 

 

 

 

 

Approximate

 

Rental Revenue for

 

Percentage of

 

 

 

Number of

 

Leasable

 

the Quarter Ended

 

Rental

 

Property Type

 

Properties

 

Square Feet

 

December 31, 2013

(1)

Revenue

 

Retail

 

3,747

 

39,979,700

 

  $

 158,804

 

77.4

%

Industrial and distribution

 

79

 

15,661,100

 

22,374

 

10.9

 

Office

 

42

 

3,104,400

 

13,450

 

6.6

 

Manufacturing

 

13

 

3,715,200

 

5,254

 

2.6

 

Agriculture

 

15

 

184,500

 

5,202

 

2.5

 

Totals

 

3,896

 

62,644,900

 

  $

 205,084

 

100.0

%

 

(1)

Includes rental revenue for all properties owned by Realty Income at December 31, 2013, including revenue from properties reclassified as discontinued operations of $279.  Excludes revenue of $23 from properties owned by Crest.

 

Tenant Diversification

The largest tenants based on percentage of total portfolio rental revenue at December 31, 2013 include the following:

 

FedEx

 

5.2%

 

Dollar General

 

2.4

%

Walgreens

 

5.0%

 

Rite Aid

 

2.2

%

Family Dollar

 

4.8%

 

Regal Cinemas

 

2.1

%

LA Fitness

 

4.3%

 

CVS Pharmacy

 

2.1

%

AMC Theatres

 

3.1%

 

The Pantry

 

1.8

%

Diageo

 

2.9%

 

Circle K

 

1.7

%

BJ’s Wholesale Clubs

 

2.9%

 

Walmart/Sam’s Club

 

1.6

%

Northern Tier Energy/Super America

 

2.5%

 

 

 

 

 

 

-18-



Table of Contents

 

Service Category Diversification for our Retail Properties

The following table sets forth certain information regarding the 3,747 retail properties, included in the 3,896 total properties, owned by Realty Income at December 31, 2013, classified according to the business types and the level of services they provide at the property level (dollars in thousands):

 

 

 

Number of

 

Retail Rental Revenue

 

Percentage of

 

 

 

Retail

 

for the Quarter Ended

 

Retail Rental

 

 

 

Properties

 

December 31, 2013

(1)

Revenue

 

Tenants Providing Services

 

 

 

 

 

 

 

Automotive collision services

 

29

 

     $

 1,663

 

1.0

%

Automotive service

 

226

 

3,971

 

2.5

 

Child care

 

220

 

5,136

 

3.2

 

Education

 

14

 

790

 

0.5

 

Entertainment

 

9

 

1,199

 

0.8

 

Equipment services

 

2

 

150

 

0.1

 

Financial services

 

106

 

2,814

 

1.8

 

Health and fitness

 

71

 

13,974

 

8.8

 

Health care

 

26

 

955

 

0.6

 

Theaters

 

44

 

11,539

 

7.3

 

Transportation services

 

1

 

206

 

0.1

 

Other

 

10

 

143

 

0.1

 

 

 

758

 

42,540

 

26.8

 

Tenants Selling Goods and Services

 

 

 

 

 

 

 

Automotive parts (with installation)

 

46

 

1,049

 

0.7

 

Automotive tire services

 

183

 

6,775

 

4.3

 

Convenience stores

 

775

 

21,704

 

13.7

 

Motor vehicle dealerships

 

18

 

3,196

 

2.0

 

Pet supplies and services

 

13

 

671

 

0.4

 

Restaurants - casual dining

 

316

 

9,090

 

5.7

 

Restaurants - quick service

 

389

 

8,789

 

5.5

 

 

 

1,740

 

51,274

 

32.3

 

Tenants Selling Goods

 

 

 

 

 

 

 

Apparel stores

 

22

 

3,491

 

2.2

 

Automotive parts

 

68

 

1,743

 

1.1

 

Book stores

 

1

 

104

 

0.1

 

Consumer electronics

 

7

 

594

 

0.4

 

Crafts and novelties

 

10

 

1,002

 

0.6

 

Dollar stores

 

662

 

14,524

 

9.1

 

Drug stores

 

203

 

18,377

 

11.6

 

General merchandise

 

52

 

2,475

 

1.6

 

Grocery stores

 

63

 

5,751

 

3.6

 

Home furnishings

 

60

 

1,631

 

1.0

 

Home improvement

 

29

 

2,078

 

1.3

 

Jewelry

 

4

 

142

 

0.1

 

Office supplies

 

11

 

865

 

0.5

 

Shoe stores

 

1

 

168

 

0.1

 

Sporting goods

 

25

 

3,293

 

2.1

 

Wholesale clubs

 

31

 

8,752

 

5.5

 

 

 

1,249

 

64,990

 

40.9

 

Total Retail Properties

 

3,747

 

     $

 158,804

 

100.0

%

 

(1)

Includes rental revenue for all retail properties owned by Realty Income at December 31, 2013, including revenue from properties reclassified as discontinued operations of $279.  Excludes revenue of $46,280 from non-retail properties and $23 from properties owned by Crest.

 

-19-



Table of Contents

 

Lease Expirations

The following table sets forth certain information regarding Realty Income’s property portfolio regarding the timing of the lease term expirations (excluding rights to extend a lease at the option of the tenant) on our 3,807 net leased, single-tenant properties as of December 31, 2013 (dollars in thousands):

 

Total Portfolio

Initial Expirations(3)

Subsequent Expirations(4)

 

 

 

 

 

 

Rental

 

 

 

 

 

 

Rental

 

 

 

 

 

 

Rental

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

for the

 

 

 

 

 

 

for the

 

 

 

 

 

 

for the

 

 

 

 

 

 

 

 

 

Quarter

 

 % of

 

 

 

 

Quarter

 

 % of

 

 

 

 

Quarter

 

 % of

 

 

 

Number

 

Approx.

 

Ended

 

Total

 

 

Number

 

Ended

 

Total

 

 

Number

 

Ended

 

Total

 

 

 

of Leases

 

Leasable

 

Dec 31,

 

Rental

 

 

of Leases

 

Dec 31,

 

Rental

 

 

of Leases

 

Dec 31,

 

Rental

 

Year

 

Expiring

(1)

Sq. Feet

 

2013

(2)  

Revenue

 

 

Expiring

 

2013

 

Revenue

 

 

Expiring

 

2013

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

157

 

1,116,500

 

$

 4,005

 

2.0

%

 

56

 

$

 1,960

 

1.0

%

 

101

 

$

 2,045

 

1.0

%

2015

 

174

 

961,500

 

4,111

 

2.0

 

 

67

 

1,808

 

0.9

 

 

107

 

2,303

 

1.1

 

2016

 

200

 

1,214,900

 

4,618

 

2.3

 

 

121

 

2,807

 

1.4

 

 

79

 

1,811

 

0.9

 

2017

 

177

 

2,038,400

 

6,058

 

3.0

 

 

46

 

3,052

 

1.5

 

 

131

 

3,006

 

1.5

 

2018

 

278

 

3,621,900

 

11,276

 

5.6

 

 

162

 

7,920

 

3.9

 

 

116

 

3,356

 

1.7

 

2019

 

193

 

3,017,500

 

10,496

 

5.1

 

 

161

 

9,599

 

4.7

 

 

32

 

897

 

0.4

 

2020

 

110

 

3,404,600

 

8,844

 

4.4

 

 

99

 

8,468

 

4.2

 

 

11

 

376

 

0.2

 

2021

 

189

 

5,314,200

 

13,616

 

6.7

 

 

181

 

13,105

 

6.4

 

 

8

 

511

 

0.3

 

2022

 

224

 

7,270,400

 

14,508

 

7.2

 

 

216

 

14,273

 

7.1

 

 

8

 

235

 

0.1

 

2023

 

355

 

6,133,200

 

19,731

 

9.7

 

 

342

 

19,076

 

9.4

 

 

13

 

655

 

0.3

 

2024

 

140

 

2,105,200

 

7,016

 

3.5

 

 

140

 

7,016

 

3.5

 

 

-

 

-

 

-

 

2025

 

288

 

3,734,800

 

16,633

 

8.3

 

 

283

 

16,510

 

8.2

 

 

5

 

123

 

0.1

 

2026

 

231

 

3,396,200

 

12,133

 

6.0

 

 

228

 

12,049

 

6.0

 

 

3

 

84

 

*

 

2027

 

443

 

4,177,700

 

14,591

 

7.2

 

 

441

 

14,551

 

7.2

 

 

2

 

40

 

*

 

2028

 

283

 

5,758,000

 

15,911

 

7.8

 

 

281

 

15,858

 

7.8

 

 

2

 

53

 

*

 

2029 - 2043

 

365

 

7,951,300

 

38,832

 

19.2

 

 

358

 

38,652

 

19.1

 

 

7

 

180

 

0.1

 

Totals

 

3,807

 

61,216,300

 

$

 202,379

 

100.0

%

 

3,182

 

$

 186,704

 

92.3

%

 

625

 

$

 15,675

 

7.7

%

 

*      Less than 0.1%

 

(1)   Excludes 19 multi-tenant properties and 70 vacant unleased properties, one of which is a multi-tenant property. The lease expirations for properties under construction are based on the estimated date of completion of those properties.

 

(2)   Includes rental revenue of $279 from properties reclassified as discontinued operations and excludes revenue of $2,705 from 19 multi-tenant properties and from 70 vacant and unleased properties at December 31, 2013.  Excludes revenue of $23 from properties owned by Crest.

 

(3)   Represents leases to the initial tenant of the property that are expiring for the first time.

 

(4)   Represents lease expirations on properties in the portfolio, which have previously been renewed, extended or re-tenanted.

 

-20-



Table of Contents

 

Geographic Diversification

The following table sets forth certain state-by-state information regarding Realty Income’s property portfolio as of December 31, 2013 (dollars in thousands):

 

 

 

 

 

 

 

Approximate

 

Rental Revenue for

 

Percentage of

 

 

 

Number of

 

Percent

 

Leasable

 

the Quarter Ended

 

Rental

 

State

 

Properties

 

Leased

 

Square Feet

 

December 31, 2013

(1)

Revenue

 

Alabama

 

104

 

97

%

791,800

 

     $

 2,846

 

1.4

%

Alaska

 

2

 

100

 

128,500

 

307

 

0.1

 

Arizona

 

110

 

96

 

1,187,400

 

5,510

 

2.7

 

Arkansas

 

36

 

94

 

619,200

 

1,180

 

0.6

 

California

 

161

 

99

 

4,705,200

 

22,672

 

11.1

 

Colorado

 

69

 

99

 

792,100

 

2,969

 

1.4

 

Connecticut

 

22

 

95

 

462,100

 

2,071

 

1.0

 

Delaware

 

16

 

100

 

29,500

 

418

 

0.2

 

Florida

 

279

 

99

 

2,951,000

 

12,029

 

5.9

 

Georgia

 

209

 

97

 

2,689,400

 

8,368

 

4.1

 

Hawaii

 

--

 

--

 

--

 

--

 

--

 

Idaho

 

13

 

100

 

91,800

 

456

 

0.2

 

Illinois

 

155

 

100

 

4,215,700

 

12,244

 

6.0

 

Indiana

 

100

 

98

 

1,055,400

 

4,954

 

2.4

 

Iowa

 

35

 

97

 

2,751,700

 

3,301

 

1.6

 

Kansas

 

76

 

99

 

1,583,300

 

3,370

 

1.6

 

Kentucky

 

45

 

98

 

808,700

 

2,920

 

1.4

 

Louisiana

 

75

 

97

 

836,700

 

2,456

 

1.2

 

Maine

 

9

 

100

 

126,400

 

837

 

0.4

 

Maryland

 

32

 

100

 

654,100

 

3,711

 

1.8

 

Massachusetts

 

82

 

96

 

728,200

 

3,205

 

1.6

 

Michigan

 

103

 

98

 

938,600

 

3,229

 

1.6

 

Minnesota

 

155

 

100

 

1,153,300

 

7,416

 

3.6

 

Mississippi

 

96

 

97

 

1,307,200

 

3,177

 

1.5

 

Missouri

 

122

 

98

 

2,307,000

 

7,343

 

3.6

 

Montana

 

2

 

50

 

30,000

 

13

 

*

 

Nebraska

 

30

 

100

 

660,200

 

1,296

 

0.6

 

Nevada

 

22

 

100

 

413,000

 

1,279

 

0.6

 

New Hampshire

 

18

 

100

 

290,900

 

1,224

 

0.6

 

New Jersey

 

62

 

98

 

452,700

 

2,608

 

1.3

 

New Mexico

 

24

 

100

 

184,600

 

589

 

0.3

 

New York

 

81

 

95

 

2,007,900

 

10,153

 

5.0

 

North Carolina

 

129

 

99

 

1,259,300

 

4,795

 

2.3

 

North Dakota

 

7

 

100

 

66,000

 

138

 

0.1

 

Ohio

 

200

 

98

 

4,795,700

 

11,294

 

5.5

 

Oklahoma

 

112

 

100

 

1,467,200

 

3,601

 

1.8

 

Oregon

 

24

 

100

 

455,200

 

1,620

 

0.8

 

Pennsylvania

 

147

 

99

 

1,745,400

 

6,957

 

3.4

 

Rhode Island

 

3

 

100

 

21,300

 

107

 

*

 

South Carolina

 

127

 

98

 

897,500

 

4,140

 

2.0

 

South Dakota

 

11

 

100

 

133,500

 

244

 

0.1

 

Tennessee

 

156

 

97

 

2,653,200

 

5,145

 

2.5

 

Texas

 

393

 

98

 

6,760,200

 

19,493

 

9.5

 

Utah

 

13

 

100

 

749,000

 

1,326

 

0.6

 

Vermont

 

6

 

100

 

100,700

 

522

 

0.3

 

Virginia

 

127

 

97

 

2,531,900

 

6,465

 

3.2

 

Washington

 

38

 

100

 

415,300

 

1,609

 

0.8

 

West Virginia

 

12

 

100

 

261,200

 

883

 

0.4

 

Wisconsin

 

39

 

95

 

1,329,300

 

2,382

 

1.2

 

Wyoming

 

3

 

100

 

21,100

 

63

 

*

 

Puerto Rico

 

4

 

100

 

28,300

 

149

 

0.1

 

Totals\Average

 

3,896

 

98

%

62,644,900

 

     $

 205,084

 

100.0

%

 

*          Less than 0.1%

 

(1)      Includes rental revenue for all properties owned by Realty Income at December 31, 2013, including revenue from properties reclassified as discontinued operations of $279.  Excludes revenue of $23 from properties owned by Crest.

 

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FORWARD-LOOKING STATEMENTS

 

This annual report on Form 10-K, including the documents incorporated by reference herein, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. When used in this annual report, the words “estimated”, “anticipated”, “expect”, “believe”, “intend” and similar expressions are intended to identify forward-looking statements. Forward-looking statements include discussions of strategy, plans, or intentions of management. Forward-looking statements are subject to risks, uncertainties, and assumptions about Realty Income Corporation, including, among other things:

 

·                  Our anticipated growth strategies;

·                  Our intention to acquire additional properties and the timing of these acquisitions;

·                  Our intention to sell properties and the timing of these property sales;

·                  Our intention to re-lease vacant properties;

·                  Anticipated trends in our business, including trends in the market for long-term net leases of freestanding, single-tenant properties; and

·                  Future expenditures for development projects.

 

Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements.  In particular, some of the factors that could cause actual results to differ materially are:

 

·                  Our continued qualification as a real estate investment trust;

·                  General business and economic conditions;

·                  Competition;

·                  Fluctuating interest rates;

·                  Access to debt and equity capital markets;

·                  Continued volatility and uncertainty in the credit markets and broader financial markets;

·                  Other risks inherent in the real estate business including tenant defaults, potential liability relating to environmental matters, illiquidity of real estate investments, and potential damages from natural disasters;

·                 Impairments in the value of our real estate assets;

·                  Changes in the tax laws of the United States of America;

·                  The outcome of any legal proceedings to which we are a party or which may occur in the future; and

·                  Acts of terrorism and war.

 

Additional factors that may cause risks and uncertainties include those discussed in the sections entitled “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this annual report.

 

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date that this annual report was filed with the SEC. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this annual report or to reflect the occurrence of unanticipated events. In light of these risks and uncertainties, the forward-looking events discussed in this annual report might not occur.

 

Item 1A:                                             Risk Factors

 

This “Risk Factors” section contains references to our “capital stock” and to our “stockholders.”  Unless expressly stated otherwise, the references to our “capital stock” represent our common stock and any class or series of our preferred stock, while the references to our “stockholders” represent holders of our common stock and any class or series of our preferred stock.

 

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In order to grow we need to continue to acquire investment properties.  The acquisition of investment properties may be subject to competitive pressures.

We face competition in the acquisition, operation and sale of property. We expect competition from:

 

·                  Businesses;

·                  Individuals;

·                  Fiduciary accounts and plans; and

·                  Other entities engaged in real estate investment and financing.

 

Some of these competitors are larger than we are and have greater financial resources. This competition may result in a higher cost for properties we wish to purchase.

 

Negative market conditions or adverse events affecting our existing or potential tenants, or the industries in which they operate, could have an adverse impact on our ability to attract new tenants, re-lease space, collect rent or renew leases, which could adversely affect our cash flow from operations and inhibit growth.

Cash flow from operations depends in part on the ability to lease space to tenants on economically favorable terms. We could be adversely affected by various facts and events over which we have limited or no control, such as:

 

·                  Lack of demand in areas where our properties are located;

·                  Inability to retain existing tenants and attract new tenants;

·                  Oversupply of space and changes in market rental rates;

·                  Declines in our tenants’ creditworthiness and ability to pay rent, which may be affected by their operations, the current economic situation and competition within their industries from other operators;

·                  Defaults by and bankruptcies of tenants, failure of tenants to pay rent on a timely basis, or failure of tenants to comply with their contractual obligations;

·                  Economic or physical decline of the areas where the properties are located; and

·                  Deterioration of the physical condition of our properties.

 

At any time, any tenant may experience a downturn in its business that may weaken its operating results or overall financial condition. As a result, a tenant may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent or declare bankruptcy. Any tenant bankruptcy or insolvency, leasing delay or failure to make rental payments when due could result in the termination of the tenant’s lease and material losses to us.

 

If tenants do not renew their leases as they expire, we may not be able to rent or sell the properties.  Furthermore, leases that are renewed, and some new leases for properties that are re-leased, may have terms that are less economically favorable than expiring lease terms, or may require us to incur significant costs, such as renovations, tenant improvements or lease transaction costs. Negative market conditions may cause us to sell vacant properties for less than their carrying value, which could result in impairments. Any of these events could adversely affect cash flow from operations and our ability to make distributions to stockholders and service indebtedness. A significant portion of the costs of owning property, such as real estate taxes, insurance and maintenance, are not necessarily reduced when circumstances cause a decrease in rental revenue from the properties. In a weakened financial condition, tenants may not be able to pay these costs of ownership and we may be unable to recover these operating expenses from them.

 

Further, the occurrence of a tenant bankruptcy or insolvency could diminish the income we receive from the tenant’s lease or leases. In addition, a bankruptcy court might authorize the tenant to terminate its leases with us. If that happens, our claim against the bankrupt tenant for unpaid future rent would be subject to statutory limitations that most likely would result in rent payments that would be substantially less than the remaining rent we are owed under the leases or we may elect not to pursue claims against the tenant for terminated leases. In addition, any claim we have for unpaid past rent, if any, may not be paid in full, or at all. Moreover, in the case of a tenant’s leases that are not terminated as a result of its bankruptcy, we may be required or elect to reduce the rent payable under those leases or provide other concessions, reducing amounts we receive under those leases. As a result, tenant bankruptcies may have a material adverse effect on our results of operations.  Any of these events could adversely affect cash from operations and our ability to make distributions to stockholders and service indebtedness.

 

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Seventy of our properties were available for lease or sale at December 31, 2013, all but one of which were single-tenant properties. At December 31, 2013, twenty-nine of our properties under lease were unoccupied and available for sublease by the tenants, all of which were current with their rent and other obligations. During 2013, each of our tenants accounted for less than 10% of our rental revenue.

 

For the fourth quarter of 2013, our tenants in the “convenience stores” industry accounted for approximately 10.6% of our rental revenue. A downturn in this industry, whether nationwide or limited to specific sectors of the United States, could adversely affect tenants in this industry, which in turn could have a material adverse effect on our financial position, results of operations and our ability to pay the principal of and interest on our debt securities and other indebtedness and to make distributions on our common stock and preferred stock.

 

Individually, each of the other industries in our property portfolio accounted for less than 10% of our rental revenue for 2013. Nevertheless, downturns in these other industries could also adversely affect our tenants, which in turn could also have a material adverse effect on our financial position, results of operations and our ability to pay the principal of and interest on our debt securities and other indebtedness and to make distributions on our common and preferred stock.  In addition, we may in the future make additional investments in the “convenience store” industry, which would increase this industry’s percentage of our rental revenues, thereby increasing the effect that such a downturn in this industry would have on us.

 

In addition, a substantial number of our properties are leased to middle-market commercial tenants that generally have more limited financial and other resources than certain upper-market commercial tenants, and therefore, they are more likely to be adversely affected by a downturn in their respective businesses or in the regional, national or international economy.

 

Furthermore, we have made and may continue to make selected acquisitions of properties that fall outside our historical focus on freestanding, single-tenant, net lease retail locations in the United States. We may be exposed to a variety of new risks by expanding into new property types and/or new jurisdictions outside the United States and properties leased to tenants engaged in non-retail businesses. For example, our acquisition of ARCT included tenants in the aerospace, freight, governmental services, healthcare, home maintenance, manufacturing, pharmacy, retail banking, technology and telecommunications businesses, some of which are non-retail businesses and none of which was in an industry segment that was within our property portfolio prior to our acquisition of ARCT.  These risks may include a limited knowledge and understanding of the industry in which the tenant operates, limited experience in managing certain types of new properties, new types of real estate locations and lease structures, and the laws and culture of any non-U.S. jurisdiction.

 

As a property owner, we may be subject to unknown environmental liabilities.

Investments in real property can create a potential for environmental liability. An owner of property can face liability for environmental contamination created by the presence or discharge of hazardous substances on the property. We can face such liability regardless of:

 

·                 Our knowledge of the contamination;

·                  The timing of the contamination;

·                  The cause of the contamination; or

·                  The party responsible for the contamination of the property.

 

There may be environmental problems associated with our properties of which we are unaware. In that regard, a number of our properties are leased to operators of convenience stores that sell petroleum-based fuels, as well as to operators of oil change and tune-up facilities and operators that use chemicals and other waste products. These facilities, and some other of our properties, use, or may have used in the past, underground lifts or underground tanks for the storage of petroleum-based or waste products, which could create a potential for the release of hazardous substances.

 

The presence of hazardous substances on a property may adversely affect our ability to lease or sell that property and we may incur substantial remediation costs. Although our leases generally require our tenants to operate in compliance with all applicable federal, state and local environmental laws, ordinances and regulations, and to indemnify us against any environmental liabilities arising from the tenants’ activities on the

 

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property, we could nevertheless be subject to strict liability by virtue of our ownership interest. There also can be no assurance that our tenants could or would satisfy their indemnification obligations under their leases. The discovery of environmental liabilities attached to our properties could have an adverse effect on our results of operations, our financial condition or our ability to make distributions to stockholders and to pay the principal of and interest on our debt securities and other indebtedness.

 

In addition, several of our properties were built during the period when asbestos was commonly used in building construction and we may acquire other buildings with asbestos in the future. Environmental laws govern the presence, maintenance and removal of asbestos-containing materials, or ACMs, and require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, that they adequately inform or train those who may come into contact with asbestos and that they undertake special precautions, including removal or other abatement in the event that asbestos is disturbed during renovation or demolition of a building. These laws may impose fines and penalties on building owners or operators for failure to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers.

 

It is also possible that some of our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediation of the problem. When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, should our tenants or their employees or customers be exposed to mold at any of our properties we could be required to undertake a costly remediation program to contain or remove the mold from the affected property, which would reduce our cash available for distribution. In addition, exposure to mold by our tenants or others could expose us to liability if property damage or health concerns arise.

 

Compliance.  We have not been notified by any governmental authority, and are not otherwise aware, of any material noncompliance, liability or claim relating to hazardous substances, toxic substances, or petroleum products in connection with any of our properties. In addition, we believe we are in compliance in all material respects with all present federal, state and local laws relating to ACMs. Nevertheless, if environmental contamination should exist, we could be subject to strict liability by virtue of our ownership interest.

 

Insurance and Indemnity.  In July 2012, we entered into a ten-year environmental insurance policy that expires in July 2022 and replaced our previous seven-year environmental insurance policy. The limits on our current policy are $10 million per occurrence and $60 million in the aggregate.  The limits on the excess policy are $5 million per occurrence and $10 million in the aggregate.  Therefore, the primary and excess ten-year policies together provide a total limit of $15 million per occurrence and $70 million in the aggregate.

 

It is possible that our insurance could be insufficient to address any particular environmental situation and that, in the future, we could be unable to obtain insurance for environmental matters at a reasonable cost, or at all. Our tenants are generally responsible for, and indemnify us against, liabilities for environmental matters that occur on our properties.  For properties that have underground storage tanks, in addition to providing an indemnity in our favor, the tenants generally obtain environmental insurance or rely upon the state funds in the states where these properties are located to reimburse tenants for environmental remediation.

 

If we fail to qualify as a real estate investment trust, the amount of dividends we are able to pay would decrease, which could adversely affect the market price of our capital stock and could adversely affect the value of our debt securities.

Commencing with our taxable year ended December 31, 1994, we believe that we have been organized and have operated, and we intend to continue to operate, so as to qualify as a REIT under Sections 856 through 860 of the Code. However, we cannot assure you that we have been organized or have operated in a manner that has satisfied the requirements for qualification as a REIT, or that we will continue to be organized or operate in a manner that will allow us to continue to qualify as a REIT.

 

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Qualification as a REIT involves the satisfaction of numerous requirements under highly technical and complex Code provisions, for which there are only limited judicial and administrative interpretations, as well as the determination of various factual matters and circumstances not entirely within our control.

 

For example, in order to qualify as a REIT, at least 95% of our gross income in each year must be derived from qualifying sources, and we must pay distributions to stockholders aggregating annually at least 90% of our taxable income (excluding net capital gains).

 

In the future, it is possible that legislation, new regulations, administrative interpretations or court decisions will change the tax laws with respect to qualification as a REIT, or the federal income tax consequences of such qualification.

 

If we fail to satisfy all of the requirements for qualification as a REIT, we may be subject to certain penalty taxes or, in some circumstances, we may fail to qualify as a REIT.  If we were to fail to qualify as a REIT in any taxable year:

 

·                  We would be required to pay federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates;

·                  We would not be allowed a deduction for amounts distributed to our stockholders in computing our taxable income;

·                  We could be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost;

·                  We would no longer be required to make distributions to stockholders; and

·                  This treatment would substantially reduce amounts available for investment or distribution to stockholders because of the additional tax liability for the years involved, which could have a material adverse effect on the market price of our capital stock and the value of our debt securities.

 

Even if we qualify for and maintain our REIT status, we may be subject to certain federal, state and local taxes on our income and property. For example, if we have net income from a prohibited transaction, that income will be subject to a 100% tax. In addition, our taxable REIT subsidiaries, including Crest, are subject to federal and state taxes at the applicable tax rates on their income and property.

 

Distribution requirements imposed by law limit our flexibility.

To maintain our status as a REIT for federal income tax purposes, we generally are required to distribute to our stockholders at least 90% of our taxable income, excluding net capital gains, each year. We also are subject to tax at regular corporate rates to the extent that we distribute less than 100% of our taxable income (including net capital gains) each year.

 

In addition, we are subject to a 4% nondeductible excise tax to the extent that we fail to distribute during any calendar year at least the sum of 85% of our ordinary income for that calendar year, 95% of our capital gain net income for the calendar year, and any amount of that income that was not distributed in prior years.

 

We intend to continue to make distributions to our stockholders to comply with the distribution requirements of the Code as well as to reduce our exposure to federal income taxes and the nondeductible excise tax. Differences in timing between the receipt of income and the payment of expenses to arrive at taxable income, along with the effect of required debt amortization payments, could require us to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT.

 

Future issuances of equity securities could dilute the interest of holders of our common stock.

Our future growth will depend, in large part, upon our ability to raise additional capital. If we were to raise additional capital through the issuance of equity securities, we could dilute the interests of holders of our common stock. The interests of our common stockholders could also be diluted by the issuance of shares of common stock upon the exercise of outstanding options or pursuant to stock incentive plans. Likewise, our Board of Directors is authorized to cause us to issue preferred stock of any class or series (with dividend, voting and other rights as determined by our Board of Directors). Accordingly, our Board of Directors may authorize the issuance of preferred stock with voting, dividend and other similar rights that could dilute, or otherwise adversely affect, the interest of holders of our common stock.

 

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We may acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in stockholder dilution and limit our ability to sell or refinance such assets.

We have in the past and may in the future acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership units in an operating partnership, which could result in stockholder dilution through the issuance of operating partnership units that, under certain circumstances, may be exchanged for shares of our common stock.  This acquisition structure may have the effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired properties, and may require that we agree to restrictions on our ability to dispose of, or refinance the debt on, the acquired properties in order to protect the contributors’ ability to defer recognition of taxable gain.  Similarly, we may be required to incur or maintain debt we would otherwise not incur so we can allocate the debt to the contributors to maintain their tax bases.  These restrictions could limit our ability to sell or refinance an asset at a time, or on terms, that would be favorable absent such restrictions.

 

We are subject to risks associated with debt and capital stock financing.

We intend to incur additional indebtedness in the future, including borrowings under our $1.5 billion acquisition credit facility. At December 31, 2013, we had $128 million of outstanding borrowings under our acquisition credit facility, a total of $3.2 billion of outstanding unsecured senior debt securities (excluding unamortized original issuance discounts of $14.5 million), $70 million of borrowings outstanding under a senior unsecured term loan and approximately $754.5 million of outstanding mortgage debt (excluding net premiums totaling $28.9 million on these mortgages). To the extent that new indebtedness is added to our current debt levels, the related risks that we now face would increase. As a result, we are and will be subject to risks associated with debt financing, including the risk that our cash flow could be insufficient to meet required payments on our debt. We also face variable interest rate risk as the interest rates on our acquisition credit facility, our term loan and some of our mortgage debt are variable and could therefore increase over time.  We also face the risk that we may be unable to refinance or repay our debt as it comes due. Given past disruptions in the financial markets and the ongoing global financial crisis, we also face the risk that one or more of the participants in our acquisition credit facility may not be able to lend us money.

 

In addition, our acquisition credit facility, term loan facility and mortgage loan documents contain provisions that could limit or, in certain cases, prohibit the payment of dividends and other distributions on our common stock and preferred stock.  In particular, our acquisition credit facility provides that, if an event of default (as defined in the credit facility) exists, neither we nor any of our subsidiaries may make any dividends or other distributions on (except distributions payable in shares of a given class of our stock to the shareholders of that class), or repurchase or redeem, among other things, any shares of our common stock or preferred stock, during any period of four consecutive fiscal quarters in an aggregate amount in excess of the greater of:

 

·                  The sum of (a) 95% of our adjusted funds from operations (as defined by the credit facility agreement) for that period plus (b) the aggregate amount of cash distributions on our preferred stock for that period, and

·                  The minimum amount of cash distributions required to be made to our shareholders in order to maintain our status as a REIT for federal income tax purposes,

 

except that we may repurchase or redeem preferred stock with the net proceeds from the issuance of our common stock or preferred stock. The acquisition credit facility further provides that, in the event of a failure to pay principal, interest or any other amount payable thereunder when due or upon the occurrence of certain events of bankruptcy, insolvency or reorganization with respect to us or with respect to any of our subsidiaries that have guaranteed amounts payable under the credit facility or that meet a significance test set forth in the credit facility, we and our subsidiaries may not pay any dividends or other distributions on (except distributions payable in shares of a given class of our stock to the shareholders of that class), or repurchase or redeem, among other things, any shares of our common stock or preferred stock.  If any such event of default under our acquisition credit facility were to occur, it would likely have a material adverse effect on the market price of our outstanding common and preferred stock and on the market value of our debt securities, could limit the amount of dividends or other distributions payable on our common stock and preferred stock or prevent us from paying those dividends or other distributions altogether, and may adversely affect our ability to qualify, or prevent us from qualifying, as a REIT.  Likewise, one of our subsidiaries is the borrower under our $70 million term loan facility and that facility requires that this subsidiary maintain its consolidated tangible net worth (as defined in the

 

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term loan facility) above a certain minimum dollar amount and comply with certain other financial covenants.  This minimum consolidated tangible net worth covenant may limit the ability of this subsidiary, as well as other subsidiaries that are owned by this subsidiary, to provide funds to us in order to pay dividend and other distributions on our common stock, including the shares of common stock offered hereby, and preferred stock and amounts due on our indebtedness.  Any failure by this subsidiary to comply with these financial covenants will, and any failure by this subsidiary to comply with other covenants in the term loan facility may, result in an event of default under that facility, which could have adverse consequences similar to those that may result from an event of default under our acquisition credit facility as described above.

 

Our indebtedness could also have other important consequences to holders of our common and preferred stock, and preferred stock and debt securities, including:

 

·                  Increasing our vulnerability to general adverse economic and industry conditions;

·                  Limiting our ability to obtain additional financing to fund future working capital, acquisitions, capital expenditures and other general corporate requirements;

·                  Requiring the use of a substantial portion of our cash flow from operations for the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund working capital, acquisitions, capital expenditures and general corporate requirements;

·                  Limiting our flexibility in planning for, or reacting to, changes in our business and our industry; and

·                  Putting us at a disadvantage compared to our competitors with less indebtedness.

 

If we default under a loan agreement or other debt instrument, the lenders will generally have the right to demand immediate repayment of the principal of and interest on all of their loans and, in the case of secured indebtedness, to exercise their rights to seize and sell the collateral.  Moreover, a default under a single loan or debt instrument may trigger cross-default or cross acceleration provisions in other indebtedness and debt instruments, giving the holders of such other indebtedness and debt instruments similar rights to demand immediate repayment and seize and sell any collateral.

 

Our business operations may not generate the cash needed to make distributions on our capital stock or to service our indebtedness.

Our ability to make distributions on our common stock and preferred stock and payments on our indebtedness, and to fund planned acquisitions and capital expenditures will depend on our ability to generate cash in the future.  We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to make distributions on our common stock and preferred stock, to pay our indebtedness, or to fund our other liquidity needs.

 

The market value of our capital stock and debt securities could be substantially affected by various factors.

The market value of our capital stock and debt securities will depend on many factors, which may change from time to time, including:

 

·                  Prevailing interest rates, increases in which may have an adverse effect on the market value of our capital stock and debt securities;

·                  The market for similar securities issued by other REITs;

·                  General economic and financial market conditions;

·                  The financial condition, performance and prospects of us, our tenants and our competitors;

·                  Changes in financial estimates or recommendations by securities analysts with respect to us, our competitors or our industry;

·                  Changes in our credit ratings; and

·                  Actual or anticipated variations in quarterly operating results of us and our competitors.

 

In addition, over the last several years, prices of common stock and debt securities in the U.S. trading markets have been experiencing extreme price fluctuations, and the market values of our common stock and debt securities have also fluctuated significantly during this period. As a result of these and other factors, investors who purchase our capital stock and debt securities may experience a decrease, which could be substantial and rapid, in the market value of our capital stock and debt securities, including decreases unrelated to our operating performance or prospects.

 

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Real estate ownership is subject to particular economic conditions that may have a negative impact on our revenue.

We are subject to all of the inherent risks associated with the ownership of real estate.  In particular, we face the risk that rental revenue from our properties may be insufficient to cover all corporate operating expenses, debt service payments on indebtedness we incur and distributions on our capital stock. Additional real estate ownership risks include:

 

·                  Adverse changes in general or local economic conditions;

·                  Changes in supply of, or demand for, similar or competing properties;

·                 Changes in interest rates and operating expenses;

·                  Competition for tenants;

·                  Changes in market rental rates;

·                  Inability to lease properties upon termination of existing leases;

·                  Renewal of leases at lower rental rates;

·                  Inability to collect rents from tenants due to financial hardship, including bankruptcy;

·                  Changes in tax, real estate, zoning and environmental laws that may have an adverse impact upon the value of real estate;

·                  Uninsured property liability;

·                  Property damage or casualty losses;

·                  Unexpected expenditures for capital improvements or to bring properties into compliance with applicable federal, state and local laws;

·                  The need to periodically renovate and repair our properties;

·                  Physical or weather-related damage to properties;

·                  The potential risk of functional obsolescence of properties over time;

·                  Acts of terrorism and war; and

·                  Acts of God and other factors beyond the control of our management.

 

An uninsured loss or a loss that exceeds the policy limits on our properties could subject us to lost capital or revenue on those properties.

Under the terms and conditions of the leases currently in force on our properties, tenants generally are required to indemnify and hold us harmless from liabilities resulting from injury to persons, air, water, land or property, due to activities conducted on the properties, except for claims arising from the negligence or intentional misconduct of us or our agents. Additionally, tenants are generally required, at the tenant’s expense, to obtain and keep in full force during the term of the lease, liability and property damage insurance policies. The insurance policies our tenants are required to maintain for property damage are generally in amounts not less than the full replacement cost of the improvements less slab, foundations, supports and other customarily excluded improvements. Our tenants are generally required to maintain general liability coverage varying between $1,000,000 and $10,000,000 depending on the tenant and the industry in which the tenant operates.

 

In addition to the indemnities and required insurance policies identified above, many of our properties are also covered by flood and earthquake insurance policies (subject to substantial deductibles) obtained and paid for by the tenants as part of their risk management programs. Additionally, we have obtained blanket liability, flood and earthquake (subject to substantial deductibles) and property damage insurance policies to protect us and our properties against loss should the indemnities and insurance policies provided by the tenants fail to restore the properties to their condition prior to a loss. However, should a loss occur that is uninsured or in an amount exceeding the combined aggregate limits for the policies noted above, or in the event of a loss that is subject to a substantial deductible under an insurance policy, we could lose all or part of our capital invested in, and anticipated revenue from, one or more of the properties, which could have a material adverse effect on our results of operations or financial condition and on our ability to pay the principal of and interest on our debt securities and other indebtedness and to make distributions to our stockholders. We also face the risk that our insurance carriers may not be able to provide payment under any potential claims that might arise under the terms of our insurance policies, and we may not have the ability to purchase insurance policies we desire.

 

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Compliance with the Americans with Disabilities Act of 1990 and fire, safety, and other regulations may require us to make unintended expenditures that could adversely impact our results of operations.

Our properties are generally required to comply with the Americans with Disabilities Act of 1990, or the ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants. The retailers to whom we lease properties are obligated by law to comply with the ADA provisions, and we believe that these retailers may be obligated to cover costs associated with compliance. If required changes involve greater expenditures than anticipated, or if the changes must be made on a more accelerated basis than anticipated, the ability of these retailers to cover costs could be adversely affected and we could be required to expend our own funds to comply with the provisions of the ADA, which could materially adversely affect our results of operations or financial condition and our ability to pay the principal of and interest on our debt securities and other indebtedness and to make distributions to our stockholders. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. We may be required to make substantial capital expenditures to comply with those requirements and these expenditures could have a material adverse effect on our results of operations or financial condition and our ability to pay the principal of and interest on our debt securities and other indebtedness and to make distributions to our stockholders.

 

Property taxes may increase without notice.

The real property taxes on our properties and any other properties that we develop or acquire in the future may increase as property tax rates change and as those properties are assessed or reassessed by tax authorities.

 

We depend on key personnel.

We depend on the efforts of our executive officers and key employees. The loss of the services of our executive officers and key employees could have a material adverse effect on our results of operations or financial condition and on our ability to pay the principal and interest on our debt securities and other indebtedness and to make distributions to our stockholders. It is possible that we will not be able to recruit additional personnel with equivalent experience in the net lease industry.

 

Terrorist attacks and other acts of violence or war may affect the value of our debt and equity securities, the markets in which we operate and our results of operations.

Terrorist attacks may negatively affect our operations, the market price of our capital stock and the value of our debt securities. There can be no assurance that there will not be further terrorist attacks against the United States or U.S. businesses. These attacks, or armed conflicts, may directly impact our physical facilities or the businesses of our tenants.

 

If events like these were to occur, they could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and worldwide financial markets and economy. They also could result in or prolong an economic recession in the U.S. or abroad. Any of these occurrences could have a significant adverse impact on our operating results and revenues and on the market price of our capital stock and on the value of our debt securities. It could also have an adverse effect on our ability to pay principal and interest on our debt securities or other indebtedness and to make distributions to our stockholders.

 

Disruptions in the financial markets could affect our ability to obtain financing on reasonable terms and have other adverse effects on us and the market price of our common stock.

Over the last several years, the United States stock and credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks and debt securities to fluctuate substantially and the spreads on prospective debt financings to widen considerably. In addition, the ongoing global financial crisis (which includes concerns that certain European countries may be unable to pay their national debt) has had a similar effect. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in certain cases have resulted in the unavailability of certain types of financing. Unrest in certain Middle Eastern countries and resultant fluctuation in petroleum prices have added to the uncertainty in the capital markets.  Continued uncertainty in the stock and credit markets may negatively impact our ability to access additional financing at

 

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reasonable terms, which may negatively affect our ability to make acquisitions. A prolonged downturn in the stock or credit markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. In addition, these factors may make it more difficult for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of financing or difficulties in obtaining financing. These events in the stock and credit markets may make it more difficult or costly for us to raise capital through the issuance of our common stock or preferred stock or debt securities. These disruptions in the financial markets also may have a material adverse effect on the market value of our common stock, preferred stock and debt securities, the income we receive from our properties and the lease rates we can charge for our properties, as well as other unknown adverse effects on us or the economy in general.

 

Inflation may adversely affect our financial condition and results of operations.

Although inflation has not materially impacted our results of operations in the recent past, increased inflation could have a more pronounced negative impact on any variable rate debt we incur in the future and on our results of operations. During times when inflation is greater than increases in rent, as provided for in our leases, rent increases may not keep up with the rate of inflation. Likewise, even though net leases reduce our exposure to rising property expenses due to inflation, substantial inflationary pressures and increased costs may have an adverse impact on our tenants if increases in their operating expenses exceed increases in revenue, which may adversely affect the tenants’ ability to pay rent.

 

Current volatility in market and economic conditions may impact the accuracy of the various estimates used in the preparation of our financial statements and footnotes to the financial statements.

Various estimates are used in the preparation of our financial statements, including estimates related to asset and liability valuations (or potential impairments), and various receivables. Often these estimates require the use of market data values that are currently difficult to assess, as well as estimates of future performance or receivables collectability that can also be difficult to accurately predict. Although management believes it has been prudent and used reasonable judgment in making these estimates, it is possible that actual results may differ from these estimates.

 

Changes in accounting standards may adversely impact our financial condition and results of operations.

The SEC is currently considering whether issuers in the U.S. should be required to prepare financial statements in accordance with International Financial Reporting Standards, or IFRS, instead of U.S. generally accepted accounting principles, or GAAP.  IFRS is a comprehensive set of accounting standards promulgated by the International Accounting Standards Board, or IASB, which are rapidly gaining worldwide acceptance.  Additionally, the Financial Accounting Standards Board, or FASB, is considering various changes to GAAP, some of which may be significant, as part of a joint effort with the IASB to converge accounting standards.  Although the FASB and IASB currently have a project on their agenda to examine the accounting for leases, the project may not result in the issuance of a final standard or a standard that would be comparable to current GAAP.  If IFRS is adopted, the potential issues associated with lease accounting, along with other potential changes associated with the adoption or convergence with IFRS, may adversely impact our financial condition and results of operations.

 

Item 1B:                     Unresolved Staff comments

 

There are no unresolved staff comments.

 

Item 2:                              Properties

 

Information pertaining to our properties can be found under Item 1.