10-Q 1 ricq108_10q.htm REALTY INCOME CORPORATION Q1-08 FORM 10-Q ricq108_10q.htm




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

FORM 10-Q

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

For the quarterly period ended March 31, 2008, or

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

Commission File Number 1-13374


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

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

Registrant’s telephone number, including area code: (760) 741-2111
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x     NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

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

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

There were 101,297,237 shares of common stock outstanding as of April 23, 2008.

 
1

 

REALTY INCOME CORPORATION

Form 10-Q
March 31, 2008

 

PART I.                   FINANCIAL INFORMATION
 
Page
 
Item 1:
     
 
Consolidated Balance Sheets                                                                                           
    3  
 
Consolidated Statements of Income                                                                                           
   
4
 
 
Consolidated Statements of Cash Flows                                                                                           
   
5
 
 
Notes to Consolidated Financial Statements                                                                                           
   
6
 
Item 2:
       
     
17
 
     
18
 
     
20
 
 
Liquidity and capital resources                                                                                           
   
21
 
 
Results of operations                                                                                           
   
26
 
     
34
 
 
Property portfolio information                                                                                           
   
36
 
 
Impact of inflation                                                                                           
   
41
 
 
Impact of recent accounting pronouncements                                                                                           
   
41
 
 
Other information                                                                                           
   
41
 
Item 3:
   
41
 
Item 4:
Controls and Procedures                                                                                                  
   
42
 
PART II.                   OTHER INFORMATION
       
Item 1A:
Risk Factors                                                                                                  
   
43
 
Item 6:
Exhibits                                                                                                  
   
43
 
   
45
 


 
 
REALTY INCOME CORPORATION AND SUBSIDIARIES
March 31, 2008 and December 31, 2007
(dollars in thousands, except per share data)
   
2008
   
2007
 
ASSETS
 
(unaudited)
       
Real estate, at cost:
           
Land
  $ 1,166,234     $ 1,110,897  
Buildings and improvements
    2,259,449       2,127,897  
      3,425,683       3,238,794  
Less accumulated depreciation and amortization
    (492,073 )     (470,695 )
Net real estate held for investment
    2,933,610       2,768,099  
Real estate held for sale, net
    32,379       56,156  
Net real estate
    2,965,989       2,824,255  
Cash and cash equivalents
    13,343       193,101  
Accounts receivable
    8,312       7,142  
Goodwill
    17,206       17,206  
Other assets, net
    34,614       35,648  
Total assets
  $ 3,039,464     $ 3,077,352  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Distributions payable
  $ 15,936     $ 15,844  
Accounts payable and accrued expenses
    20,513       38,112  
Other liabilities
    11,728       15,304  
Line of credit payable
    --       --  
Notes payable
    1,470,000       1,470,000  
Total liabilities
    1,518,177       1,539,260  
                 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Preferred stock and paid in capital, par value $1.00 per share,
               
20,000,000 shares authorized, 13,900,000 shares issued
               
and outstanding in 2008 and 2007
    337,790       337,790  
Common stock and paid in capital, par value $1.00 per share,
               
200,000,000 shares authorized, 101,293,987 and 101,082,717
               
shares issued and outstanding in 2008 and 2007, respectively
    1,546,180       1,545,037  
Distributions in excess of net income
    (362,683 )     (344,735 )
Total stockholders’ equity
    1,521,287       1,538,092  
Total liabilities and stockholders’ equity
  $ 3,039,464     $ 3,077,352  
 
The accompanying notes to consolidated financial statements are an integral part of these statements.


REALTY INCOME CORPORATION AND SUBSIDIARIES
For the three months ended March 31, 2008 and 2007
(dollars in thousands, except per share data)
(unaudited)
 
   
2008
   
2007
 
             
REVENUE
           
Rental
  $ 81,975     $ 69,178  
Other
    1,448       2,152  
      83,423       71,330  
                 
EXPENSES
               
Interest
    23,469       12,536  
Depreciation and amortization
    22,960       18,068  
General and administrative
    5,544       5,091  
Property
    1,263       861  
Income taxes
    398       245  
      53,634       36,801  
Income from continuing operations
    29,789       34,529  
Income (loss) from discontinued operations:
               
Real estate acquired for resale by Crest
    (269 )     1,705  
Real estate held for investment
    241       89  
      (28 )     1,794  
Net income
    29,761       36,323  
Preferred stock cash dividends
    (6,063 )     (6,063 )
Net income available to common stockholders
  $ 23,698     $ 30,260  
                 
Basic and diluted amounts per common share, available to common stockholders:
               
Income from continuing operations
  $ 0.24     $ 0.28  
Net income
  $ 0.24     $ 0.30  
Weighted average common shares outstanding:
               
Basic
    100,280,264       100,054,868  
Diluted
    100,365,576       100,276,300  
 
The accompanying notes to consolidated financial statements are an integral part of these statements.


REALTY INCOME CORPORATION AND SUBSIDIARIES
For the three months ended March 31, 2008 and 2007
(dollars in thousands)(unaudited)

   
2008
   
2007
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 29,761     $ 36,323  
Adjustments to net income:
               
Depreciation and amortization
    22,960       18,068  
(Income) loss from discontinued operations:
               
Real estate acquired for resale
    269       (1,705 )
Real estate held for investment
    (241 )     (89 )
Gain on sales of land
    (439 )     (1,806 )
Amortization of share-based compensation
    1,143       823  
Cash provided by (used in) discontinued operations:
               
Real estate acquired for resale
    (581 )     465  
Real estate held for investment
    36       155  
            Proceeds from sales of real estate acquired for resale
    17,487       10,221  
Change in assets and liabilities:
               
Accounts receivable and other assets
    (171 )     29  
Accounts payable, accrued expenses and other liabilities
    (22,111 )     (8,133 )
Net cash provided by operating activities
    48,113       54,351  
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sales of investment properties:
               
Continuing operations
    439       2,471  
      Discontinued operations
    369       446  
Acquisition of and improvements to investment properties
    (180,657 )     (60,865 )
Intangibles acquired in connection with acquisitions of
               
investment properties
    (397 )     (319 )
Restricted escrow funds acquired in connection with
               
acquisitions of investment properties
    --       (2,648 )
Net cash used in investing activities
    (180,246 )     (60,915 )
CASH FLOWS FROM FINANCING ACTIVITIES
               
Cash distributions to common stockholders
    (41,554 )     (38,329 )
Cash dividends to preferred stockholders
    (6,063 )     (6,393 )
Note issuance cost
    (8 )     --  
Borrowings from lines of credit
    --       69,900  
Payments under lines of credit
    --       (24,100 )
Proceeds from other stock issuances
    --       303  
Proceeds from preferred stock offerings, net
    --       9  
Net cash provided by (used in) financing activities
    (47,625 )     1,390  
Net decrease in cash and cash equivalents
    (179,758 )     (5,174 )
Cash and cash equivalents, beginning of period
    193,101       10,573  
Cash and cash equivalents, end of period
  $ 13,343     $ 5,399  
For supplemental disclosures, see note 12.
 
The accompanying notes to consolidated financial statements are an integral part of these statements.

REALTY INCOME CORPORATION AND SUBSIDIARIES
March 31, 2008
(unaudited)
1.
Management Statement
 
The consolidated financial statements of Realty Income Corporation (“Realty Income”, the “Company”, “we” or “our”) were prepared from our books and records without audit and include all adjustments (consisting of only normal recurring accruals) necessary to present a fair statement of results for the interim period presented. Certain of the 2007 balances have been reclassified to conform to the 2008 presentation.  Readers of this quarterly report should refer to our audited financial statements for the year ended December 31, 2007, which are included in our 2007 Annual Report on Form 10-K, as certain disclosures that would substantially duplicate those contained in the audited financial statements have not been included in this report.

At March 31, 2008, we owned 2,375 properties, located in 49 states, containing over 19.2 million leasable square feet, along with 15 properties owned by our wholly-owned taxable REIT subsidiary, Crest Net Lease, Inc. (“Crest”).  Crest was created to buy and sell properties, primarily to individual investors who are involved in tax-deferred exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Tax Code”).

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

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

C.  We recognize an allowance for doubtful accounts relating to accounts receivable for amounts deemed uncollectible.  We consider tenant specific issues such as financial stability and ability to pay rent when determining collectibility of accounts receivable and appropriate allowances to record.  The allowance for doubtful accounts was $879,000 at March 31, 2008 and $795,000 at December 31, 2007.

   
March 31,
   
December 31,
 
D.  Other assets consist of the following (dollars in thousands) at:
 
2008
   
2007
 
Deferred bond financing costs, net
  $ 14,550     $ 14,940  
Value of in place and above-market leases, net
    11,342       11,211  
Prepaid expenses
    3,318       3,803  
Corporate assets, net of accumulated depreciation and amortization
    1,426       1,356  
Settlements on treasury lock agreements
    542       759  
Unamortized credit line fees, net
    305       434  
Other items
    3,131       3,145  
    $ 34,614     $ 35,648  

             
E.  Accounts payable and accrued expenses consist of the
 
March 31,
   
December 31,
 
     following (dollars in thousands) at:
 
2008
   
2007
 
Bond interest payable
  $ 10,176     $ 24,987  
Other items
    10,337       13,125  
    $ 20,513     $ 38,112  

   
March 31,
   
December 31,
 
F.  Other liabilities consist of the following (dollars in thousands) at:
 
2008
   
2007
 
Rent received in advance
  $ 6,110     $ 10,626  
Security deposits
    3,804       2,818  
Value of in place below-market leases, net
    1,814       1,860  
    $ 11,728     $ 15,304  

G.   Impact of Recent Accounting Pronouncements

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements.  Statement No. 157 sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements.  Statement No. 157 is described in note 6 below.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115.  Statement No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value.  We have elected not to use the fair value measurement provisions of Statement No. 159 for any of our outstanding financial instruments or firm commitments.

In December 2007, the FASB issued Statement No. 141R (revised 2007), Business Combinations.  Effective January 1, 2009, Statement No. 141R will change the accounting treatment and disclosures for certain specific items in a business combination.  Under Statement No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions.  We do not expect Statement No. 141R to have an impact on our financial position or results of operations.

In December 2007, the FASB issued Statement No. 160, Noncontrolling Interest in Consolidated Financial Statements.  Statement No. 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  Statement No. 160 is effective for us at the beginning of 2009.  We currently do not have any minority or noncontrolling interest in a subsidiary and we do not expect Statement No. 160 to have an impact on our consolidated financial statements; however, transactions between now and the adoption date of Statement No. 160 could have an impact on our financial position or results of operations.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133.  Statement No. 161 enhances required disclosures regarding derivatives and hedging activities to improve the transparency of financial reporting.  Statement No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008.  Since we currently have not entered into any derivative instruments, we do not expect Statement No. 161 to have an impact on our financial position or results of operations.


3.
Retail Properties Acquired
 
We acquire land, buildings and improvements that are used by retail operators.

A.  During the first three months of 2008, Realty Income invested $181.4 million in 106 new retail properties and properties under development with an initial weighted average contractual lease rate of 8.7%.  These 106 properties are located in 14 states, will contain over 705,000 leasable square feet, and are 100% leased with an average lease term of 20.6 years.  The initial weighted average contractual lease rate is computed by dividing the estimated aggregate base rent for the first year of each lease by the estimated total cost of the properties.

In comparison, during the first three months of 2007, Realty Income invested $60.9 million in 11 new retail properties and properties under development.  These 11 properties are located in 10 states, contain over 345,000 leasable square feet, and are 100% leased with an average lease term of 18.4 years.

B.  During the first three months of 2008 and 2007, Crest did not invest in any new retail properties.

C.  Crest’s property inventory at March 31, 2008 consisted of 15 properties with a total investment of $39.0 million; of which, 14 properties ($31.7 million) are held for sale and one property ($7.3 million) is held for investment as we decided not to sell the property (see note 9).  At December 31, 2007, Crest’s property inventory consisted of 30 properties with a total investment of $56.2 million, all of which was held for sale.

D.  Of the $181.4 million invested by Realty Income in the first quarter of 2008, $10.0 million was used to acquire two properties with existing leases with retail tenants.  In accordance with Statement No. 141, Realty Income recorded $397,000 as the intangible value of the in place leases.  This amount is recorded to “other assets” on our consolidated balance sheets and amortized over the life of the leases.

Of the $60.9 million invested by Realty Income in the first quarter of 2007, $7.1 million was used to acquire one property with an existing lease with a retail tenant.  In accordance with Statement No. 141, Realty Income recorded $1.0 million as the intangible value of the in place lease and $689,000 as the intangible value of the below-market rents.  These amounts are recorded to “other assets” and “other liabilities,” respectively, on our consolidated balance sheets and are amortized over the life of the lease.

4.
Credit Facility

We have a $300 million acquisition credit facility that expires in October 2008, unless extended as provided for in the credit facility agreement.  We have the right to extend the credit facility for an additional term of one year (to October 2009).  Since May 2007, our investment grade credit ratings provided for financing under the credit facility at LIBOR (London Interbank Offered Rate) plus 60 basis points with a facility commitment fee of 15 basis points, for all-in drawn pricing of 75 basis points over LIBOR.

We did not utilize our credit facility during the first quarter of 2008.  The effective borrowing rate at March 31, 2008 was 3.8%. The average borrowing rate on our credit facility during the first quarter of 2007 was 6.0%.  Our current credit facility is subject to various leverage and interest coverage ratio limitations. We are and have been in compliance with these covenants.

Our credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation.  We regularly review our credit facility and may seek to extend, renew or replace our credit facility to the extent we deem appropriate. We are currently in discussions with various lenders to determine whether we would rather renew our current facility for an additional year or enter into a new credit facility agreement.
 
5.
Notes Payable
 
Our senior unsecured note obligations consist of the following, sorted by maturity date at both March 31, 2008 and December 31, 2007 (dollars in millions):
       
   8.25% notes, issued in October 1998 and due in November 2008
  $ 100.0  
   8% notes, issued in January 1999 and due in January 2009
    20.0  
   5.375% notes, issued in March 2003 and due in March 2013
    100.0  
   5.5% notes, issued in November 2003 and due in November 2015
    150.0  
   5.95% notes, issued in September 2006 and due in September 2016
    275.0  
   5.375% notes, issued in September 2005 and due in September 2017
    175.0  
   6.75% notes, issued in September 2007 and due in August 2019
    550.0  
   5.875% bonds, issued in March 2005 and due in March 2035
    100.0  
    $ 1,470.0  
 
We anticipate paying off the notes due in 2008 and 2009 by using cash on hand, utilizing our credit facility or issuing new securities.
 
6.       Fair Value of Financial Assets and Liabilities
 
Statement No. 157 became effective for us at the beginning of 2008 and did not have an impact on our financial position or results of operations.  In February 2008, the FASB delayed the effective date of Statement No. 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to the beginning of 2009.
 
Statement No. 157 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, and establishes a framework for measuring fair value.  Statement No. 157 also establishes a three-level valuation hierarchy for disclosure of fair value measurements.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.  A financial instrument’s categorization within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  This statement applies to fair value measurements that are already required or permitted by most existing FASB accounting standards.

We do not have any financial assets or liabilities that are measured at fair value as of March 31, 2008 on our consolidated balance sheets.  Additionally, we do not have any non-financial assets or liabilities that are measured or disclosed at fair value as of March 31, 2008.

We believe that the carrying values reflected in the consolidated balance sheets at March 31, 2008 and December 31, 2007 reasonably approximate the fair values for cash and cash equivalents, accounts receivable, and all liabilities, due to their short-term nature, except for notes payable.  In making these assessments, we used estimates.  The estimated fair value of the notes payable at March 31, 2008 is $1.345 billion and at December 31, 2007 is $1.413 billion, based upon the closing market price per note or indicative price per each note at March 31, 2008 and December 31, 2007, respectively.

7.
Gain on Sales of Real Estate Acquired for Resale by Crest
 
During the first quarter of 2008, Crest sold 15 properties for $17.5 million, which resulted in a gain of $2.7 million.  In comparison, during the first quarter of 2007, Crest sold five properties for $13.4 million, which resulted in a gain of $1.2 million.  In 2007, as part of one sale, Crest provided buyer financing of $3.1 million.  Crest’s gains on sales are reported before income taxes and are included in discontinued operations.


 
8.
Gain on Sales of Investment Properties and Land by Realty Income
 
During the first quarter of 2008, we sold one investment property for $369,000, which resulted in a gain of $218,000.  The results of operations for this property have been reclassified to discontinued operations.  Additionally, we received proceeds from a sale of excess land from one property, which resulted in a gain of $439,000.  This gain is included in “other revenue” on our consolidated statements of income because the proceeds were associated with a property that continues to be owned as part of our core operations.
 
In comparison, during the first quarter of 2007, we sold one investment property for $446,000, which resulted in no gain. Information regarding this property has been reclassified to discontinued operations.  In addition, we sold excess land from three properties for $3.8 million, which resulted in a gain of $1.8 million.  The gain from the land sales is reported in “other revenue” on our consolidated statements of income because these properties continue to be owned as part of our core operations.
 
9.
Discontinued Operations
 
In accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, Realty Income’s operations from two investment properties classified as held for sale at March 31, 2008, plus properties sold in 2008 and 2007, are reported as discontinued operations.  Their respective results of operations have been reclassified to “income (loss) from discontinued operations, real estate held for investment” on our consolidated statements of income.  We do not depreciate properties that are classified as held for sale.

Crest acquires properties with the intention of reselling them rather than holding them for investment and operating the properties.  Consequently, we typically classify properties acquired by Crest as held for sale at the date of acquisition and do not depreciate them.  In accordance with Statement No. 144, the operations of Crest’s properties are classified as “income (loss) from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income, except for one property which was classified as held for investment during the first quarter of 2008, as described below.

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

If circumstances arise, which were previously considered unlikely and, as a result, we decide not to sell a property previously classified as held for sale, the property is reclassified as real estate held for investment.  A property that is reclassified to held for investment is measured and recorded at the lower of (i) its carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held for investment, or (ii) the fair value at the date of the subsequent decision not to sell.

During the first quarter of 2008, we determined that one property, acquired by Crest in 2005, no longer met the held for sale criteria because we ceased efforts to sell the property.  As a result, investment in real estate of $7.3 million was reclassified from real estate held for sale to real estate held for investment on our consolidated balance sheet at March 31, 2008, and depreciation expense of $735,000 was recorded to our consolidated statement of income for the three months ended March 31, 2008.  The results of operations for the property are included in income from continuing operations on our consolidated statements of income.


Provisions for impairment of $2.4 million were recorded by Crest on two properties held for sale in the first quarter of 2008 and are included in “income (loss) from discontinued operations, real estate acquired for resale by Crest.”  The provisions for impairment recorded in the first quarter of 2008 reduced the carrying values to the estimated fair-market value of those properties, net of estimated selling costs.  These two properties were leased to a subsidiary of Buffets, Inc. (“Buffets”) and the leases were guaranteed by Buffets.  Buffets is a subsidiary of Buffets Holdings, Inc. (“Buffets Holdings”).  In January 2008, Buffets Holdings together with each of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U. S. Bankruptcy Code.  These two Crest properties and 12 Realty Income properties were rejected by Buffets Holdings in February 2008 and returned to us.  No provisions for impairment were recorded by Crest in the first quarter of 2007.  
 
The following is a summary of Crest’s “income (loss) from discontinued operations, real estate acquired for resale” on our consolidated statements of income (dollars in thousands):
 
 
Crest’s income (loss) from discontinued operations, real estate acquired for resale
 
Three months
ended 3/31/08
   
Three months
ended 3/31/07
 
Gain on sales of real estate acquired for resale
  $ 2,706     $ 1,240  
Rental revenue
    878       2,721  
Other revenue
    71       6  
Interest expense
    (549 )     (2,004 )
General and administrative expense
    (162 )     (103 )
Property expenses
    (11 )     (5 )
Provisions for impairment
    (2,394 )     --  
Income taxes
    (808 )     (150 )
Income (loss) from discontinued operations,
  real estate acquired for resale by Crest
  $ (269 )   $ 1,705  

The following is a summary of Realty Income’s “income from discontinued operations, from real estate held for investment” on our consolidated statements of income (dollars in thousands):
 
 
Realty Income’s income from discontinued operations, real estate held for investment
 
Three months ended 3/31/08
   
Three months ended 3/31/07
 
Gain on sales of investment properties
  $ 218     $ --  
Rental revenue
    48       169  
Depreciation and amortization
    (13 )     (66 )
Property expenses
    (12 )     (14 )
Income from discontinued operations,
  real estate held for investment
  $ 241     $ 89  


The following is a summary of our total discontinued operations (dollars in thousands, except per share data):
   
Three months ended 3/31/08
   
Three months ended 3/31/07
 
 Real estate acquired for resale by Crest
  $ (269 )   $ 1,705  
 Real estate held for investment
    241       89  
 Income (loss) from discontinued operations
  $ (28 )   $ 1,794  
 Per common share, basic and diluted
  $ 0.00     $ 0.02  

10.   Distributions Paid and Payable

A.  Common Stock

We pay monthly distributions to our common stockholders.  The following is a summary of the monthly distributions paid per common share for the first three months of 2008 and 2007:

Month
 
2008
   
2007
 
January
  $ 0.13675     $ 0.12650  
February
    0.13675       0.12650  
March
    0.13675       0.12650  
Total
  $ 0.41025     $ 0.37950  

At March 31, 2008, a distribution of $0.137375 per common share was payable and was paid in April 2008.

B.  Preferred Stock

In 2006, we issued 8.8 million shares of 6.75% Monthly Income Class E cumulative redeemable preferred stock.  Beginning December 7, 2011, the Class E preferred shares are redeemable, at our option, for $25 per share.  During the first quarter of 2008, we paid three monthly dividends to holders of our Class E preferred stock totaling $0.421875 per share, or $3.7 million, and at March 31, 2008 a monthly dividend of $0.140625 per share was payable and was paid in April 2008.  During the first quarter of 2007, we paid three monthly dividends to holders of our Class E preferred stock totaling $0.459375 per share, or $4.0 million.  In January 2007, we paid the first Class E preferred dividend of $0.178125, which covered a period of 38 days.

In 2004, we issued 5.1 million shares of 7.375% Monthly Income Class D cumulative redeemable preferred stock.  Beginning May 27, 2009, the Class D preferred shares are redeemable, at our option, for $25 per share.  During the first quarters of 2008 and 2007, we paid three monthly dividends to holders of our Class D preferred stock totaling $0.4609377 per share, or $2.4 million, and at March 31, 2008 a monthly dividend of $0.1536459 per share was payable and was paid in April 2008.
 

11.
Net Income Per Common Share
 
Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period.  Diluted net income per common share is computed by dividing net income available to common stockholders for the period by the weighted average number of common shares that would have been outstanding assuming the issuance of common shares for all potentially dilutive common shares outstanding during the reporting period.

The following is a reconciliation of the denominator of basic net income per common share computation to the denominator of diluted net income per common share computation:
   
Three months
ended 3/31/08
   
Three months
ended 3/31/07
 
Weighted average shares used for the basic net income per share computation
    100,280,264       100,054,868  
Incremental shares from share-based compensation
    85,312       221,432  
Adjusted weighted average shares used for diluted net income per share computation
    100,365,576       100,276,300  
Unvested shares from share-based compensation that were anti-dilutive
    646,758       400  

No stock options were anti-dilutive for the three months ended March 31, 2008 and 2007.
 
12.
Supplemental Disclosures of Cash Flow Information
 
Interest paid in the first three months of 2008 was $38.1 million and in the first three months of 2007 was $21.5 million.
 
Interest capitalized to properties under development in the first three months of 2008 was $14,000 and in the first three months of 2007 was $226,000.
 
Income taxes paid by Realty Income and Crest in the first three months of 2008 totaled $755,000 and in the first three months of 2007 totaled $1.2 million.

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

A.  Share-based compensation expense for the first three months of 2008 was $1.1 million and for the first three months of 2007 was $823,000.

B.  See note 9 for a discussion of impairments recorded by Crest in the first quarter of 2008.

C.  Accrued costs on properties under development resulted in an increase in buildings and improvements and accounts payable of $981,000 at March 31, 2008.

D.  In the first three months of 2007, Crest sold a property for $4.1 million and received a note of $3.1 million from the buyer, which is included in “other assets” on our consolidated balance sheets.

E.  In the first three months of 2007, Realty Income sold a portion of excess land from one property for $1.4 million, which was held in a temporary escrow account.


F.  In connection with the acquisition of seven properties during the first three months of 2007, we acquired restricted escrow funds totaling $2.6 million.  We only had limited rights regarding the use of these funds.  During the remainder of 2007, all of these funds were invested in improvements to these seven properties.

G.  Distributions payable on our balance sheets are comprised of the following declared distributions as of March 31, 2008 and December 31, 2007 (dollars in thousands):
 
   
2008
   
2007
 
Common stock distributions
  $ 13,915     $ 13,823  
Preferred stock dividends
    2,021       2,021  

13.
Segment Information
 
We evaluate performance and make resource allocation decisions on an industry by industry basis. For financial reporting purposes, we have grouped our tenants into 31 industry and activity segments (including properties owned by Crest that are grouped together as a segment). All of the properties are incorporated into one of the applicable segments. Because almost all of our leases require the tenant to pay operating expenses, revenue is the only component of segment profit and loss we measure.

The following tables set forth certain information regarding the properties owned by us, classified according to the business of the respective tenants as of March 31, 2008 (dollars in thousands):

   
Revenue
 
For the quarters ended March 31,
 
2008
   
2007
 
Segment rental revenue(1):
           
Automotive service
  $ 4,001     $ 3,700  
Automotive tire services
    5,483       5,282  
Child care
    6,335       6,078  
Convenience stores
    11,738       9,632  
Drug stores
    2,879       1,941  
Health and fitness
    4,522       3,015  
Motor vehicle dealerships
    2,552       2,363  
Restaurants
    19,370       13,394  
Theaters
    7,182       6,514  
22 non-reportable segments
    17,913       17,259  
Total rental revenue
    81,975       69,178  
Other revenue
    1,448       2,152  
Total revenue
  $ 83,423     $ 71,330  
 
 
(1) Crest’s revenue appears in “income (loss) from discontinued operations, real estate acquired for resale by Crest” and is not included in this table, which covers revenue but does not include revenue classified as part of income (loss) from discontinued operations.  Rental revenue from one Crest property held for investment has been included.


 
   
March 31,
   
December 31,
 
Assets, as of:
 
2008
   
2007
 
Segment net real estate:
           
   Automotive service
  $ 109,322     $ 110,100  
   Automotive tire services
    212,130       212,747  
   Child care
    90,219       91,178  
   Convenience stores
    482,061       408,119  
   Drug stores
    149,156       100,154  
   Health and fitness
    171,112       169,109  
   Motor vehicle dealerships
    107,240       101,887  
   Restaurants
    773,486       776,973  
   Theaters
    304,156       267,413  
   22 other non-reportable segments
    567,107       586,575  
Total segment net real estate
    2,965,989       2,824,255  
Other intangible assets – Drug stores
    7,223       6,988  
Other intangible assets – Theaters
    2,419       2,496  
Other intangible assets – Grocery stores
    950       962  
Other intangible assets – Automotive tire services
    750       765  
Other corporate assets
    62,133       241,886  
Total assets
  $ 3,039,464     $ 3,077,352  

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

Effective January 1, 2006, we adopted FASB Statement No. 123R, Share-Based Payments.  Statement No. 123R requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees.  Effective January 1, 2002, we adopted the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, and starting January 1, 2002 expensed costs for all stock option awards granted, modified, or settled.

The amount of share-based compensation costs charged against income during the first quarter of 2008 was $1.1 million and during the first quarter of 2007 was $823,000.
The following table summarizes our common stock grant activity under our Stock Plan.  Our common stock grants vest over periods ranging from immediately to 10 years.
   
 
For the three months
 ended March 31, 2008
   
For the year ended
 December 31, 2007
 
   
Number of
shares
   
Weighted
average
price (1)
   
Number of
shares
   
Weighted
average
price (1)
 
Outstanding nonvested
                       
shares, beginning of year
    994,572     $ 19.46       868,726     $ 17.96  
Shares granted
    212,047       27.01       276,631       27.64  
Shares vested
    (128,295 )     21.53       (149,284 )     20.94  
Shares forfeited
    (777 )     25.20       (1,501 )     24.81  
Outstanding nonvested
shares, end of each period
    1,077,547     $ 22.20       994,572     $ 19.46  
(1) Grant date fair value.

During the first quarter of 2008, we issued 212,047 shares of common stock under our Stock Plan. These shares vest over the following service periods: 350 vested upon grant, 16,000 vest over a service period of one year, 156 vest over a service period of two years, 3,681 vest over a service period of four years, 91,153 vest over a service period of five years and 100,707 vest over a service period of 10 years.

As of March 31, 2008, the remaining unamortized share-based compensation expense totaled $23.9 million, which is being amortized on a straight-line basis over the service period of each applicable award.

The effect of pre-vesting forfeitures on our recorded expense has historically been negligible.  Any future pre-vesting forfeitures are also expected to be negligible and we will record the benefit related to such forfeitures as they occur.  Under the terms of our Stock Plan, we pay non-refundable dividends to the holders of our nonvested shares.  Under Statement No. 123R, the dividends paid to holders of these nonvested shares should be charged as compensation expense to the extent that they relate to nonvested shares that do not or are not expected to vest.  Given the negligible historical and prospective forfeiture rate determined by us, we did not record any amount to compensation expense related to dividends paid in 2008 or 2007, nor do we expect to record any amounts in future periods.

No stock options were granted after January 1, 2002 and all outstanding options were fully vested as of December 31, 2006.  Stock options were granted with an exercise price equal to the underlying stock’s fair market value at the date of grant.  Stock options expire ten years from the date they were granted and vested over service periods of one, three, four or five years.  As of March 31, 2008, there were 45,007 vested stock options outstanding and exercisable with a weighted average exercise price of $12.71.  No stock options were exercised or forfeited in the first quarter of 2008.

15.
Commitments and Contingencies
 
In the ordinary course of business, we are party to various legal actions which we believe are routine in nature and incidental to the operation of our business. We believe that the outcome of the proceedings will not have a material adverse effect upon our consolidated financial position or results of operations.

At March 31, 2008, we have committed $5.2 million under construction contracts.  These costs are expected to be paid in the next 12 months.  In addition, we also have contingent payments for tenant improvements and leasing costs of $659,000.





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

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

Additional factors that may cause risks and uncertainties include those discussed in the sections entitled “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

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





Realty Income Corporation, The Monthly Dividend Company®, is a Maryland corporation organized to operate as an equity real estate investment trust, or REIT.  Our primary business objective is to generate dependable monthly cash distributions from a consistent and predictable level of funds from operations, or FFO per share.  Our monthly distributions are supported by the cash flow from our portfolio of retail properties leased to regional and national retail chains.  We have in-house acquisition, leasing, legal, retail and real estate research, portfolio management and capital markets expertise. Over the past 39 years, Realty Income and its predecessors have been acquiring and owning freestanding retail properties that generate rental revenue under long-term lease agreements (primarily 15 to 20 years).

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

In acquiring additional properties, we adhere to a focused strategy of primarily acquiring properties that are:
 
·
Freestanding, single-tenant, retail locations;
·
Leased to regional and national retail chains; and
·
Leased under long-term, net-lease agreements.

At March 31, 2008, we owned a diversified portfolio:
 
·
Of 2,375 retail properties;
·
With an occupancy rate of 97.4%, or 2,314 properties occupied of the 2,375 properties in the portfolio;
·
With only 61 properties available for lease;
·
Leased to 119 different retail chains doing business in 30 separate retail industries;
·
Located in 49 states;
·
With over 19.2 million square feet of leasable space; and
·
With an average leasable retail space per property of approximately 8,100 square feet.

Of the 2,375 properties in the portfolio, 2,364, or 99.5%, are single-tenant, retail properties and the remaining 11 are multi-tenant properties. At March 31, 2008, 2,304 of the 2,364 single-tenant properties were leased with a weighted average remaining lease term (excluding extension options) of approximately 13.2 years.

In addition, at March 31, 2008, our wholly-owned taxable REIT subsidiary, Crest, had invested
$39.0 million in 15 properties, of which $31.7 million is classified as held for sale and $7.3 million is classified as held for investment.  Crest was created to buy and sell properties, primarily to individual investors who are involved in tax-deferred exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Tax Code”).

We typically acquire retail store properties under long-term leases with retail chain store operators. These transactions generally provide capital to owners of retail real estate and retail chains for expansion or other corporate purposes. Our acquisition and investment activities are concentrated in well-defined target markets and generally focus on retail chains providing goods and services that satisfy basic consumer needs.



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

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

Credit Strategy
We generally provide sale-leaseback financing to less than investment grade retail chains.  We typically acquire and lease back properties to regional and national retail chains and believe that within this market we can achieve an attractive risk-adjusted return on the financing we provide to retailers.  Since 1970, our overall weighted average occupancy rate at the end of each year has been 98.5%, and the occupancy rate at the end of each year has never been below 97%.

Acquisition Strategy
We seek to invest in industries in which several, well-organized, regional and national retail chains are capturing market share through service, quality control, economies of scale, advertising and the selection of prime retail locations. We execute our acquisition strategy by acting as a source of capital to regional and national retail chain store owners and operators, doing business in a variety of industries, by acquiring and leasing back retail store locations. We undertake thorough research and analysis to identify appropriate industries, tenants and property locations for investment. Our research expertise is instrumental to uncovering net-lease opportunities in markets where our real estate financing program adds value. In selecting real estate for potential investment, we generally seek to acquire properties that have the following characteristics:
 
·
Freestanding, commercially-zoned property with a single tenant;
·
Properties that are important retail locations for regional and national retail chains;
· 
Properties that we deem to be profitable for the retailers;
·
Properties that are located within attractive demographic areas relative to the business of their 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.

 


Acquisitions During the First Quarter of 2008
During the first quarter of 2008, Realty Income invested $181.4 million in 106 new retail properties and properties under development with an initial weighted average contractual lease rate of 8.7%. These 106 properties are located in 14 states, will contain over 705,000 leasable square feet, and are 100% leased with an average lease term of 20.6 years.  The 106 new properties acquired by Realty Income are net-leased to eight different retail chains in the following seven industries: automotive tire service, convenience store, drug store, financial service, motor vehicle dealership, restaurant and theater.  There were no acquisitions by Crest in the first quarter of 2008.

At March 31, 2008, Realty Income had invested $2.9 million in three properties that were leased and being developed by the tenant (with development costs funded by Realty Income).  Rent on these properties is scheduled to begin at various times during the next twelve months.  At March 31, 2008, we had outstanding commitments to pay estimated unfunded development costs totaling approximately
$5.2 million.

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

Investments in Existing Properties
In the first quarter of 2008, we capitalized costs of $685,000 on existing properties in our portfolio, consisting of $131,000 for re-leasing costs and $554,000 for building improvements.

Net Income Available to Common Stockholders
Net income available to common stockholders was $23.7 million in the first quarter of 2008 versus $30.3 million in the same quarter of 2007, a decrease of $6.6 million. On a diluted per common share basis, net income was $0.24 per share in the first quarter of 2008 compared to $0.30 in the first quarter of 2007.

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

The gain recognized during the first quarter of 2008 from the sale of an investment property and from the additional proceeds received from a previous period sale of excess land was $657,000, as compared to a $1.8 million gain recognized from the sales of investment properties for the first quarter of 2007.

Funds from Operations (FFO)
In the first quarter of 2008, our FFO decreased by $602,000, or 1.3%, to $45.9 million versus $46.5 million in the first quarter of 2007.  On a diluted per common share basis, FFO was $0.46 in the first quarters of 2008 and 2007.

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


Crest’s Property Sales
During the first quarter of 2008, Crest sold 15 properties from its inventory for an aggregate of $17.5 million, which resulted in a gain of $2.7 million.  Crest’s gains are included in “income (loss) from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income.

Crest’s Property Inventory
At March 31, 2008, Crest had $39.0 million invested in 15 properties.  At December 31, 2007, Crest’s property inventory totaled $56.2 million in 30 properties.  These properties are included in “real estate held for sale, net” on our consolidated balance sheets, except for the $7.3 million at March 31, 2008 that is classified as held for investment.

Increases in Monthly Distributions to Common Stockholders
We continue our 39-year policy of paying distributions monthly.  Monthly distributions per share were increased in April 2008 by $0.000625 to $0.137375.  The increase in April 2008 was our 42nd consecutive quarterly increase and the 48th increase in the amount of our dividend since our listing on the New York Stock Exchange, or NYSE, in 1994. In the first three months of 2008, we paid three monthly cash distributions per share in the amount of $0.13675, totaling $0.41025. In March 2008 and April 2008, we declared distributions of $0.137375 per share, which were paid in April 2008 and will be paid in May 2008, respectively.

The monthly distribution of $0.137375 per share represents a current annualized distribution of $1.6485 per share, and an annualized distribution yield of approximately 6.1% based on the last reported sale price of our common stock on the NYSE of $27.00 on April 23, 2008. Although we expect to continue our policy of paying monthly distributions, we cannot guarantee that we will maintain our current level of distributions, that we will continue our pattern of increasing distributions per share, or what our actual distribution yield will be in any future period.


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 retail properties. We intend to retain an appropriate amount of cash as working capital. At March 31, 2008, we had cash and cash equivalents totaling $13.3 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 foreseeable future.  We intend, however, to use additional sources of capital to fund property acquisitions and to repay future borrowings under our credit facility.

$300 Million Acquisition Credit Facility
We have a $300 million revolving, unsecured credit facility that expires in October 2008, unless extended as provided for in the credit facility agreement.  Since May 2007, our investment grade credit ratings have provided for financing under the credit facility at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 60 basis points with a facility fee of 15 basis points, for all-in drawn pricing of 75 basis points over LIBOR.  At April 23, 2008, we had a borrowing capacity of $300 million available on our credit facility and no outstanding balance.


We expect to use the credit facility to acquire additional retail properties and for other corporate purposes.  Any additional borrowings will increase our exposure to interest rate risk.  We have the right to request an increase in the borrowing capacity of the credit facility by up to $100 million, to a total borrowing capacity of $400 million.  Any increase in the borrowing capacity is subject to approval by the lending banks on our credit facility.

We regularly review our credit facility and may seek to extend, renew or replace our credit facility, to the extent we deem appropriate.  We have the right to extend the credit facility for an additional term of one year (to October 2009).  We are currently in discussions with various lenders to determine whether we would rather renew our current facility for an additional year or enter into a new credit facility.

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

Universal Shelf Registration
In April 2006, we filed a shelf registration statement with the SEC, which is effective for a term of three years. In accordance with SEC rules, the amount of the securities to be issued pursuant to this shelf registration statement was not specified when it was filed.  The securities covered by this registration statement include common stock, preferred stock, debt securities, or any combination of such securities.  We may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering.  There is no specific limit to the dollar amount of new securities that can be issued under this new shelf registration before it expires in April 2009, and our common stock, preferred stock and notes issued after April 2006 were all issued pursuant to this universal shelf registration statement.

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 April 23, 2008, our total outstanding credit facility borrowings and outstanding notes were $1.47 billion or approximately 32.3% of our total market capitalization of $4.55 billion.

We define our total market capitalization at April 23, 2008 as the sum of:
 
·
Shares of our common stock outstanding of 101,297,237 multiplied by the last reported sales price of our common stock on the NYSE of $27.00 per share on April 23, 2008, or $2.74 billion;
·
Aggregate liquidation value (par value of $25 per share) of the Class D preferred stock of $127.5 million;
·
Aggregate liquidation value (par value of $25 per share) of the Class E preferred stock of $220 million; and
·
Outstanding notes of $1.47 billion.

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


Credit Agency Ratings
We are currently assigned investment grade corporate credit ratings on our senior unsecured notes.   Fitch Ratings has assigned a rating of BBB+, Moody’s Investors Service has assigned a rating of Baa1 and Standard & Poor’s Ratings Group has assigned a rating of BBB to our senior notes. The rating by Standard & Poor’s has a “positive” outlook and the ratings by Fitch and Moody’s have “stable” outlooks.

We have also been assigned investment grade credit ratings on our preferred stock. Fitch Ratings has assigned a rating of BBB, Moody’s has assigned a rating of Baa2 and Standard & Poor’s has assigned a rating of BBB- to our preferred stock.  The rating by Standard & Poor’s has a “positive” outlook and the ratings by Fitch and Moody’s have “stable” outlooks.

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

Notes Outstanding
Our senior unsecured note obligations consist of the following as of March 31, 2008, sorted by maturity date (dollars in millions):

   8.25% notes, issued in October 1998 and due in November 2008
  $ 100.0  
   8% notes, issued in January 1999 and due in January 2009
    20.0  
   5.375% notes, issued in March 2003 and due in March 2013
    100.0  
   5.5% notes, issued in November 2003 and due in November 2015
    150.0  
   5.95% notes, issued in September 2006 and due in September 2016
    275.0  
   5.375% notes, issued in September 2005 and due in September 2017
    175.0  
   6.75% notes, issued in September 2007 and due in August 2019
    550.0  
   5.875% bonds, issued in March 2005 and due in March 2035
    100.0  
    $ 1,470.0  

All of our outstanding notes and bonds have fixed interest rates.

Interest on all of our senior note obligations is paid semiannually, with the exception of the interest on the 8.25% senior notes issued in October 1998, which is paid monthly.  All of these notes contain various covenants, including: (i) a limitation on incurrence of any debt which would cause our debt to total adjusted assets ratio to exceed 60%; (ii) a limitation on incurrence of any secured debt which would cause our secured debt to total adjusted assets ratio to exceed 40%; (iii) a limitation on incurrence of any debt which would cause our debt service coverage ratio to be less than 1.5 times; and (iv) the maintenance at all times of total unencumbered assets not less than 150% of our outstanding unsecured debt. We have been in compliance with these covenants since each of the notes were issued.

The following is a summary of the key financial covenants for our senior unsecured notes, as defined and calculated per the terms of our notes.  These calculations, which are not based on GAAP measurements, are presented to investors to show our ability to incur additional debt under the terms of our notes only and are not measures of our liquidity or performance.  The actual amounts as of March 31, 2008 are:

Note Covenants
Required
 
Actual
 
Limitation on incurrence of total debt
≤ 60%
    42.1 %
Limitation on incurrence of secured debt
≤ 40%
    0.0 %
Debt service coverage (trailing 12 months)
≥ 1.5 x
    3.9 x
Maintenance of total unencumbered assets
≥ 150% of unsecured debt
    238 %



The following table summarizes the payments of each of our obligations as of March 31, 2008 (dollars in millions):
 
Table of Obligations
                     
Ground
   
Ground
             
                     
Leases
   
Leases
             
                     
Paid by
   
Paid by
             
Year of
 
Credit
               
Realty
   
Our
             
Maturity
 
Facility (1)
   
Notes
   
Interest (2)
   
Income(3)
   
Tenants(4)
   
Other (5)
   
Totals
 
2008
  $ --     $ 100.0     $ 68.2     $ 0.1     $ 2.7     $ 5.9     $ 176.9  
2009
    --       20.0       82.5       0.1       3.6       --       106.2  
2010
    --       --       82.4       0.1       3.5       --       86.0  
2011
    --       --       82.4       0.1       3.5       --       86.0  
2012
    --       --       82.4       0.1       3.4       --       85.9  
Thereafter
    --       1,350.0       505.9       0.9       43.1       --       1,899.9  
Totals
  $ --     $ 1,470.0     $ 903.8     $ 1.4     $ 59.8     $ 5.9     $ 2,440.9  

 
(1) There was no outstanding credit facility balance on April 23, 2008.
 
(2) Interest on the credit facility and notes has been calculated based on outstanding balances as of March 31, 2008 through their respective maturity dates.
 
(3) Realty Income currently pays the ground lessors directly for the rent under the ground leases.  A majority of this rent is reimbursed to Realty Income as additional rent from our tenants.
 
(4) Our tenants, who are generally sub-tenants under the ground leases, are responsible for paying the rent under these ground leases.  In the event a tenant fails to pay the ground lease rent, we are primarily responsible.
 
(5) “Other” consists of $5.2 million of commitments under construction contracts and $659,000 of contingent payments for tenant improvements and leasing costs.

Our credit facility and note obligations are unsecured.  Accordingly, we have not pledged any assets as collateral for these obligations.

We anticipate paying off the notes due in 2008 and 2009 by using cash on hand, utilizing our credit facility or issuing new securities.

Preferred Stock Outstanding
In 2004, we issued 5.1 million shares of 7.375% Class D cumulative redeemable preferred stock.  Beginning May 27, 2009, shares of Class D preferred stock are redeemable at our option for $25 per share, plus any accrued and unpaid dividends.  Dividends on shares of Class D preferred are paid monthly in arrears.

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

No Off-Balance Sheet Arrangements or Unconsolidated Investments
We have no unconsolidated or off-balance sheet investments in “variable interest entities” or off-balance sheet financing, nor do we engage in trading activities involving energy or commodity contracts or other derivative instruments.


As we have no joint ventures, off-balance sheet entities, or mandatory redeemable preferred stock, our financial position or results of operations are currently not affected by Financial Accounting Standard Board Interpretation No. 46R, Consolidation of Variable Interest Entities and Statement of Financial Accounting Standard No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.

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

In order to maintain our tax status as a REIT for federal income tax purposes, we generally are required to distribute dividends to our stockholders aggregating annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains), and we are subject to income tax to the extent we distribute less than 100% of our REIT taxable income (including net capital gains). In 2007, our cash distributions totaled $182.2 million, or approximately 113.6% of our estimated REIT taxable income of $160.4 million. Our estimated REIT taxable income reflects non-cash deductions for depreciation and amortization.  Our estimated REIT taxable income is a non-GAAP financial measure presented to show our compliance with REIT distribution requirements and is not a measure of our liquidity or performance.

We intend to continue to make distributions to our stockholders that are sufficient to meet this distribution requirement and that will reduce our exposure to income taxes. Our cash distributions to common stockholders for the first three months of 2008 totaled $41.6 million, representing 90.6% of our funds from operations available to common stockholders of $45.9 million.  In comparison, our 2007 cash distributions to common stockholders totaled $157.7 million, representing 83.1% of our funds from operations available to common stockholders of $189.7 million.

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

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


Distributions of our current and accumulated earnings and profits for federal income tax purposes generally will be taxable to stockholders as ordinary income, except to the extent that we recognize capital gains and declare a capital gains dividend or that such amounts constitute "qualified dividend income" subject to a reduced rate of tax. The maximum tax rate of non-corporate taxpayers for “qualified dividend income” has generally been reduced to 15% (until it “sunsets” or reverts to the provisions of prior law, which under current law will occur with respect to taxable years beginning after December 31, 2010). In general, dividends payable by REITs are not eligible for the reduced tax rate on corporate dividends, except to the extent the REIT’s dividends are attributable to dividends received from taxable corporations (such as our taxable REIT subsidiary, Crest), to income that was subject to tax at the corporate or REIT level (for example, if we distribute taxable income that we retained and paid tax on in the prior taxable year) or, as discussed above, dividends properly designated by us as “capital gain dividends.” Distributions in excess of earnings and profits generally will be treated as a non-taxable reduction in the stockholders’ basis in their stock. Distributions above that basis, generally, will be taxable as a capital gain to stockholders who hold their shares as a capital asset. Approximately 11.2% of the distributions to our common stockholders, made or deemed to have been made in 2007, were classified as a return of capital for federal income tax purposes. We are unable to predict the portion of future distributions that may be classified as a return of capital.

Matters Pertaining to a Certain Tenant

On January 22, 2008, Buffets Holdings, Inc. (“Buffets Holdings”) together with each of its subsidiaries, filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code.  Realty Income owned 116 properties and Crest owned three properties leased to subsidiaries of Buffets, Inc. (”Buffets”) and guaranteed by Buffets.  Buffets is a subsidiary of Buffets Holdings.  In February 2008, Buffets Holdings elected to reject the leases for 12 properties owned by Realty Income and two properties owned by Crest, and returned those 14 properties to us.  As of March 31, 2008, the annualized rent from these 14 stores previously leased to Buffets was approximately $2.8 million.  We believe that the demand in the market for these 14 properties will allow us to find suitable replacement tenants within the next 12 months.  Through April 2008, Buffets is current on its rental obligations for the remaining properties owned by Realty Income and Crest.  However, there can be no assurance that Buffets will continue to pay rent for the remainder of the lease term for its remaining properties.  Based on our analysis of the Buffets locations owned by Realty Income, we believe that the Chapter 11 filing will not have a material adverse affect on our operations and financial position.



Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Our consolidated financial statements are the basis for our discussion and analysis of financial condition and results of operations. Preparing our consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. We believe that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions.


In order to prepare our consolidated financial statements according to the rules and guidelines set forth by GAAP, many subjective judgments must be made with regard to critical accounting polices. One of these judgments is our estimate for useful lives in determining depreciation expense for our properties. Depreciation of buildings and improvements is computed using the straight–line method over an estimated useful life of 25 years. If we use a shorter or longer estimated useful life it could have a material impact on our results of operations. We believe that 25 years is an appropriate estimate of useful life. No depreciation has been recorded on Crest’s properties that are classified as held for sale.

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

The following is a comparison of our results of operations for the three months ended March 31, 2008 to the three months ended March 31, 2007.

Rental Revenue
Rental revenue was $82.0 million for the first quarter of 2008 versus $69.2 million for the first quarter of 2007, an increase of $12.8 million, or 18.5%.  The increase in rental revenue in the first quarter of 2008 compared to the first quarter of 2007 is primarily attributable to:
 
·
The 106 retail properties acquired by Realty Income in 2008, which generated $1.3 million of rent in the first quarter of 2008;
·
The 325 retail properties acquired by Realty Income in 2007, which generated $9.9 million of rent in the first quarter of 2008 compared to $304,000 in the first quarter of 2007, an increase of $9.6 million;
·
Same store rents generated on 1,816 properties during the entire first quarters of 2008 and 2007 increased by $959,000, or 1.5%, to $65.9 million from $64.9 million;
·
An increase of $227,000 relating to the aggregate of (i) development properties acquired before 2007 that started paying rent in 2007, (ii) properties that were vacant during part of 2008 or 2007, (iii) properties sold during 2008 and 2007 and (iv) lease termination settlements.  These items totaled $3.86 million, in aggregate, in the first quarter of 2008 compared to $3.65 million in the same quarter of 2007; and
·
An increase in straight-line rent and other non-cash adjustments to rent of $613,000 in the first quarter of 2008 as compared to the first quarter of 2007.

Of the 2,375 properties in the portfolio at March 31, 2008, 2,364, or 99.5%, are single-tenant properties and the remaining 11 are multi-tenant properties. Of the 2,364 single-tenant properties, 2,304, or 97.5%, were net leased with a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 13.2 years at March 31, 2008. Of our 2,304 leased single-tenant properties, 2,100, or 91.1%, were under leases that provide for increases in rents through:
 
·
Primarily base rent increases tied to a consumer price index;
·
Fixed increases;
·
To a lesser degree, overage rent based on a percentage of the tenants’ gross sales; or
·
A combination of two or more of the above rent provisions.


Percentage rent, which is included in rental revenue, was $691,000 in the first quarter of 2008 and $162,000 in the first quarter of 2007. Percentage rent in the first quarter of 2008 was less than 1% of rental revenue and we anticipate percentage rent to continue to be less than 1% of rental revenue for 2008.

Our portfolio of retail real estate, leased primarily to regional and national chains under net leases, continues to perform well and provides dependable lease revenue supporting the payment of monthly dividends to our stockholders.  At March 31, 2008, our portfolio of 2,375 retail properties was 97.4% leased with 61 properties available for lease, one of which is a multi-tenant property.

As of April 23, 2008, transactions to lease or sell 26 of the 61 properties available for lease at
March 31, 2008 were underway or completed. We anticipate these transactions will be completed during the next several months, although we cannot guarantee that all of these properties can be leased or sold within this period. It has been our experience that approximately 1% to 3% of our property portfolio will be unleased at any given time; however, we cannot assure you that the number of properties available for lease will not exceed these levels.

Interest Expense
Interest expense was $10.9 million higher in the first quarter of 2008 than in the first quarter of 2007, primarily due to higher average outstanding balances and higher interest rates related to our average outstanding borrowings.  We issued $550 million of 12-year notes in September 2007 which contributed to the increase in average outstanding balances and higher average interest rates on our debt.

The following is a summary of the components of our interest expense (dollars in thousands):
   
Three
months
ended
3/31/08
   
Three
months
ended
3/31/07
 
Interest on our credit facility and notes
  $ 23,061     $ 13,913  
Interest included in discontinued operations
               
from real estate acquired for resale by Crest
    (549 )     (2,004 )
Amortization of settlements on treasury lock
               
   agreement
    218       218  
Credit facility commitment fees
    114       114  
Amortization of credit facility origination costs and
               
   deferred bond financing costs
    639       521  
Interest capitalized
    (14 )     (226 )
Interest expense
  $ 23,469     $ 12,536  

Credit facility and notes outstanding
 
Three
months
ended
3/31/08
   
Three
months
ended
3/31/07
 
Average outstanding balances (dollars in thousands)
  $ 1,470,000     $ 928,971  
Average interest rates
    6.28 %     6.07 %

At April 23, 2008, the weighted average interest rate on our notes payable of $1.47 billion was 6.28% and the average interest rate on our credit line was 3.76%.  There was no outstanding balance on our credit line at April 23, 2008.


Interest Coverage Ratio
Our interest coverage ratio for the first quarter of 2008 was 3.2 times and for the first quarter of 2007 was 4.6 times.  Interest coverage ratio is calculated as: the interest coverage amount (as calculated in the following table) divided by interest expense, including interest recorded to discontinued operations. We consider interest coverage ratio to be an appropriate supplemental measure of a company’s ability to meet its interest expense obligations. Our calculation of interest coverage ratio may be different from the calculation used by other companies and, therefore, comparability may be limited. This information should not be considered as an alternative to any GAAP liquidity measures.

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

   
Three
months
ended
3/31/08
   
Three
months
ended
3/31/07
 
Net cash provided by operating activities
  $ 48,113     $ 54,351  
Interest expense
    23,469       12,536  
Interest expense included in discontinued operations(1)
    549       2,004  
Income taxes
    398       245  
Income taxes included in discontinued operations(1)
    808       150  
Proceeds from sales of real estate acquired for resale(1)
    (17,487 )     (10,221 )
Crest provisions for impairment(1)
    (2,394 )     --  
Gain on sales of real estate acquired for resale(1)
    2,706       1,240  
Amortization of share-based compensation
    (1,143 )     (823 )
Changes in assets and liabilities:
               
  Accounts receivable and other assets
    171       (29 )
  Accounts payable, accrued expenses and other liabilities
    22,111       8,133  
Interest coverage amount
  $ 77,301     $ 67,586  
Divided by interest expense(2)
  $ 24,018     $ 14,539  
Interest coverage ratio
    3.2       4.6  
 
(1)   Crest activities.
(2)  Includes interest expense recorded to “income (loss) from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income.

Fixed Charge Coverage Ratio
Our fixed charge coverage ratio for the first quarter of 2008 was 2.6 times and for the first quarter of 2007 was 3.3 times. Fixed charge coverage ratio is calculated in exactly the same manner as interest coverage ratio, except that preferred stock dividends are also added to the denominator. We consider fixed charge coverage ratio to be an appropriate supplemental measure of a company’s ability to make its interest and preferred stock dividend payments. Our calculation of the fixed charge coverage ratio may be different from the calculation used by other companies and, therefore, comparability may be limited. This information should not be considered as an alternative to any GAAP liquidity measures.


Interest coverage amount divided by interest expense plus preferred stock dividends (dollars in thousands):
   
Three
months
ended
3/31/08
   
Three
months
ended
3/31/07
 
Interest coverage amount
  $ 77,301     $ 67,586  
Divided by interest expense plus preferred stock dividends(1)
  $ 30,081     $ 20,602  
Fixed charge coverage ratio
    2.6       3.3  
 
 
(1) Includes interest expense recorded to “income (loss) from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income.

Depreciation and Amortization
For the first quarter of 2008, depreciation and amortization was $23.0 million as compared to $18.1 million in the first quarter of 2007. The increase in depreciation and amortization in 2008 was primarily due to the acquisition of properties in 2008 and 2007, which was partially offset by property sales in these years.  Depreciation for the first quarter of 2008 includes $735,000 related to one Crest property that was reclassified from held for sale to held for investment during the first quarter of 2008.  As discussed in the section entitled “Funds from Operations Available to Common Stockholders,” depreciation and amortization is a non-cash item that is excluded from our calculation of FFO.

General and Administrative Expenses
General and administrative expenses increased by $453,000 to $5.5 million in the first quarter of 2008 as compared to $5.1 million in the first quarter of 2007.  In the first quarter of 2008, general and administrative expenses as a percentage of total revenue were 6.6% as compared to 7.1% in the first quarter of 2007.  General and administrative expenses increased in total dollars during the first quarter of 2008 primarily due to increases in employee costs.  We anticipate that in the remainder of 2008, general and administrative expenses as a percentage of total revenue will remain flat or decrease.

In April 2008 and 2007, we had 73 permanent employees.

Property Expenses
Property expenses are broken down into costs associated with non-net leased multi-tenant properties, unleased single-tenant properties and general portfolio expenses. Expenses related to the multi-tenant and unleased single-tenant properties include, but are not limited to, property taxes, maintenance, insurance, utilities, property inspections, bad debt expense and legal fees. General portfolio costs include, but are not limited to, insurance, legal, bad debt expense, property inspections and title search fees. At March 31, 2008, 61 properties were available for lease, as compared to 48 at December 31, 2007 and 24 at March 31, 2007.

Property expenses were $1.3 million in the first quarter of 2008 and $861,000 in the first quarter of 2007.  The increase in property expenses in the first quarter of 2008 is primarily attributable to an increase in bad debt expense and maintenance, utilities, property taxes and legal fees associated with vacant properties.

Income Taxes
Income taxes were $398,000 in the first quarter of 2008 as compared to $245,000 in the first quarter of 2007.  These amounts are for city and state income taxes paid by Realty Income.  The increase in the first quarter of 2008 is due primarily to an increase in rental revenue resulting in higher city and state income tax expense and higher state tax rates.


In addition, Crest incurred state and federal income taxes of $808,000 in the first quarter of 2008 as compared to $150,000 in the first quarter of 2007.  The increase in Crest’s 2008 income taxes, in comparison to 2007, is due to higher taxable income, primarily attributable to higher gain on sales of real estate acquired for resale and lower interest expense.  These amounts are included in “income (loss) from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income.

Discontinued Operations
Crest acquires properties with the intention of reselling them rather than holding them as investments and operating the properties.  Consequently, we typically classify properties acquired by Crest as held for sale at the date of acquisition and do not depreciate them.  The operations of Crest’s properties are classified as “income (loss) from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income, except for one property which was classified as held for investment during the first quarter of 2008.

If we decide not to sell a property previously classified as held for sale, the property is reclassified as real estate held for investment.  A property that is reclassified to held for investment is measured and recorded at the lower of (i) its carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held for investment, or (ii) the fair value at the date of the subsequent decision not to sell.

During the first quarter of 2008, we determined that one property, acquired by Crest in 2005, no longer met the held for sale criteria because we ceased efforts to sell the property.  As a result, investment in real estate of $7.3 million was reclassified from real estate held for sale to real estate held for investment on our consolidated balance sheet at March 31, 2008, and depreciation expense of $735,000 was recorded to our consolidated statement of income for the three months ended March 31, 2008.  The results of operations for the property are included in income from continuing operations on our consolidated statements of income.

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

 
 
Crest’s income (loss) from discontinued operations, real estate acquired for resale
 
Three
months
ended
3/31/08
   
Three
months
ended
3/31/07
 
Gain on sales of real estate acquired for resale
  $ 2,706     $ 1,240  
Rental revenue
    878       2,721  
Other revenue
    71       6  
Interest expense
    (549 )     (2,004 )
General and administrative expense
    (162 )     (103 )
Property expenses
    (11 )     (5 )
Provisions for impairment
    (2,394 )     --  
Income taxes
    (808 )     (150 )
Income (loss) from discontinued operations,
     real estate acquired for resale by Crest
  $ (269 )   $ 1,705  
Per common share, basic and diluted
  $ 0.00     $ 0.02  



Realty Income’s operations from two investment properties classified as held for sale at March 31, 2008, plus properties sold in 2008 and 2007, have been classified as discontinued operations.  The following is a summary of Realty Income’s “income from discontinued operations, real estate held for investment” on our consolidated statements of income (dollars in thousands, except per share data):
 
 
Realty Income’s income from discontinued operations, real estate held for investment
 
Three
months
ended
3/31/08
   
Three
months
ended
3/31/07
 
Gain on sales of investment properties
  $ 218     $ --  
Rental revenue
    48       169  
Depreciation and amortization
    (13 )     (66 )
Property expenses
    (12 )     (14 )
Income from discontinued operations,
     real estate held for investment
  $ 241     $ 89  
Per common share, basic and diluted
  $ 0.00     $ 0.00  

The following is a summary of our total income (loss) from discontinued operations (dollars in thousands, except per share data):
   
Three
months
ended
3/31/08
   
Three
months
ended
3/31/07
 
Real estate acquired for resale by Crest
  $ (269 )   $ 1,705  
Real estate held for investment
    241       89  
Income (loss) from discontinued operations
  $ (28 )   $ 1,794  
Per common share, basic and diluted
  $ 0.00     $ 0.02  

Crest’s Property Sales
During the first quarter of 2008, Crest sold 15 properties for $17.5 million, which resulted in a gain of $2.7 million.  In comparison, during the first quarter of 2007, Crest sold five properties for $13.4 million, which resulted in a gain of $1.2 million.  In the first quarter of 2007, Crest provided buyer financing of $3.1 million.  Crest’s gains on sales are reported before income taxes and are included in discontinued operations.

Crest’s Property Inventory
At March 31, 2008, Crest had $39.0 million invested in 15 properties, of which $31.7 million is classified as held for sale and $7.3 million is classified as held for investment.

Gain on Sales of Investment Properties and Land by Realty Income
During the first quarter of 2008, we sold one investment property for $369,000, which resulted in a gain of $218,000.  The results of operations for this property have been reclassified to discontinued operations.  Additionally, we received proceeds from a sale of excess land from one property, which resulted in a gain of $439,000.  This gain is included in “other revenue” on our consolidated statements of income because the proceeds were associated with a property that continues to be owned as part of our core operations.

In comparison, during the first quarter of 2007, we sold one investment property for $446,000, which resulted in no gain. Information regarding this property has been reclassified to discontinued operations.  In addition, we sold excess land from three properties for $3.8 million, which resulted in a gain of $1.8 million.  The gain from the land sales is reported in “other revenue” on our consolidated statements of income because these properties continue to be owned as part of our core operations.


We have an active portfolio management program that incorporates the sale of assets when we believe the reinvestment of the sale proceeds will generate higher returns, enhance the credit quality of our real estate portfolio or extend our average remaining lease term. At March 31, 2008, we classified real estate with a carrying amount of $32.4 million as held for sale on our balance sheet.  Additionally, we anticipate selling investment properties from our portfolio that have not yet been specifically identified, from which we anticipate receiving between $10 million and $35 million in proceeds during the next 12 months. We intend to invest these proceeds into new property acquisitions. However, we cannot guarantee that we will sell properties during the next 12 months.

Provisions for Impairment on Real Estate Acquired for Resale by Crest
Provisions for impairment of $2.4 million were recorded by Crest on two properties held for sale in the first quarter of 2008.  These two properties were leased to a subsidiary of Buffets and guaranteed by Buffets.  In February 2008, Buffets Holdings elected to reject the leases for two properties owned by Crest.  No provisions for impairment were recorded by Crest in the first quarter of 2007.  The provisions for impairment recorded in the first quarter of 2008 reduced the carrying costs to the estimated fair-market value of those properties, net of estimated selling costs.

Provisions for Impairment on Realty Income Investment Properties
No provisions for impairment were recorded in the first quarters of 2008 and 2007.

Preferred Stock Dividends
Preferred stock cash dividends totaled $6.1 million in the first quarters of 2008 and 2007.

Net Income Available to Common Stockholders
Net income available to common stockholders was $23.7 million in the first quarter of 2008, a decrease of $6.6 million as compared to $30.3 million in the first quarter of 2007.

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

The gain recognized during the first quarter of 2008 from the sale of an investment property and from the additional proceeds received from a previous period sale of excess land was $657,000, as compared to a $1.8 million gain recognized from the sales of investment properties for the first quarter of 2007.




FFO for the first quarter of 2008 decreased by $602,000, or 1.3%, to $45.9 million as compared to $46.5 million in the first quarter of 2007.  The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable GAAP measure) to FFO.  Also presented is information regarding distributions paid to common stockholders and the weighted average number of common shares used for the basic and diluted computation per share (dollars in thousands, except per share amounts):

   
Three
months
ended
3/31/08
   
Three
months
ended
3/31/07
 
Net income available to common stockholders
  $ 23,698     $ 30,260  
Depreciation and amortization:
               
Continuing operations
    22,960       18,068  
Discontinued operations
    13       66  
Depreciation of furniture, fixtures and equipment
    (77 )     (49 )
Gain on sales of land and investment properties:
               
Continuing operations
    (439 )     (1,806 )
Discontinued operations
    (218 )     --  
FFO available to common stockholders
  $ 45,937     $ 46,539  
FFO per common share:
               
Basic
  $ 0.46     $ 0.47  
Diluted
  $ 0.46     $ 0.46  
Distributions paid to common stockholders
  $ 41,554     $ 38,329  
FFO in excess of distributions paid to
               
common stockholders
  $ 4,383     $ 8,210  
Weighted average number of common shares
               
used for computation per share:
               
Basic
    100,280,264       100,054,868  
Diluted
    100,365,576       100,276,300  

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

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



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

Other Non-Cash Items and Capitalized Expenditures
The following information includes non-cash items and capitalized expenditures on existing properties in our portfolio. These items are not included in the adjustments to net income available to common stockholders to arrive at FFO. Analysts and investors often request this supplemental information.
 
 
 
(dollars in thousands)
 
Three
months
ended
3/31/08
   
Three
months
ended
3/31/07
 
Amortization of settlement on treasury lock agreement(1)
  $ 218     $ 218  
Amortization of deferred note financing costs(2)
    454       336  
Amortization of share-based compensation
    1,143       823  
Capitalized leasing costs and commissions
    (131 )     (127 )
Capitalized building improvements
    (554 )     (578 )
Straight line rent revenue(3)
    (754 )     (143 )
Crest provisions for impairment
    2,394       --  

(1)
The settlement on the treasury lock agreement resulted from an interest rate risk prevention strategy that we used in 1998, which correlated to a pending issuance of senior note securities.  We have not employed this strategy since 1998.
(2)
Amortization of deferred note financing costs includes the amortization of costs incurred and capitalized when our notes were issued in May 1997, October 1998, January 1999, March 2003, November 2003, March 2005, September 2005, September 2006 and September 2007. These costs are being amortized over the lives of these notes. No costs associated with our credit facility agreements or annual fees paid to credit rating agencies have been included.
(3)
A negative amount indicates that our straight-line rent revenue was greater than our actual cash rent collected.




At March 31, 2008, we owned a diversified portfolio:

·
Of 2,375 retail properties;
·
With an occupancy rate of 97.4%, or 2,314 properties occupied of the 2,375 properties in the portfolio;
·
With only 61 properties available for lease;
·
Leased to 119 different retail chains doing business in 30 separate retail industries;
·
Located in 49 states;
·
With over 19.2 million square feet of leasable space; and
·
With an average leasable retail space per property of approximately 8,100 square feet.

In addition to our real estate portfolio, our subsidiary, Crest had invested $39.0 million in 15 properties located in 10 states at March 31, 2008. Of the $39.0 million investment by Crest, $31.7 million of properties are classified as held for sale and $7.3 million is classified as held for investment related to one property.

At March 31, 2008, 97.0% of our 2,375 retail properties, or 2,304 properties, were leased under net-lease agreements. A net lease typically require the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance. In addition, our tenants are typically responsible for future rent increases based on increases in the consumer price index, fixed increases or, to a lesser degree, additional rent calculated as a percentage of the tenants’ gross sales above a specified level.

Our net-leased retail properties primarily are leased to regional and national retail chain store operators. Most buildings are single-story structures with adequate parking on site to accommodate peak retail traffic periods. The properties tend to be on major thoroughfares with relatively high traffic counts, adequate access and proximity to a sufficient population base to constitute a suitable market or trade area for the retailer’s business.


Industry Diversification
The following table sets forth certain information regarding Realty Income’s property portfolio (excluding properties owned by Crest) classified according to the business of the respective tenants, expressed as a percentage of our total rental revenue:
   
Percentage of Rental Revenue(1)
 
   
For the Quarter
   
For the Years Ended
 
 
Industries
 
Ended
March 31,
2008
   
Dec 31,
2007
   
Dec 31,
2006
   
Dec 31,
2005
   
Dec 31,
2004
   
Dec 31,
2003
   
Dec 31,
2002
 
Apparel stores
    1.1 %     1.2 %     1.7 %     1.6 %     1.8 %     2.1 %     2.3 %
Automotive collision services
    1.0       1.1       1.3       1.3       1.0       0.3       --  
Automotive parts
    1.8       2.1       2.8       3.4       3.8       4.5       4.9  
Automotive service
    5.0       5.2       6.9       7.6       7.7       8.3       7.0  
Automotive tire services
    6.7       7.3       6.1       7.2       7.8       3.1       2.7  
Book stores
    0.2       0.2       0.2       0.3       0.3       0.4       0.4  
Business services
    0.1       0.1       0.1       0.1       0.1       0.1       0.1  
Child care
    7.7       8.4       10.3       12.7       14.4       17.8       20.8  
Consumer electronics
    0.8       0.9       1.1       1.3       2.1       3.0       3.3  
Convenience stores
    14.3       14.0       16.1       18.7       19.2       13.3       9.1  
Crafts and novelties
    0.3       0.3       0.4       0.4       0.5       0.6       0.4  
Distribution and office
    1.0       0.6       --       --       --       --       --  
Drug stores
    3.5       2.7       2.9       2.8       0.1       0.2       0.2  
Entertainment
    1.2       1.4       1.6       2.1       2.3       2.6       2.3  
Equipment rental services
    0.2       0.2       0.2       0.4       0.3       0.2       --  
Financial services
    0.2       0.2       0.1       0.1       0.1       --       --  
General merchandise
    0.7       0.7       0.6       0.5       0.4       0.5       0.5  
Grocery stores
    0.7       0.7       0.7       0.7       0.8       0.4       0.5  
Health and fitness
    5.5       5.1       4.3       3.7       4.0       3.8       3.8  
Home furnishings
    2.3       2.6       3.1       3.7       4.1       4.9       5.4  
Home improvement
    1.9       2.1       3.4       1.1       1.0       1.1       1.2  
Motor vehicle dealerships
    3.1       3.1       3.4       2.6       0.6       --       --  
Office supplies
    1.0       1.1       1.3       1.5       1.6       1.9       2.1  
Pet supplies and services
    0.8       0.9       1.1       1.3       1.4       1.7       1.7  
Private education
    0.7       0.8       0.8       0.8       1.1       1.2       1.3  
Restaurants
    23.7       21.2       11.9       9.4       9.7       11.8       13.5  
Shoe stores
    --       --       --       0.3       0.3       0.9       0.8  
Sporting goods
    2.3       2.6       2.9       3.4       3.4       3.8       4.1  
Theaters
    8.8       9.0       9.6       5.2       3.5       4.1       3.9  
Travel plazas
    0.2       0.2       0.3       0.3       0.4       0.3       --